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'Third-Level Survivorship' in Crowdfunding
editorial

'Third-Level Survivorship' in Crowdfunding

Editor's Note: We continue our look at the leading industry research and advisory work that our sister organization massolution is engaged in. The piece below is just a sampling of a presentation from a recent workshop massolution helped to organize for its client, the Multilateral Investment Fund of the Inter-American Development Bank. For more information on massolution and its industry research, go to crowdsourcing.org/research; for services, visit massolution.com. The introductory piece in this series, discussing the 'engagement effect' in crowdfunding, is here.

Crowdfunding has already demonstrated its ability to create economic impact in the startup and emerging companies sectors.

It is providing the seed funding that has enabled thousands of new companies to launch. And, small and medium size businesses have been able to raise millions of dollars in growth financing through crowdfunding.

Crowdfunding has changed the lives of many people that successfully raised funds to support caused-based initiatives. Consider, for example, Kerfluffles Marshmallows, which raised over $100,000 -- well above the initial $2,000 goal. This success enabled the campaign owner to lease a commercial kitchen space, launch an online store to sell her treats, and hire employees to help with the baking.

In 2011, there were over 1.1 million successful campaigns, raising $1.47 billion worldwide across the four categories of crowdfunding (reward-, debt-, donation- and equity-based). Individual successes such as Kerfluffles Marshmallows and thousands of others have caught the attention of large enterprises and organizations who wish to better understand how crowdfunding can be applied on a much larger scale.

Crowdfunding’s success as a viable, scalable alternative to public and private finance has implications for how governments set jobs policy, frame economic development programs, and leverage public investments. It also affects how companies raise finance, interact with their lead customers, and validate their R&D outputs.

One group thinking about crowdfunding on a mass scale is the Multilateral Investment Fund (MIF), which is a member of the Inter-American Development Bank (IDB).

MIF is the largest technical assistance provider to the private sector in Latin America and the Caribbean, allocating over $100 million each year to projects aimed at helping small producers, entrepreneurs, and poor and low-income households. IDB as a whole is the largest source of development financing for the region and has helped a number of industries take root, including microfinance.

In order to understand how crowdfunding can help Latin America foster small business growth and job creation, MIF engaged massolution to help with the discovery and ideation process, and to consider plans that would bring social and economic impact to the region.

In a project initiation workshop held in Washington, D.C. on Tuesday, January 29th, massolution’s researchers introduced an emerging crowdfunding concept ("third-level survivorship"). We explain it below and frame it in the context of implications for the development of a national or regional crowdfunding strategy.

Crowdfunding and Third-Level Survivorship

Crowds are, clearly, essential to crowdfunding. Presumably, the larger the crowd, the bigger the funding.

It’s no surprise that crowdfunding consultants recommend pitching the project to potential backers months in advance of the launch. Marketing is essential during the campaign, and keeping the backers content is one of the many jobs of a campaign owner.

These outreach efforts, at their core, are about building the campaign’s audience. Enabled by social media, individuals can quickly share information among their friends and family, who in turn send it along their peers, and so on.

A campaign’s success depends on whether the project is appealing enough to attract the support of individuals who are thrice removed from the campaign owner. This is something massolution crowdfunding research director Dr. Kevin Berg Kartaszewicz-Grell has called third-level survivorship.

Key to understanding third-level survivorship is the S-curve, often used to show the potential audience of a new product. The y-axis on the graph represents the number of adaptors, of whom some will never adapt and others will adapt sooner or later; the x-axis represents time.

At the beginning, growth is slow as the earliest of adaptors begin to come on board. As more people learn about a new product, they share it among their friends. Assuming that individuals can influence others at equal rates, the growth in the number of adaptors begins to reach an exponential level. Once the number of potential adaptors begins to decline, growth tapers off. 

The S-curve, Kartaszewicz-Grell explained in his presentation, also has implications for crowdfunding. Campaign managers need to understand what the full potential of their product or project is, how it can be reached, and how fast. Finding out how many people may back the campaign and who they are is essential to devising a clear narrative and marketing strategy around the project.

The key to success, however, is being able to pass third-party survivorship. The earliest of backers will often contribute to a campaign because of the emotional attachment to the owner or a person involved with the project. Their friends may also be more inclined to support a campaign if they have a loose connection to it. As the backers become three or more levels removed from the owner, however, the decision to fund becomes a rational one. If that owner can convince a large group of strangers that the campaign is worth backing, it is a good bet that the crowdfund will succeed.

Kartaszewicz-Grell’s explanation of third-level survivorship was only a small portion of a larger presentation that focused primarily on the potential of crowdfund in Latin America. While massolution's research director used the S-curve specifically to discuss individual campaigns, it's not a stretch to apply the concept to crowdfunding in Latin America as a whole.

Crowdfunding Potential in Latin America

Currently, there are few platforms in the region and not many people are aware of the general crowdfunding concept. There are many reasons to believe, however, that the potential audience is huge and that the region is ready for crowdfunding.

Latin America’s economic outlook is bright, and while internet penetration is still relatively low (under 45 percent), growth has been strong. Of the people who are online, many participate in social networks; crowdsourcing platforms have done well there.

Initiatives like Startup Chile show that the region is more than ready to tap into its innovative potential. While the program aims to attract entrepreneurs from far and wide, Chile and Argentina trail only the U.S. in the number of companies admitted to the program. Strong diaspora groups and the prevalence of Spanish across the world mean that Latin American crowdfunding projects can reach a global audience. The crowdfunding projects that have taken place in the region, like Colombia's bid to fund a skyscraper, have resonated with the populace.

How big the potential Latin American audience for crowdfunding is, and how to engage that audience, is exactly what MIF and IDB aim to determine. The day-long workshop in which MIF and massolution explored crowdfunding in Latin America was a resounding success, and the bank will continue to explore the topic with massolution's guidance.

To learn more about crowdsourcing and crowdfunding business models, check out our research section, which features more reports by massolution.

About massolution

Massolution is a unique research and advisory firm specializing in the crowdsourcing and crowdfunding industries. Massolution works with governments, institutions and enterprises in the design and implementation of crowdsourcing and crowdfunding business models that drive improved business performance, product and service innovation, enhanced levels of customer engagement and in the formation of new sources of capital.

Massolution also operates the industry website Crowdsourcing.org.

You can reach a representative at massolution by emailing contact@crowdsourcing.org.

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