This morning, Rally.org announced it’d raised $7.9 million toward its crowdfunding platform thanks to big name investors like Google Ventures, Greylock Partners, and Collaborative Fund. The application, which certainly falls into the same bucket as the likes of IndieGoGo and Kickstarter, has distinguished itself with its own payment system (leading to smaller user fees, 4.5 percent per transaction) as well as a simple analytics system to measure campaign efficacy.
Rally.org and its 1.5 million users also focus more specifically on nonprofit and charity fundraising, rather than creative projects.
No matter the distinctions between crowdfunding platform A, B, and C (and D and E…), a trend has been pinpointed and they are all riding the wave of popularity and raking in investors’ money in the meantime. I’ve warned about the perils of this market, and I’ve marveled at the human stories that have been given voice (and cash… lots of cash).
But as the crowdfunding platform continues to grow, seemingly unstoppably, it might be challenging its inherent worth. A lot of this is pure math: the more projects there are the more money is needed, and eventually the sheer amount will thin down the contributions. Social engagement consultant Craig Agranoff recently explained:
“The other kick is that as crowdfunding becomes more and more popular and more and more projects get put into the mix, the number of donations towards [sic] each project would likely fall. While there will still be big splashes of success here and there, they will be the exception as they are now. The dilution of projects will make it harder and harder for those with little promotion to get noticed.”
If you define crowd funding success as a majority — or at least a relatively high percent — of projects using these platforms achieving funding goals, then we’re in trouble. The recently outed number of failed Kickstarter projects revealed this. Say 10 people post their ideas on crowdfunding sites, and between one and three are fully funded – I’d call that a success (of course, you might not – it’s a pretty subjective qualifier). But if 2,000 projects are posted and 400 are fully-funded – I wouldn’t. Sure, it’s the same percent of success, give or take, but 1,600 failed campaigns (which have collected backing from interested consumers) is a difficult number to ignore.
There’s the possibility that as the number of crowdfunding platforms grows, so will consumer interest, and we’ll have ourselves a perfectly aligned market and it will look like this:
[This is a very fake chart made for effect.]
The JOBS Act will inevitably draw some new interested to crowdfunding. It will give the startups using these sites the legal ability to give equity in their companies to contributors. Right now, you get t-shirts, beta invites, early access to the product, but you aren’t an actual investor. The JOBS Act will change that.
Under this new legislation, companies will be allowed to solicit up to $1 million from public investors in exchange for equity, or future benefits the startup will reap. The news has spurred even more interest in the market and it’s projected to be a huge part of crowdfunding’s growth: A recent report forecasts that the number of platforms is expected to jump to 530 by the end of 2012, and total global funding will reach approximately $3 billion.
But with the JOBS Act comes regulation of these crowd investing politics, and it’s made some of the platforms themselves wary. Many of these platforms, like we heard today with Rally.org, weren’t funded by the masses; they were funded by venture firms and angel investors. And in essence, the new rules would mean that anyone and everyone who has some spare change would be competing with these legacy entrepreneur backers. And if this is all too regulated, people will long for the days when you could just sign in and ship off ten bucks; not regulated enough and we’re looking at scam city. That’s a pretty fine line to walk.
There’s also the concern that changing the investment game could rock the tech startup scene, which is already steeped in bubble talk. We can never escape the “this is the next Facebook!” chatter, and sometimes it even lures industry savvy types out of millions of dollars (a la Color, the $41 million hype machine that has pivoted and re-pivoted until kingdom come). It could lead to a lot of over-funding for startups that bust, which is one thing when it’s a millionaire throwing money away and another beast entirely when it’s someone making $50k a year who’s easily swept up in press releases, launch announcements, and bullish forecasts from news pundits. Convincing VCs who’ve seen it all can be difficult; convincing the public via crowdfunding might not be as hard. It’s not that this would necessarily lead to malicious, scammy behavior (although it could), but startups have to hustle and this could be a problem when taken to the public forum level.
So this was all a very long way of saying that, yes, we could be reaching crowdfunding oversaturation thanks to A) trending popularity and B) increasing attention thanks to the JOBS Act.
I’m definitely for cutting out the middle man, taking it to the streets, giving power to the people and all that. And with the flood of heartwarming stories and disruptive tech that crowdfunding sites have brought us, it’s incredibly easy to get caught up in it all – but that’s the problem. We could easily hit a point where too many startups are hitting this scene, and there aren’t enough people and dollars to divide amongst them; or over-regulation has complicated the whole thing; or rampant fraud; or too much hype has ended in consumers who wanted to be a part of the next Instagram getting burned and swearing off it all.
There are a lot of “what ifs” that could happen here, and yes, there are lots of good, positive headlines I can already see too (“Single Mom Makes Millions on Crowd Investment in Mood-Reading Social Network!”). But it won’t all be Pebble Watches and bus monitors going on $650k vacations. So it’s important to remember that along with all the do-gooder vibes we get from Kickstarter and its comrades, this is about to become a regulated industry and regular people will feel the effects of its ups and downs.