Cloud Funding Offers More than Pennies from Heaven

by Tom Harnish

In the age of social networking, if you need money for an art project or for a new business, friending could also mean funding.

Chris Young wanted to shoot a feature film presentation. The plot: dude's car breaks down in the desert, no mobile signal, not a soul in sight. Parched, our hero stumbles into a lonely gas station where he makes a disturbing discovery. Someone, or something, is chained to a backroom wall.

Bankers didn't get it, but people on Twitter, Facebook, and LinkedIn did. Within eight weeks people donated $11,350 (more than his goal) so Young could shoot the 3D live-action short. What did those 92 people receive in return? Depending on how much they contributed, Young's collaborators were given special mention in the credits, invited to the first screening and party, or announced in the main titles as Executive Producer.

Welcome to the world of cloud funding, also known as crowd source capital or social funding, where entrepreneurs combine social networking with project fundraising.

How it Works

Unlike peer-to-peer microlending, which was introduced to the U.S. in 2005 by Kiva, social funds aren't paid back. Unlike debt funding from banks, social funding doesn't require you to pledge collateral or offer personal guarantees. Unlike equity funding from venture investors, you don't have to give up equity or control.

Young used IndieGoGo to raise the money for his project, but other cloud funding websites exist. Kickstarter, Pledge Music and SellaBand focus on the arts, and Spot.Us helps support investigative journalists. IndieGoGo and Invested.in help a wide range of entrepreneurial effort from musicians, to writers, filmmakers, game or application developers, designers, inventors, non-profits and charities.

IndiGoGo was launched in 2008 to leverage social marketing with view that it would democratize lending. And it has. Contributors from 120 countries have participated in more than 5,000 projects on IndieGoGo. The average fund raising goal is about $5,000, but projects range from $500 to $25,000.

The process is straightforward. You create an account, and website forms help you build a project description, establish fund-raising goals, and explain "perks" designed to entice people to contribute at various levels.

Some people will contribute simply because they like what you're doing, and projects with a video description raise 122 percent more, according to IndieGoGo. Other people will be attracted if you offer desirable perks. Contributions tend to be in the $50-$75 and $300-$400 range.

IndieGoGo makes money the old fashioned way; they get 9 percent of whatever you raise. But they add an innovative twist: If you meet your fundraising goal in the time you've set, they pay you back 5 percent. This offers you an incentive to market your project aggressively so the site has a better chance of making money. 4 percent of something is better than 9 percent of nothing, after all.

What if You Don't Make Your Goal?

Nevertheless, not all projects meet their fundraising goals. In any event, if your project is underfunded, you've still learned a valuable lesson. If you can't attract people to your project you know that either your project isn't attractive or your marketing isn't working. Good ideas are a dime a dozen, and most people will politely give you their two cents worth when asked for an opinion. But when it comes to dollars for dancers, say, they may not be as enthusiastic.

Surprisingly, if you don't reach your goal, you still keep the money you raise, less the websites' take. Even more surprisingly, according to Danae Ringelmann, President and co-founder of IndieGoGo, contributors understand they won't get their money back if the project isn't fully funded.

But if you get to keep the money, even if your project isn't fully funded, doesn't that attract people who dishonestly claim they have a project so they can to run off with the money? No, says Ringelmann, "People inherently don't have an itch to fund the unknown. (But) if a friend, blogger you like, or organization you're a part of funds a project and tells you about it, you're much more likely to fund it than if you stumbled upon it on your own."

According to Ringelmann, "The transparent and open nature of cloud funding gives project champions the opportunity to showcase their growing community and the traction on their project — two key elements that not only build trust and spark a movement, but also provide validation that the project is legit. So projects that don't reveal who's behind them, don't have a core community, and don't do outreach to showcase the community building around it are very poor candidates for success. A person who wanted to commit fraud by raising money and running would have to be willing to destroy their reputation and social graph connections across the web to succeed."

Regulatory Issues

Federal and state laws govern debt and equity funding. Any investment opportunity that's offered to the general public, no matter how small, has to be registered at substantial expense with the Securities and Exchange Commission (SEC), for example. Technically, you can't even invest $10 in a project led by someone you know personally if they offer you a share of the profits from their venture.

But that may change thanks to social financing. A successful crowdfunding campaign raised $1,300 to cover the cost of preparing a petition to convince the SEC to exempt projects of $20,000 or less, and for contributions of $100 or less. If public response is strong enough, the SEC might just make the change — all thanks to the power of a crowd.

It's Not Just About the Money

Over a two-month period, 97 people contributed a total of $2,700 to help Elaine Zelker, a hospice nurse, produce a photography exhibit of her patient's hands for display in a local gallery. In return, her contributors received a big thank you, or — if they really dug deep — a coffee table book of the collection. That's all.

Zelker say, "I'd love to book more 'hand participants' and capture their last photo. Everyone has a unique story to tell. I am not able to leave my day job yet, and do photography full time. I am waiting for that moment."

That may happen. She's booked a half dozen photography jobs over the past three months. They may not have been a direct result of the exhibit project, she says, but now she knows people love her work. Social funding may have helped her take her photography to a new level.

Who needs pennies from heaven when you can find dollars in the cloud?

Tom Harnish is a serial entrepreneur. Always on the bleeding edge of technology, he learned what works (and what doesn't) when raising money by spending countless (and often fruitless) hours in front of lenders and investors.
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Should we trust the wisdom of crowds?

A problem shared is a problem halved, goes the old saying. But what happens if you share a problem with millions of people? Are you left with a millionth of a problem? Or just lots of rubbish suggestions? Both the British government and BP have recently called on the public to help them sort out a mess. Chancellor George Osborne asked for tips on programmes to be cut to trim the huge budget deficit, while deputy prime minister Nick Clegg wants us to suggest "silly" laws that can be repealed. And the ongoing Deepwater Horizon oil spill in the Gulf of Mexico prompted BP to call on Joe Public for ideas to stem the flow of oil after its in-house solutions failed. So far BP's corporate May Day has elicited more than 20,000 suggestions. This is the most ambitious online crowd sourcing exercise ever attempted by any British government. It is an entirely new way for government to engage with people.Clegg calls for law repeal ideas Public 'want quangos and aid cut' In trendy parlance, such appeals for outside help are known as crowdsourcing, a term that Mr Clegg made sure to name check in his appeal. So what is crowdsourcing? Anthony Williams, co-author of Wikinomics: How Mass Collaboration Changed Everything, says examples are everywhere. Open source computer operating systems, such as Linux and Google's Android, the big rival to Apple's iPhone, are written and refined by members of the public. Another good example of such collaboration is Wikipedia, which allows users to write and edit entries for its online encyclopaedia: "For the first time millions of people can aggregate their talent and expertise," says Williams. "Previously the assumption had been you had to create a company. Here is something completely different." There are numerous modern examples of how collaboration has transformed businesses, Williams says. One good recent example is that of the Canadian mining company Goldcorp, which was struggling financially and unable to find gold on its land in northern Ontario. When a new chief executive arrived he put all its geological data online, asked for help on where the gold was located and put up $500,000 in prize money for accurate suggestions. "They got submissions from people all over the world, including people using 3D computer modelling techniques. They found $3bn worth of gold on the property and Goldcorp became one of Canada's biggest mining companies." Is crowdsourcing just the old employees' suggestions box reinvented? One famous legendary business story - which may be urban myth - relates how an employee suggested to the matchmaker Swan Vestas that they could have one instead of two sandpaper strips on the matchbox
The company listened to the lateral thinking and reaped the benefits in lower costs

It's just one of a number of examples of how opening a problem out to the public and away from a small pool of workers can lead to huge gains, Williams says.

"These things happen a lot. You're making a problem accessible to a large range of people with a diverse range of skills. And it turns out it's not just for companies it applies to government as well."

The idea is gaining traction in the normally more conservative corridors of the public sector, says Natalie Evans, deputy director of think tank Policy Exchange.

"We now have the technology to reach a huge pool of talent and ideas from the general public in way that simply wasn't possible before. Done properly, this means we can leverage mass collaboration in a way that fosters a sense of 'public buy-in'.

"This can be particularly important where - say in the case of deciding where the axe must fall in terms of cutting public spending - there are difficult decisions to be made."

Seeking ideas is one thing? But how willing are those in power to act on the public's suggestions?

The point is neatly made in the findings of a survey published on Monday about where spending cuts should be. Some 2,000 members of the public were asked for their suggestions and one of the most popular targets was Britain's overseas aid budget. Yet this, along with healthcare, is an area the government has pledged not to touch.

Perry Walker, head of participation at the New Economics Foundation, believes crowdsourcing works well for ideas, less well for how you develop them.

"Brain storming works best when people don't talk to each other because people inhibit each other. But then what happens when you've got the ideas? You could have 30,000 ideas on what laws to repeal."

At this point smaller groups of committed citizens must be given a chance to filter and discuss the ideas, he says. Transparency and feedback are also crucial if the public is not to become cynical, he warns.

Geoff Mulgan, commentator and director of think tank the Young Foundation
'Crowdsourcing is already being used extensively - the World Bank used it in Haiti, the firm Innocentive now has hundreds of thousands of scientists on tap to solve problems for a fee, and New Zealand briefly tried it for police legislation. So far reality hasn't caught up with the promise - and good strategic policy making involves deliberation, which the existing crowd-sourcing models aren't suitable for. But for more discrete and practical problem-solving it undoubtedly has a lot to offer.'

In fact, there is a question about whether what Mr Clegg and BP have done is genuine crowdsourcing at all.

Crowdsourcing, says Stephen Overell, associate director of the Work Foundation, is really about using looser, freelance forms of commissioning tasks, allowing an organisation to tap into a much wider pool of knowledge or specialist skills.

BP's effort is more about public relations - appearing to be responsive, says Overell.

"BP has handled the oil leak atrociously. So its priority is public relations first and the need for high quality information second, in that order. 20,000 ideas is unmanageable, you'll need all sorts of procedures for sorting through them. Solving this sort of issue is a profoundly technical issue that the vast majority of people are ill equipped for."

And asking for ideas in this way is not new - the employee suggestion box has been around for years and is actually far more useful than what either the government or BP is up to, he argues.

"The best ideas of how to solve a problem usually come from employees, although it's probably best done through technology now rather than a box."

But it only works if there is a genuine interest from management - "too often over time it becomes a silly gimmick that you feel you have to do."

Another sceptic is Peter Kellner, who as president of polling company YouGov, is well used to listening to the views of ordinary members of the public.

He doubts Nick Clegg's call to arms will elicit anything civil servants couldn't have come up with. And what's worse, the government will end up with egg on its face.

Populist open-ended gestures like this normally end in embarrassment, says Kellner.

"The last government allowed people to put up petitions on the Number 10 website and it quickly got out of hand with Jeremy Clarkson for prime minister. It's an invitation to idiocy and madness and an opportunity for lobby groups."

Surprisingly, Anthony Williams, whose follow up to Wikinomics is published later this year, agrees.

"The White House tried crowdsourcing when Obama first came in. They asked the public what its main priorities should be. Legalising marijuana came up number one."

For that reason, the term crowdsourcing has become unpopular with some of those like Wikipaedia founder Jimmy Wales who one would expect to support it.

"The problem with the term is the notion of a crowd - this amorphous crowd has no individual perspective. There's value in mass participation but where possible the people need some expertise. We just call it collaboration frankly."
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UK Government launches online crowdsourcing initiative

Deputy PM Nick Clegg will this morning unveil the Coalition Government’s first significant online crowdsourcing initiative, aided by a raft of digital tools. The initiative, supported by a website – Your Freedom – as well as a Dialogue app, will garner opinion and ideas from the public on which laws it feels are unnecessary and infringe on civil liberties, to influence future policy making. The website has been set up to allow as many people in the UK as possible to put forward their ideas on what laws and regulations should be done away with, Clegg will say this morning. The initiative forms an important part of the Government’s intentions to slash bureaucracy and red tape, with sourced ideas feeding into reforms including the proposed Freedom Bill and the streamlining of regulation, particularly for businesses, social enterprise and other third-sector organisations. It’s the first time a UK government has run a crowdsourcing project of this nature and scale, according to Chris Quigley, director of Delib, the firm which developed the Dialogue app. The app was initially created for the Obama Administration in the US, and has been used extensively by US government agencies in the last 12 months. Those wishing to take part in the initiative will have options to submit ideas or to rate and comment on other people’s. The overall aim, according to Quigley, is to not just share law reform ideas with the Government, but to help collectively analyse the ideas to sort the best from the worst.
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Crowdsourcing may speed lawsuit archive

A crowdsourcing effort may speed the archiving of drug lawsuit documents, making them more accessible to the public. The Drug Industry Document Archive wants to enlist the help of crowds in an effort that has exceeded its capacity.

DIDA was formed following a lawsuit in which Parke-Davis was charged with illegally promoting a drug for unapproved uses. Witnesses against the drugmaker approached the now 11 million-document Legacy Tobacco Documents Archive, created as a condition of the settlement between tobacco companies and states that sued them. Tobacco companies were forced to hire workers to enter document metadata, making the archives searchable.

DIDA already has thousands of documents from attorneys and journalists involved in drug company lawsuits, and it expects millions more. But they need to be indexed, evaluated and entered before they are searchable.

Archive manager Kim Klausner pictures "an Internet army" of students, journalists and citizens doing the work. Grants aren't feasible, she says.

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Phoning It In

The brave "upstanders" of the DRC--the group Women's Synergy for Victims of Sexual Violence, for example--would have the tools to report instances of abuse, crowdsourcing sexual violence the way Clinton hopes young Kenyans will crowdsource anti-corruption efforts. The people of the Congo certainly don't lack for courage. Perhaps mobile phone technology can give them the tools they need to take action against the thugs and war-criminals who are ripping their society apart.
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Crowdsourcing' puts many extra hands to work

The August long weekend goes by many names in Canada – Simcoe Day in Toronto, Colonel By Day in Ottawa, and British Columbia Day in B.C. – but the most common is simply Civic Day. On this Civic Day, it is worth noting how our civic institutions are rapidly being transformed by open government mandates that leverage the power of the Internet to foster greater transparency and public engagement. The City of Vancouver has led the way with the adoption of a resolution in May that endorsed open and accessible data, open standards, and open source software. The open data component states, "the City of Vancouver will freely share with citizens, businesses and other jurisdictions the greatest amount of data possible while respecting privacy and security concerns."
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Portland businesses criticize city's bid for free Web redesign

Crowdsourcing is hot in the business world, with companies asking the public to design T-shirts, shoes and more -- then vote the best entries into stores. Portland city officials joined the fray this month, launching a contest to help redesign the government's Web site. They see the project as a hip, tech-savvy way to engage a city known for civic pride. "Portland has a lot to live up to in terms of public input," says Roy Kaufmann, spokesman for Mayor Sam Adams. Not cool, Portland. By asking amateurs to design for free, creative professionals say, the city is disrespecting a signature industry and botching a chance to brand Portland.
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Crowdsourcing Closer Government Scrutiny

A new Web-based effort promises to track the sources of congressional earmarks, compile databases of the Twitter posts of state lawmakers, and add sharper perspective to the Obama administration's open-government efforts. Government watchdogs: With an online tool developed by Sunlight Labs, Web-based volunteers can comb through earmark requests. "Government puts out a ton of data that is really interesting about what it does, but people can't understand it," says Clay Johnson, director of Sunlight Labs, an arm of the open-government group Sunlight Foundation, based in Washington, DC.
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Oink oink! Crowdsourcing government earmark requests

A new project hopes to use volunteer labor to compile a list of all Congressionally requested "earmarks" into a central database. Get ready to slice, dice, sort, and map earmark requests online. "People are desperate for fruitcake these days," says The Cato Institute's Jim Harper when explaining why he's giving one away as a prize in his crowdsourced earmark-exposure contest. Behind the fruitcake lies a serious purpose: crowdsource the compilation of all federal legislators' "earmark" requests, those specific funding requests to dole out money directly to (hopefully) deserving entities in the legislator's home district. To Learn More Click Here Oink Oink