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By Sarah McKinney (MBA C11)

The overall market size for crowd-funding is anticipated to reach $500 million by the end of 2012, with growth fueled by anticipation of the JOBS Act taking force in January 2013. This legislation will expand campaign “perks” received in exchange for individual donations to include equity ownership in start-up businesses. Extreme crowd-funding success stories like Pebble, which exceeded its funding goal to raise $10.3 million in wristwatch pre-sales on Kickstarter, have given hope to entrepreneurs by democratizing the funding of ideas.

But arguably more powerful than the capability to raise capital or generate early orders is crowd-funding’s ability to:

1. Accurately assess demand
2. Generate engagement prior to launch
3. Create brand advocates who assist on-going development
4. Invite strategic partnership and acquisition opportunities
5. Lower costs and, in turn, mitigate risk

Why spend thousands of dollars on custom surveys to gauge purchase interest when you can find out if people are willing to put their money where their mouth is at virtually no cost? In the future, crowd-funding will likely be seen as a viable solution not only for creative projects, causes, and aspiring entrepreneurs, but also for established small-to-medium sized companies seeking an alternative to traditional market research.

The US market research services industry includes 4,800 companies with combined annual revenue of about $17 billion. I have spent over a decade working in this sector, first on the vendor side conducting focus groups and quantitative studies for a variety of technology, consumer packaged goods, retail and automotive companies. I then managed research at Vivendi Universal Games, Activision and Yahoo! before going back to graduate school for an MBA is sustainable management.

Now, as a first-time entrepreneur of a tech start-up called AMP, which is a collaborative bookmarking site and file exchange for sustainability champions, launching a crowdfunding campaign on Indiegogo to kick-start our efforts arose as the obvious choice. In addition to the five reasons mentioned above, crowdfunding is a way for us to entice developer talent and gain leverage that can be used to secure additional investment and resources needed to scale growth post-beta

Large companies will likely continue spending huge sums of money on traditional market research and product development, but crowd-funding offers a compelling alternative for small-to-medium sized businesses with budgetary constraints. Beyond the up-front investment needed to identify what will be tested and develop supporting campaign materials (e.g., AMP’s video cost ~$5K), crowd-funding is virtually free, reducing risk by allowing consumers to determine the viability of proposed products and/or services before development is pursued. The influx of small-to-medium sized business investment received directly from consumers, whether they’re new or existing companies, will stimulate the economy and create needed jobs by helping businesses with strong ideas to grow and flourish.

Having a simple way to stay engaged with the individuals who helped you develop your product or service, and thus creating brand advocates, is a marketer’s dream come true. Not to mention the benefits of having quantitative data to inform accurate sales forecasts. In some ways, this approach isn’t new, as iTunes, Amazon and video game publishers, to name a few, have been using a pre-sale strategy for years. But instead this would simply move the purchase decision up in the development cycle, further decreasing risk.

Established companies could also use crowd-funding platforms to identify acquisition opportunities, following the money to identify business ideas generating the most enthusiasm. Granted, some policing will be required to ensure established businesses don’t monopolize or misuse a crowd-funding platform, but it strikes me as an obvious evolution in market research methodologies, aimed at accurate demand assessment, customer relationship management and brand loyalty generation.  

What do you think? Do you see other opportunities and risks for crowd-funding moving forward?

This is the second post in a 3-part series by Sarah McKinney and John Lehnert. You can contact them at Sarah.McKinney@presidioedu.org and John.Lehnert@presidioedu.org

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