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  • Cloudfunding – How to Kickstart an Economy

    Tom Koulopoulos, Cloudfunding – How to Kickstart an Economy

    Cloudfunding – How to Kickstart an Economy

    Ready for a quick quiz to test your business acumen and understanding of how to best kickstart an economy?Tell me which organization I am describing below.

    Represents 99.7 percent of all employer firmsEmploys just over half of all private sector employees

    Pays 44 percent of total U.S. private payrollHas generated 64 percent of net new jobs over the past fifteen years

    Creates more than half of the nonfarm private gross domestic product (GDP)Hires 40 percent of high-tech workers (such as scientists, engineers, and computer programmers)

    Makes up over 95 percent of all identified exporters

    Produced thirteen times more patents per employee than large patenting firms; these patents are twice as likely as large firms’ patents to be among the 1 percent most citedWho did you come up with? GM, GE, Apple, IBM, the US government? Sorry, none of the above.

    OK, it was a set up. These bullet points don’t describe any single organization. Instead they reflect the contribution of Small Business to the US economy. Given the importance of small business you would think it might be a great place to focus in kickstarting the economy – certainly better than another round of the strategy “let’s print money till we run out of ink,” known more popularly as Quantitative Easing. Yet the primary challenge small business faces today is funding.

    If you look at the numbers above, it’s not hard to understand why small business is such a critical part of sustainable economic growth. Diminishing the role that these engines of the economy can have is like throwing the plankton out of an ecosystem; it may take some time but eventually every organism, including the ones at the top of the food chain, will suffer.

    If these businesses can flourish and grow, on the other hand, the positive impact on the economy is considerable. In fact, while the Small Business Administration claims that 64 percent of net new jobs during the period from 1995 to 2010 came from small business, nearly all net-new jobs during the first decade of the twenty-first century came from small business.

    And here is even better news. Recessions are especially good times to introduce a new idea, not only because the attention of larger players is diverted to operations and cost cutting, but also because the marketplace is ready for some light to illuminate their path out of the darkness. The iPod, which gave birth to a decade-long series of innovations in computing, was introduced in 2001, a time that was as dark economically and nationally as any the United States had experienced since the Great Depression and the Second World War.

    But good ideas require and appetite for failure and experimentation. As importantly, they need funding which is hard to come by via traditional sources such as banks, venture capitalists, and even angel investors when the idea is nothing more than just an idea. So, if you’re taking out a second mortgage to fund your new idea you will not have much tolerance for experimentation. But what if you could test your idea on the market at zero costs, other than your time? You can, in the cloud.

    New players such as Kickstarter, of New York, have taken the idea of crowdsourcing into the cloud by developing a way to successfully match investors and donors with recipients who use the money to fund creative projects; call it cloudfunding.

    It’s not a new concept. Nearly 150 years ago Adam Smith described the force of an invisible hand that shapes free markets. Cloudfunding is the evolution of that invisible hand, hovering over ideas and capital and bringing the two together; in the absence of cloudfunding, it would be either horribly inefficient or simply impossible to pair pure ideas with traditional financing.

    To date more than 700,000 individuals have contributed over $75 million to fund Kickstarter projects, roughly a hundred of which are introduced daily. The setup is pretty simple: recipients set their own financial goals, one or more Kickstarter investors takes an interest in the project and makes a pledge; if the goal is reached within the set timeline, the money changes hands and the creator moves forward with the idea. Donors receive products or experiences defined by the project’s creator, depending on the level of the pledge.One of my all time favorite Kickstarter projects is a new movie being created and funded in the cloud, The New Kind. Not only is The New Kind funded through Kickstarter, to the tune of over $100K, so far, but it is also being created by a global community in the cloud.

    Kickstarter also serves as a critical testing ground for new ideas, quickly validating their ability to attract attention and deliver value.In a way, Kickstarter offers a pathway for ideas that would otherwise likely die a quick death on a cocktail napkin or a slow death as their inventors tried to promote the idea among friends and family.

    Kickstarter’s biggest matchmaking successes include 2009’s Designing Obama, a book that explored the visual art and design of Barack Obama’s presidential campaign. The project raised $85,000, but was eclipsed in 2010 by several projects, including the open-source social networking project Diaspora (which topped $200,000); the film Blue Like Jazz ($350,000); and TikTok multi-touch watch kits (just shy of $1 million).

    The interactive, collaborative niche that Kickstarter established in the cloud is a far cry from the venture capital world, where funders require seats on their beneficiaries’ boards of directors in order to keep tabs on how their money is being used. And, to be clear, what you get with Kickstarter is a service or product rather than a share of the company you are providing funds to. Until investment laws change this is an unfortunate aspect of the way Kickstarter has to operate.

    Most Kickstarter projects raise $5,000 or less, but that doesn’t mean that the model is limited to no-name companies. When NASA decided to develop its own massive multiplayer online game (MMO) in 2011, for example, it turned to Kickstarter to raise money for the beta version of the project. Astronaut: Moon, Mars, and Beyond is NASA’s attempt at creating an educational game that’s exciting and targeted at today’s tech-savvy kids and teens. Able to run on computers, tablets, and “select consoles,” the project hit its $5,000 Kickstarter goal and was in development for a late 2011 release.Kickstarter isn’t alone in the “cloudfunding” space. Others, such as San Francisco-based IndieGoGo, use a similar format to fund for-profit, creative, and charitable campaigns.

    Cloudfunding serve one critical role, above all else, it redefines the notion of risk and accelerates the velocity of ideas by allowing them to flourish without bureaucratic filters, extensive and slow business plans, and investors confining the business model with unrealistic expectations.

    The impact on the economy at large may still be years off but I’ve little doubt that any mechanism that fuels the speed with which we can grow ideas will also fuel the growth of the economy.

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