6/8/15

When crowdfunding becomes a commodity


In recent years, the technology stack powering crowdfunding platforms (for rewards- and donations- based crowdfunding) has been nearing commodity status.

This has been driven primarily by developments in the payment layer — where companies likeStripe, Braintree, and WePay have converged on world-class payments-as-a-service (PaaS) solutions for crowdfunding / marketplace platforms.

As crowdfunding platforms become increasingly undifferentiated based on their technology, operators face a critical decision:

1) Double-down on their technology to become the tool for general fundraising activities; generating growth through increasing transaction volume.

2) Focus on funding discrete projects in a specific vertical; generating growth by expanding the Community and integrating vertically.

Both present different business models and serve different market needs.

1. Building the technology for fundraising: Crowdfunding-as-a-Service
Platforms that place their bets on technology are effectively commoditizing the remaining feature layer of the crowdfunding tech stack. They are competing to become the premier “crowdfunding-as-a-service” (CaaS) player.

Under this approach, the traditional crowdfunding fee-for-service business model remains the dominant revenue driver — where, in exchange for a small platform fee (typically 5–7% per $ raised), the platform offers standardized tools to run a fundraiser.

Due to low switching costs and thin profit margins, the platforms that survive and “win”, are the ones that command significant transaction volumes, offer the best price points, and are first to realize economies of scale [1].

Companies that most resemble CaaS platforms today are the “anything goes” platforms like Crowdrise, FundRazr, GoFundMe, Indiegogo, and Tilt.

In the long-run, we should expect this grouping of platforms to consolidate — limiting the feasibility for new entrants. Platforms heading down this path will need to generate growth by aggressively increasing transaction volumes. The implications for this are as follows:

Shifting towards cause-based fundraising — e.g. for non-profits,individuals, etc
Cause-based fundraising is attractive for CaaS platforms for two reasons:
  • Cause-based fundraisers are typically run by organizations or individuals with established donor networks and/or brand. There is less of an expectation for there to be an existing Community on the crowdfunding platform to fund campaigns . In fact, it’s often understood that these crowdfunding platform serve as a technology enabler for existing fundraising initiatives.
  • Cause-based fundraising campaigns tend to not be as rigidly project-based, and therefore, are usually structured as keep-it-all (KIA) crowdfunding campaigns. KIA refers to funding where donations are collected and processed regardless of if a campaign hits it’s specified target. As a result, KIA crowdfunding guarantees healthy transaction volume on which platforms can charge their fees — a feature critical for the economics of volume-driven businesses [2].


Lowering fees in exchange for scale
One of the levers that crowdfunding platforms can control is their platform fee.

Well-capitalized (or already profitable) crowdfunding platforms will need to experiment with lowering their platform fees as a way of driving more transaction volume.

Platforms like Indiegogo are already experimenting with varying (lower) fee structures. Non-profits get a 25% discount, while, Indiegogo Life (the new personal fundraising extension of Indiegogo) offers a 0% fee for all personal fundraisers.

This gamble can be worth taking as larger transaction volumes unlock benefits resulting from economies of scale. One example is with payment processing fees — where processors offer lower credit card fees per transaction as larger volumes are processed. These savings can be passed onto users (to further boost volumes) or be kept entirely (to boost margins).

Racing to internationalize the business
Being first to a new geography creates a number of non-technical competitive advantages for CaaS players in terms of capturing volume . This includes raising brand recognition ahead of competitors, and establishing strategic partnerships.

Fortunately (or unfortunately), crowdfunding payment processors like the ones mentioned above, have significantly simplified the technical requirements for going international.

As a result, many crowdfunding platforms are now on equal footing when it comes to international expansion. This makes quick international expansion an imperative. For example, at the time of writing, any crowdfunding platform using Stripe Payments will immediately have access to payment infrastructure that can accept and settle payments for 20+ major countries around the world.

2. Picking a niche, and growing beyond crowdfunding
Platforms not undertaking a CaaS strategy will need to create competitive advantages that don’t rely solely on price and transaction volume.

A platform’s competitive advantage will need to come from:
  • Developing an expertise in a specific vertical (and the strategic / operational challenges that come with it),
  • Cultivating an engaged and relevant Community that interacts with the platform frequently, and
  • Expanding into other value-added services within the specific vertical — diversifying from crowdfunding.
Companies best positioned for this approach are the ones that started out serving a specific vertical, fund rigid projects (not open-ended causes), and have a company culture that puts their Community at the core of their business.

Kickstarter is the most notable example. They serve the creative projectvertical to enable the creation of consumer tech, games, and film (among other things). There are also others popping up for verticals like science,healthcare, etc.

In the long-run, we should expect an expansion in the number of vertical-focused platforms. The template for how these platforms grow and scale will be subject to vertical-specific dynamics.

That said, there are general implications we can draw:

Broadening the definition of Community
Most vertical-focused crowdfunding platforms have Community management teams. These teams are responsible for (among other things) engaging with funders and project owners to get feedback for improving the platform, setting the culture, and advancing the collective Community’s broader mission.

While funders and project owners are important users, there are others that could benefit from / add value to the platform’s Community.
  • A starting point will be for platforms to experiment with the role of vertical-specific influencers, organizations, subject-matter experts, enthusiasts, journalists, bloggers, etc. In aggregate, the integration of these “non-funders” into the Community serves to:
  • Broaden the mandate and value of the Community beyond funding,
  • Strengthen network effects,
  • Improve distribution for fundraising projects, and
  • Democratize participation beyond only those with the financial means.

Developing a content strategy
Crowdfunding campaigns funding discrete projects are often the first step towards telling a much bigger story.

Most crowdfunding projects today are hosted on static landing pages that collect donations and provide some contextual content (e.g. text, video, images, comments, updates). Going forward, there are opportunities to use this content in a more deliberate and structured manner to tell a story.

Some early examples include:
  • Kickstarter’s timeline: Where all project pages have been changed to visual timelines (ex here) — reinforcing the fact that each campaign is a story that doesn’t end only with funding, nor does it have to only be about funding.
  • Experiment’s lab note update feature: Where updates are a channel forpublishing real-time science content not found elsewhere on the internet.
As the quality of the content improves and use-cases are better defined, content will become an increasingly important channel for re-engaging users to the platform.

At scale, content can also be filtered, sorted, and aggregated in more meaningful ways — opening the opportunity for crowdfunding platforms to evolve into themed content platforms.

Focusing on “fulfillment” activities
Project-based crowdfunding usually involves some fulfillment activity — e.g. funds raised to build a product, produce a film, conduct a research study, etc. A next step for many platforms is to offer fulfillment services to project owners.

For example, platforms like Kickstarter could provide services that help with the prototyping and manufacturing for product-themed crowdfunding campaigns. They could offer these services in-house (for a fee), and/or through partnerships with a trusted network of providers (for a referral fee).

This not only opens up other (higher margin) revenue streams, but can be beneficial for project owners as platforms have the buying power to negotiate for bulk discounts on the most frequently used services.

In conclusion
As commoditization comes into full swing, platforms will either aspire to be the largest Crowdfunding-as-a-Service player for generalized fundraising, or become a niche player that looks vertically in the value chain for growth opportunities.

The first wave of disruptions brought on by crowdfunding challenged conventions around how the world could fund things via the internet. This next wave will not only reinforce the role of technology in fundraising at a global scale, but will challenge us to see that funding is only one of many activities that “crowdfunding” platforms can offer.


Notes:
[1] A CaaS competitive landscape is similar to the payment processing landscape where margins are very thin and switching costs are relatively low. For example,Balanced Payments, a payment processor with close to half-a-billion in annual transaction volume had to closed their doors earlier this year, amid competitive pressures from other players.

[2] By contrast to KIA crowdfunding, all-or-nothing (AON) crowdfunding has funding risk involved. AON crowdfunding is where pledges only materialize into a donation if the project hits its stated target. AON crowdfunding applied to a low margin, high volume business can introduce material stresses / unpredictability to the platform economics.

Thanks to Phil for reading versions of this.