Professor of Innovation at IE Business School and blogger at enriquedans.com
Sep 29, 20134 min read
Crowdfunding’s second phase: selling shares instead of products
Two former students of mine, Guerson Meyer and Sammy Gebele, have called my attention to Seedmatch, a German crowdfunding site they have successfully used on two occasions to finance their FoodieSquarestartup. Guerson y Sammy met in Madrid while taking their MBAs at IE Business School. FoodieSquare was the project they developed as part of their studies, making it to the finals of the school’s annual Venture Lab entrepreneurship competition.
FoodieSquare connects lovers of good food with the best products and producers via a service they have created called TastyBox. These include products such as a box with all the ingredients required to make a dish for two people using artisan-made products, a cheese collection, meat selection, or potpourri of chocolates, along with a B2B line for restaurants and gourmet shops.
Sales for this year are forecast at €700,000, and growth will for the moment be restricted to Germany. The startup’s team of ten are working in a difficult market: just 1 percent of food sales in Germany are purchased online, although Google anticipates growth of around 500 percent in the coming years in the sector, at the same time as AmazonFresh is set to enter the market there.
Through Seedmatch, Guerson and Sammy have now launched new fundraising rounds: in the first, at the end of 2012, they raised €100,000 in just 23 hours. In the second, which finished a few days ago, they managed €450,000 through more than 500 microinvestors, surpassing almost nine fold the funds that they originally aimed to garner, making them the most efficient crowdfunding venture in Europe.
Seedmatch is what we might call the second phase of the crowdfunding phenomenon. Traditional sites, such as Kickstarter, Indiegogo, or ArtistShare, base their model on offering rewards in exchange for a donation. In many ways, it is a kind of pre-sale: put up some money and you will be given access to prizes that range from simple recognition to t-shirts, or the most popular, early access to the product.
The model is based on a donation, and accepting the risk that the project could come to nothing. In the case of Kickstarter, the figures are impressive: $804 million have so far been collected for around 50,000 projects, and that can be seen with full transparency on the constantly updated website. The value of platforms such as these is that entrepreneurs can not only finance their projects, but are able to do so without having to hand over any control of the company. They can also be seen as a way to gauge demand for the product, a kind of market research.
The second phase of crowdfunding, which will remain complicated in the United States due to the Stock Exchange Commission’s (SEC) rules to protect investors, will involve handing over shares in return for an investment. We are talking here about entrepreneurs showcasing their projects via videos and other information and receiving money in exchange for shares. These deals can be structured in different ways, even including eventualities such as a possible exit by the founders, or a period of maturity to assess like profitability. The idea is directed mainly at people who not only like a project, but who are also convinced of its success to the point of risking putting their money into it.
For the moment, Seedmatch’s growth plans are modest: the German startup scene is not as diverse as in the United States, and the Germans tend to be more risk averse than Americans. For the moment, only startups registered in Germany can participate in Seedmatch’s financing rounds, and only investors with a German bank account and tax number ID can take part.
As far as companies looking for investment are concerned, the investment is a contractual obligation, a profit participating loan providing rights to future profits. Last year, around one thousand companies applied to make funding appeals: Seedmatch drew up a shortlist of some two hundred, then allowed several dozen to make presentations, and finally selected just 26. It was initially thought that they would have problems raising more than €100,000 each, but experience has since shown that this is not the case, and that factors such as transparency and allowing potential investors to see their accounts are vital, as is having a good video presentation and the right team, all of which help generate confidence
I ended up in communication and teaching pretty unintentionally. I started at IE Business School because one of the most iconic professors there, Jose Mario Álvarez de Novales, convinced me to give it a try. I became involved in communication as a way of extending my teaching activities and keeping my material up to date.
I soon realized that as well as the positive impact my extra-curricular activities had on my students, attending conferences opened up many new doors. As technology improved I was able to publish my own work, and since then, I haven’t stopped.
For me, communication is a way of helping others understand that there are alternative ways to do things as we move into the future; it’s a way of resisting the inertia that tends to take over our lives and activities, carrying on in our old ways despite the evolution taking place around us that offer so many new possibilities.
Communication is not just about making complex things sound simple: it is also about overcoming those who resist technological progress because it challenges them, despite the good it can do for society as a whole. My work in communication, in whichever format, is about that, about pushing for change, about seeing change as progress, as an opportunity, not a threat.
In closing, I would like to reiterate that I consider myself very fortunate to belong to an academic institution that gives its teaching staff freedom, allowing me to spread the word about my ideas without hindrance or having to run it past any editorial board.
I have been talking about crowdfunding for several years in my innovation courses, and always highlight the same point: however much we are distracted by big projects that break records grow thanks to a successful campaign, the important thing about crowdfunding is not the money. A crowdfunding project as a way to replace traditional financing will likely fail.
Crowdfunding formulas based on the presentation of a product linked to pre-purchase schemes or similar rewards are not about funding per se.
A well-planned crowdfunding project can yield a treasure trove of data on how the market sees your product, helping you refine its features and functionality, to rethink how you present it, and even give you the bonus of additional visibility. In fact, in cases where a project beats all the records, success lies not so much with crowdfunding, but with the virality that some highly visible pages can provide.
Crowdfunding can add a lot of value to a project, but that value is purely economic, as evidenced by its corporate use; companies that take this approach not because they need the money, but because they want to study the market through real customers that will provide the most accurate test possible: putting money up in advance to obtain a product. And sometimes, companies attain visibility through the media that are constantly patrolling popular crowdfunding sites looking for interesting projects or early success. This should not be underestimated: in terms of innovation, market sensitivity and visibility can be invaluable.
I have seen numerous projects and entrepreneurs dazzled by the money they could generate through crowdfunding, but they were confusing their goal. Whatever money you generate will be spent in the process will have to devote primarily in the manufacture of the product that people have pre-purchased, and when you finish sending the products, if you succeed — usually delivery dates are longer than expected — you’ll usually find yourself exhausted.
And while being able to deliver a crowdfunding project successfully can serve as an introduction to some investors, negotiating with them must be seen as a completely different development phase of your company.
Crowdfunding will not have been substitute for financing the project through traditional means, and the most valuable thing to be extracted from it, if you did it right, will be a better understanding of the market, possibly the creation of a community of interesting users, some fleeting visibility and the experience involved in carrying out the project; not the money. The money you earn from crowdfunding will never be decisive for the future of your company, that will come from financing through other means.
Professor of Innovation at IE Business School and blogger at enriquedans.com
Sep 192 min read
Samsung and the pressures of competition
An interesting report from Bloomberg, “Rush to take advantage of a dull iPhone started Samsung’s battery crisis”, reveals how news about the launch of the iPhone 7 and above all rumors that its improvements were incremental and unattractive, pushed Samsung to improve the specifications of the Galaxy Note 7, leading to the launch of a defective product. The need to take advantage of Apple’s supposed weakness led the Korean brand to install a battery that was too large, as a result of which the pressure exerted by the housing generated short circuits in some cases.
The episode shows to what extent competition between the major consumer electronic brands is over the specifications of every single component, putting the brands under incredible pressure, as well is illustrating how difficult it is to compete against the specifications Apple includes, which while often criticized for not being totally cutting edge, forces the competition to go further than might be considered wise.
A great complement to this topic comes from the article by Jean-Louis Gassée here in Medium, “iPhone nonsensus: Apple’s debt to bloggers”, which explains how Samsung saw an opportunity to beat Apple’s device having seen that expectations for it were low. The author says Apple should be enormously grateful to all those analysts who, in the months and weeks prior to the launch of the iPhone 7 dedicated themselves to describing how boring it was going to be, and recommending people to wait for the iPhone 8, allowing the brand to deal effectively with the low expectations when the iPhone 7 was launched. And as we now know, had the beneficial side effect of almost pushing its competitors over the edge in their efforts to outdo the company…
The problem is that the message was a big, fat lie. The printer was fine, the cartridge was working perfectly, the print quality was good, and ink levels were, in most of the cases, right. Instead, the company had programmed that message in the firmware of their printers so that, from that date, printers that were working perfectly normally began to reject the cartridges that were not manufactured by HP and would not print unless they were replaced. Thousands of customers protested on HP’s forums saying their printers had stopped working until they replaced their ink cartridges, and all because of a software message arbitrarily set at a predetermined date.
HP’s apologies referring to an alleged unforeseen side effect from a firmware upgrade, are false: many printers that do not have access to the company’s network also were affected by the error, suggesting that the company had come up with the brilliant idea of programming the error at the factory: a pre-programmed date to get customers to purchase HP’s own cartridges.
Everything about the printer business model is disgusting, and has been for many years. The catalog of techniques used to try to increase manufacturers’ profits enormous, and at the same time incomprehensible: prices that defy all logic, putting the value of printer ink above that of unicorn blood, meaning that machines in perfect condition that might work for years are discarded because it is cheaper to buy a new one thanks to tricks like programming printers to waste ink in a hidden reservoir filled with absorbent material, or applications lying about the amount of ink in cartridges, programming cartridges to print only a certain number of pages, programs that require users to print absurd diagnostic pages that waste ink without helping anything, etc. A good number of managers responsible for such absurdities should have gone to jail charged with fraud.
At what point did we decide as a society that it made sense to abandon ethics? When did we decide not to severely punish certain behavior, and instead accept it as normal? How is it that someone can brazenly lie and then only be give a mild reprimand or laughable fine?
Hand on heart: I have spent the last twenty-six years working in a business school and I can say without fear of contradiction that I’ve ever seen such practices taught there, whether by action or omission. Whilst there’s obviously no 100 percent security to find out and avoid awarding a diploma to someone with a lack of respect for ethics, displaying or insinuating such attitudes in a class, test or exam can easily grant someone a failing grade or even a disciplinary expulsion.
In our hyper-connected world why don’t we punish such wrongdoers by banning them from operating anywhere in the world? Instead, we show infinite tolerance, and after a few headlines in response to the first scandal we soon forget, tending to fall back on the old truism that “everyone does it”, or accepting the false logic that low prices are the most important thing. Shouldn’t we ask what part of our education system or social codes have led us here?