Having product orphans or a product languishing in development for years and years is a sure-fire way of losing money! An entrepreneur needs to chart out a path for full commercial development of a product. They must demonstrate substance by providing investors with clear, focused plans for the development of the product over time including enhancements, extensions, or new developments. Investors are often loath to assume development risks without having seen product plans in place. It is rare to have a product in the market without later having some additional development work undertaken to keep it competitive and meeting the evolving needs of customers. Therefore, astute entrepreneurs prepare product roadmaps to express the most likely evolution of the product.
A product roadmap serves as a longer-term value creation vision than simply achieving an obvious description of the product’s development plans. A good company will make a detailed assessment of the improvements it will make to the product over a period of time and the capital required to achieve this. Having a tight but flexible plan in place allows for decisions and further plans to be benchmarked.
Having a product roadmap in place also allows the entrepreneur to assess the lifecycle of a product, considering factors such as anticipated market needs and obsolescence, the phase out of certain product elements, and/or plans to replace them. In addition a good management team will simultaneously assess the financial impact of the roadmap over time and capture this in capital requirements of the business plan. Such plans provide the company and its investors with much-needed short and long-term visibility of the company’s future.
If you haven’t already wondered, a “product roadmap” is not just a “product roadmap!” In the early stages of a company’s development, a roadmap provides a useful tool for an entrepreneur to keep the company focused on a development target. But the underlying aim of a product roadmap is also to serve as a financial roadmap. The result is increased visibility: capital requirements, the timing of revenue receipts and expenditures and cash flow – all of which define the amount of investment required over time. Investors use a financial roadmap, more than a product roadmap, in order to make their investing decisions. A good roadmap demonstrates to potential investors that the company has carefully considered product lines and target markets, as well as creating a financial plan to pay for development needed along the way.
In order for both a product and investor roadmap to be workable, the company needs to have a product (or a few) with which to plan, set goals, and work to achieve development deadline targets. Let’s explore the relationship between product development and investment.
Post startups will begin with the production of one or two core products. This early activity is a relatively easy task, but no less important than future development plans that the company wishes to undertake. It is crucial to set a time-frame in which the first prototype can be rolled out and tested by customers. Why is this important? It avoids the wanton expenditure of sacred cash and keeps stakes low when high uncertainty exits. Getting to the first prototype is a significant milestone and much can be gained by seeing customer reaction and attaining technical viability. This information is invaluable in determining whether the product and the business have a possibility of being successful. It also lowers risk, and risk management is the name of the game for investors. This is a tried-and-proven old gambling rule!
The additional benefit in focusing on the first prototype development is that as a release deadline is set, the development team can decide on only the core product features necessary in shaping the first product release – hopefully with customer input – and then reserve some add-on features for later releases. The KISS principle—Keep It Simple, Stupid—is a good principle in typical product development startup situations. Entrepreneurs should resist spending too much time in the early development stage thinking about the all of the bells and whistles they might add to their product since this creates false economies and consumes capital.
Budgets and deadlines
Entrepreneurs should prepare detailed budgets for each product release and adhere to these plans. Product rollouts have the best impact on business only when they meet both time deadlines and a budget. Companies pay a heavy price for missing deadlines—loss of revenues and possibly time to market advantages. But most importantly, in the context of raising capital, current investors can get impatient when delays happen as the burn rate keeps consuming cash. The longer the delays, the more capital will have to be raised. This increases the risk and the ante for investors, both current and potential.
Stay tuned for Part 2 in the series on building enterprise value.
The corporate structure selected by entrepreneurs is generally based upon three considerations: control, liability and taxes. There are several corporate structures to choose from: sole proprietorship, general and limited partnerships and incorporation.
To raise equity capital the structure necessary should be a separate legal entity in the form of a corporation. This has several advantages over other structures which are owner (sole proprietorship) versus investor (shareholder) oriented. As an entity, a corporation can act as an individual in terms of selling and buying assets, borrowing money, suing or be sued, taking advantage of certain government-sponsored programs, and if need be, go bankrupt (heaven forbid). The main advantage, however, is that a corporation can facilitate the transfer of shares from one person or entity to another.
To set up a corporation, an entrepreneur must first consult a lawyer and accountant because there is a myriad of paperwork to be filled out. Included in this myriad are articles of incorporation, bylaws, and stock certificates. In addition, a name availability search needs to be conducted to ensure the company’s selected name is not already in use. A good lawyer or accountant will also counsel on the number of shares to be issued along with other capital structure, tax and business issues.
Angel investors and Venture Capitalists will not enter into discussions with an entrepreneur if the foregoing structure is not in place. These investors are interested in participating in the exchange of capital for equity, so if corporate structure cannot make this happen, it is a non-starter, and an entrepreneur is advised to go back to his drawing board.
The Importance of Corporate Governance Practices
In 2002 the Sarbanes-Oxley Act came into being in the United States and had an effect in Canada as well. The bill was enacted in reaction to a number of major corporate and accounting scandals including such companies as Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals had a dramatic effect on the value of the companies, and share prices plummeted almost overnight to all-time lows, costing shareholders billions of dollars.
The Act brought about sweeping changes to how companies report, control, and manage their financial activities. Although it focused primarily on publicly traded companies there was a spill-over effect in how privately held companies with investors were managed. Corporate governance, thus, is important for any size company using “other peoples’ money” to fuel the development of their companies.
Organizing your company to adhere to good corporate governance practices is something that should be in the best interests of all stakeholders: management, board members, and shareholders. Transparency is important. Having a solid accounting system in place, human resource and accounting policies developed, audited financial statements regularly prepared, regular communications with shareholders, and good Board operating procedures allow a company to build a corporate structure based on the right level of discipline and accountability.
A qualified CFO can ensure that the proper framework is developed and executed; however, for a start-up company a CFO may not be on the team yet. In these instances it would be wise to rely on a good accountant and lawyer to prepare the foundation until a CFO is hired. In addition, a focus on this framework will make it easier to accept capital from more sophisticated investors because you can demonstrate your “house is in order,” particularly during due diligence.
Before you begin to hunt for capital, it is important to know the kind of capital you need and when and why you need it. There are basically two capital pool types. The first is debt; the second is equity.
Debt capital is probably most familiar to entrepreneurs, as debt is often what we know about in personal life. Bank loans for cars or mortgages on houses, and the use of credit cards for the purchase of personal items, are common debt instruments.
Debt financing for a company is very similar. A lender, be it a bank or individual, will loan money to an entrepreneur with the agreement that it must be paid back with interest over a period of time. As a means of reducing risk, the lender will want to have collateral of sufficient value to cover the amount being granted, in case the company is unable to pay back the loan.
However, for a start-up company, using debt to raise capital is not an option. Why? Because the company does not have any assets to pledge as collateral; nor does it have any revenues with which to pay off a debt. In such instances, some lenders may insist the entrepreneur pledge their personal assets as secured collateral. Of course, this would only occur if the lender is confident in the business, and the entrepreneur is equally confident in the company’s prospects to pay down the debt.
It is not uncommon for the entrepreneur to use credit card debt to finance a company’s growth, particularly in the early stages. However, in many cases these credit cards are personal debt instruments with their associated high interest rates, and they hold additional personal risks for the entrepreneur. Running up a high personal credit card debt, with no income on the horizon, can keep an entrepreneur awake at night with worry.
The second capital pool is equity. This, principally, relates to the sale of the company’s shares in exchange for cash from an investor.
Other people’s money
Arguably, equity as a financing option seems preferable to going into debt. You don’t have to use your first-born as collateral (something you might want to do if you have a teenager), and fret over whether you can make monthly payments. But having said this, there are issues that have to be addressed, because when you exchange equity for cash you will be “using other people’s money.” When you receive funds from an independent third party in exchange for equity in your company, immediate expectations and obligations are triggered.
To begin with, equity investors own a part of the company. Through the purchase of shares they essentially become new partners. They expect higher returns for the risks they are taking by investing in the company than they would by placing their money into safer and conservative investment instruments. These investors have a “vested” interest in your success because they have contributed their own money toward it. As a result, you are accountable for how wisely you spend their money.
An equity investor can be involved with your company for a long time, since a liquidity or exit event such as an acquisition or IPO (Initial Public Offering) might take five to seven years to happen, if it happens at all. Early-stage companies are risky ventures. Therefore, keeping long term investors on side during the good, the bad, and yes, the ugly times in your company’s development is a good idea. Why? – Because you may have to go back to them again if more capital is needed.
Private equity investors can provide more than just money to satisfy your cash-thirsty enterprise. In some cases, they can offer solid business advice. This is particularly true if the investor is familiar with your industry. Private equity investors are also “channels to capital” and expand your reach to other investors by virtue of their existing business networks.
If your “lead” investor likes your company and shares this with others, good news travels fast and can be infectious. Don’t underestimate private equity investors, as they bring more than money to the table. They bring their experience and contacts as well.
What do equity investors want to see before they invest in a company? The answer is simple – they look for companies that have the ability to increase enterprise value over time. This means that at exit or liquidity the investor expects to make 10 to 100+ times his or her original investment. How you as the entrepreneur strategically spend the capital raised in each round must increase share value. Investors want to see their shares become more valuable over time, as this translates into a return on investment – a win for you and a win for them.
If your company’s shares do not appreciate in value, the future prospects of raising additional capital will most certainly diminish. To coin a phrase “companies don’t fail; they just run out of money.” To avoid this unfortunate situation, you must create a financing strategy that increases share value and, therefore, the overall value of your company.
Is Crowdfunding disruptive? If you take the word disruptive to mean disturbing or upsetting what is currently in the funding ecosystem – my quick answer is to say no. I think there are very complementary aspects to Crowdfunding in the capital raising ecosystem. In my opinion, it is just another arrow in the entrepreneur’s quiver in the search for capital to fuel their companies.
For example, reward based Crowdfunding might be more logical for a company to pursue at a certain point than a traditional round with Angel investors. Alternatively equity based Crowdfunding might be a good stepping stone in whetting an entrepreneur’s experience with giving up shares in his or he company and priming the pump before proceeding with Angel or VC rounds.
But I do not see equity based Crowdfunding as the be all and end all for raising money for entrepreneurs. Absolutely not!
Now if you look at the other side of the coin (pardon the pun), Crowdfunding allows investors to see more deal flow as the Internet has no boundaries. However, the traditional Angel investor tends to want to be closer to their investment in terms of geography to provide “smart money” advisory support. Will this “smart money” support disappear – maybe? Yet, with technology innovations, such video conferencing, could very well support mentoring at a distance.
I also see that the many existing and new equity based Crowdfunding platforms will allow investors to quickly vet what is aligned to their risk and interest profiles. It creates an “always on” financial marketplace for them.
So what main trend do I see – it seems the approach to raising equity capital through Crowdfunding is currently so focused on the paper exercise to ensure regulatory compliance. And this seems to be the main focus of equity Crowdfunding these days particularly in Canada and the United States.
Reviewing the companies that have received significant sums of capital from equity Crowdfunding in the UK, for example, there appears to be one discerning trait about these companies and that is they can demonstrate they are not just preparing campaigns or compliance documents … they are demonstrating they are building investment value. A business that is attractive to investors.
So what will be important for entrepreneurs wishing to get involved in equity based Crowdfunding is that they have to ask this one basic question at the very beginning of any capital raise journey.
Is my company fundable?
To help answer this question, there will be a trend toward a deeper education of entrepreneurs in the “art of the start” or the art of building a company that is fundable. We will see a shift from current day bricks and mortar incubators, accelerators, advisory support to more digitally based delivery mechanisms to help entrepreneurs engaged in Crowdfunding to build better businesses.
So to summarize it basically boils down to doing the things necessary to get capital and what I call creating “investment curb appeal”. It goes well beyond just having a business plan in hand, all the regulatory documents prepared and a landing page on an equity Crowdfunding site.
It boils down to the fact that the entrepreneur must demonstrate in every way that he or she is building a sustainable business and advisory support from all corners will be necessary to help them to do this.
“90% OF ORGANIZATIONS FAIL TO EXECUTE THEIR STRATEGIES SUCCESSFULLY.” Kaplan & Norton
A frightening statistic! Yet we have been trained that without a strategic plan a company is doomed for failure.
“STRATEGIC PLANNING AT A POINT IN TIME DOUBLES THE LIKELIHOOD OF SURVIVAL AS A CORPORATE ENTITY.” Noel Capon, James M. Hurlburt, Columbia University
So then, if companies can get the implementation right then the failure rate will go down and the survival rates will go up. Sounds like a plan (pardon the pun) but let’s really get to the root of the problem if we can.
I am sure you have heard of Murphy’s Law, Moore’s law and other similar laws which are based on relationships or concept translated through ratios. Well, here is one for you it’s called …
“Blanchard’s Law”, why not, and it relates to the key factors necessary for successful strategy implementation.
Here’s it is:
An organization’s success at strategy implementation =
The organization’s ability to effectively mobilize its resources and focus on strategy/ The organization’s ability to reduce the resistance in achieving buy-in and accountability
This means that the implementation of an organization’s business strategy (direction) is equal to the ability to mobilize the people, processes, systems and technology in an organization (power), divided by the organization’s ability to achieve buy-in, discipline and focus on the implementation of the strategic plan (resistance reduction).
What does this mean?
If an organization has the ability to actively mobilize all of its resources at 100 units and yet is held back by resistance to implementation by a factor of 10 units the resulting quotient or outcome is 10. In other words, if the level of resistance goes up the ability of the organization to implement strategy goes down. In this case, the organization is relegated to the lowest common denominator of strategy implementation of 10 units.
However, if the same 100 resource units faces a resistance factor of 2 the result is a 50 unit implementation factor. Thus, if the level of resistance goes down then the effectiveness of strategy implementation goes up.
The take away, reducing resistance is the key.
Simple huh, but why is it so difficult to address. I mean if an organization can reduce the level of resistance in the way it implements strategy the greater will be its productivity – why just do it.
The big question is how can this be done?
According to a study conducted by Canadian Society of Association Executives (CSAE), it determined there are clear patterns that emerge in successful strategy implementation efforts.
They observed three common-sense tests:
A. Manage to results milestones;
B. Explicitly addressed the people issues within the organization relative to strategy execution, and;
C. Resource properly, not just with money.
The CSAE also found that even the soundest strategies failed to achieve their performance objectives because one of these tests was flunked.
So getting all three tests right is important.
And getting them all right is a tall order if an organization relies on 20th century tools for implementation. How can an organization expect to win at strategy implementation using memos, presentations, occasional plenary workshops and performance compensation plans?
These are tools that can be a good start, but we are now in the 21st Century and powerful, integrative digital tools are now at our disposal. These tools can help to define outcomes, measure and then track strategy as it is implemented.
Using technology for strategy implementation is not just a one-time thing; but an integrative effort to instantly get at the underbelly of how strategy can be managed in an organization. Not only vertically and across an organization’s structure but to penetrate the very DNA of its culture as well.
I recently encountered a company called Envisio. They have spent the time and money to answer the 21st century call for a technology to help with strategy implementation. Envisio’s cloud based software can reduce the factors that create resistance holding an organization back. It gets at the very problems of implementation and allows for the revitalization of the strategic planning process as well.
Here are the key points in reducing resistance that makes the Envisio software so unique:
Envisio provides a structured approach in creating and translating strategic plans into individual and team activities with measures. This way the organization can pinpoint resistance points and shore them up to improve implementation outcomes.
Everyone within the organization is assigned a role and responsibility to bring the strategic plan to life. It means that people become strategic thinkers making their contributions meaningful and accountable toward a common purpose. There is no room for ambiguity.
Dashboards provide a view of individual activities and measurement that connect them to the plan. This allows the people in the organization to understand how they fit into the strategic plan and how they can reach strategic objectives.
Plan updates are automatically recorded and communicated to teams and individuals. Strategy implementation means all hands on deck working together in making things happen.
Intuitive reporting revolutionizes management’s ability to track progress against the strategic plan and make adjustments when circumstances dictate. Remember there is no such thing as a perfect strategy so managing strategy under fire ensures management has its finger on the pulse.
I invite you to check out Envisio’s website to learn more about their technology and the unique opportunities it provides organizations. Envisio developed, markets and supports an easy-to-implement web-based strategy implementation software that flows from an organization’s strategic plan. I encourage you to visit – http://www.envisio.com/ for more information.
Why do strategic planning? Is it really helpful to plan when things around us are changing so rapidly? Look at the current business environment that is changing as fast as quick change artists in a theatre show.
The rate of change as we have discovered is so fast that traditional planning horizons just can’t keep up and current planning techniques are obsolete. This means organizations are often caught with their pants down before they can realize on their previously planned outcomes.
So what has to shift in how organizations approach strategic planning? The answer –they must leave behind their attachment to traditional strategic planning approaches and move toward a lean and iterative strategic management process.
Here are five principles to help an organization create a strategic adaptation culture.
Focus on one goal at a time – Abridge
Focus is essential in any activity. Confusion results when there are too many directions undertaken at once.
For example, in the sport of football the single focus is to bring the ball into the end zone and score. Note I was very specific to indicate that it was not to score a touchdown because a field goal could very well be the way to score points as well. During a game the players focus on bringing the ball down the field concentrating on crossing the line of scrimmage consecutively. The goal is to reach the end zone and score – how it is done is a matter of tactics and team work.
For organizations the same is true. Having a clear and defined goal to focus on means that everyone in an organization will know what is expected of them and what is needed in getting the goal achieved. Keeping the goal simple and focussed allows organizations to create a rallying call for what ultimately matters strategically.
Build a culture that anticipates near term trends – Anticipate
Drawing again from sports, Wayne Gretsky once said, “I skate to where the puck is going to be, not where it has been.” This insight speaks to the element of anticipation. In the context of strategic implementation it means every person in the organization should be responsible for predicting future outcomes and brace for them. A strategy conscious organization should build a culture in which anticipation is encouraged and practiced regularly.
Empower employees to make decisions based on context – Adjudicate
It is virtually impossible for any executive or manager to make every decision in an organization. What is necessary is that employees be given the right and freedom to make decisions within the context of a single overarching goal. This means that they must have the ability to make decisions on the fly when changing circumstances dictate. This ability to adjudicate allows for a nimble and focussed organization that implements through the collective wisdom of its members.
Adjust and pivot in response to new circumstances – Adapt
The “Ready, aim, fire” business principle was changed in the ‘90’s to “aim, fire, aim, re-fire”. Why? Because it is always best to adjust to changing circumstances using a test and fine-tune mentality. If something isn’t working make changes to get it right and don’t stay long with a losing approach.
Tactics are stepping stones that provide the pathway to achieve the ultimate goal but also must take into account environmental dynamics to make adjustments. In business environments that are constantly changing, adaptation is essential in shaping a lean, iterative and adaptive plan for an organization to follow.
Constant motion toward the designated single goal -Activate
Finally, organizations are in a constant state of motion relative to their changing environments. Albert Einstein’s theory of relativity is, so to speak, relevant here. (Smile). He postulated that the faster an object is moving, the slower time progresses for that object in relation to a stationary observer. In other words keeping up with the changing environment requires an organization to be in constant motion – adjusting and adapting to fluctuating changes in order to keep on top of the things that are impacting its success.
Keeping in motion means an organization is learning and adjusting to decisions that are in many instances both wrong and right at any given point. Adjustments or deviations from the path are okay as long as the goal is being focused upon.
Okay, we have seen this before. Business executives hustle off for a strategic planning retreat with their briefing binders in hand and the burning desire to come out of a planning session armed with a revitalized and innovative business direction for the company.
Didn’t this happen last year?
Remember the sacred strategy document that was produced. This plan espoused the direction needed to unlock the company’s future advantages and represent the flint for change, prosperity and success. Nirvana at last!
But sadly the swirl of enthusiasm drops off rapidly after the days following the retreat and the many weeks after the strategic plan is written.
So why do organizations repeat the same strategic planning processes year after year believing they are loyally continuing a traditional planning cycle that will lead the company to the Promised Land?
Let’s explore five main fallacies that need to be changed to make way for a completely fresh approach to strategy development and implementation.
Lore 1: The more time spent on strategic planning the more successful the business
There is absolutely no correlation between the length of time spent in strategic planning and the beneficial outcomes to a business. In fact, the more time spent on strategic planning the more management will get caught up and it becomes the focus. This promotes planning paralysis and any benefits which could be accrued are eventually lost as momentum declines.
Lore 2: Diligently analyzing every aspect of the company’s market
Yes it is hard to argue that knowing the market is a good thing, however over analyzing and creating piles of data files or studies can lead to planning paralysis that will stymy strategy development. Furthermore, some analyses can be backward rather than forward focussed causing a loss of perspective on future outlooks about where the company should be directed.
As the saying goes, knowledge is power but too much knowledge can turn any circumstance into a sea of endless options about which confusion and procrastination reins.
Lore 3: A solid, good strategy is the key
A well-conceived strategy can be blindsided. It is difficult to predict changes in the marketplace as most strategic planning tends to use past information to predict future states. A good strategy has to be flexible enough to roll with the dynamics of changing external and internal environments.
Strategic plans, once developed, represent perspectives made from the contextual view at a single point in time. The circumstances in the next timeframe can render the plan obsolete.
In addition, a great strategy cannot come alive without good solid leadership and this leadership has to come from all parts of the organization. Mobilizing a leadership culture around plan implementation is a critical element.
Lore 4: Strategic thinkers are best at strategy development
The belief that strategic thinking is the privilege of only a few individuals in an organization promotes an exclusionary point of view. It represents an exclusive club mentality where only the elite are recognized as the gifted ones who have the intelligence to create the future direction of the company.
There is also a viewpoint that to engage a broader group in the strategic planning process will slow it down. The belief is that by relegating strategic planning to an activity focussed more on consensus building is counterproductive when the view is taken that a smaller team can make decisions faster. Is faster better? Sometimes, but not always.
Lore 5: Good communication is the panacea for effective strategy implementation
Most often communicating the company’s strategic plan resembles a prophet coming down from the mountain top and issuing an edict. Although words like “cascading” or “socializing” the strategic direction with employees is often used, the approach resembles a one way water fall of information.
Employees of the organization are given very little by way of understanding the reasons why the strategic direction was established – so context is invariably missing. And they no doubt even secretly harbor resentments about how the edict is being delivered to them. Resistance becomes a product of a toxic culture.
There is not enough in the communication plan to ensure employees have a complete understanding of where they fit in, how the strategic plan will be implemented and how it will impact their day to day activities and challenges. It comes across as a strategic plan in a strait jacket.
So with these fallacies identified my next blog will provide a fresh approach to strategic planning and implementation to show how these fallacies can be overcome.
Isn’t it interesting how words can creep into our business vocabulary and have completely different meanings from their etymological roots?
Here are a few words that bear little resemblance to their original meaning:
Traction – defined as the act of drawing something over a surface. Today in business it relates to a company’s ability to generate revenue or acquire customers. For example, “the company was able to gain traction in the mobile app sector by acquiring customers”.
Runway – defined as a specially prepared surface along which an aircraft takes off and lands or a raised gangway in a fashion display. Today it means a company’s longevity to sustain revenue or cash flow. For example, “the company has enough cash in the bank for a runway of three years before the next capital raise is necessary”.
Don’t you miss Andy Rooney?
He would have had something brainy to say about our business vocabulary. You have to love his sarcastic wit. He once quipped – “The dullest Olympic sport is curling, whatever ‘curling’ means”. How true! Sorry curlers.
Well, I came across another word that is being embraced in the investment world and it is – “curation”. Curation is the new due diligence aimed at delivering high quality deal flow or investment prospects to investors and backers. It refers to the process of vetting deals to scrutinize losers from winners.
Although this seems to make sense on the surface, the way I see it the problem resides with those doing the curating. Why? Because if they are not very good at using their curation crystal ball to pick winners then the process is flawed. These gatekeepers to capital have to be really good at screening the good deals from the bad ones to generate positive investment outcomes.
Due diligence or curation, although a practice that provides a certain level of comfort to investors as a hedge in risk mitigation, cannot be relied upon entirely. The statistics on start-up failures are a testament to how terrible existing practices are in delivering on the promise. We know these top picks eventually result in a whopping 80% plus in business failures.
I see interesting differences between the curation processes for Crowdfunding and the more traditional practises used by Angels and Venture Capital Funds.
In my mind Angels and VCs represent the few that make decisions for the many about who will get funded and who will not. A lot rides on their curation prowess, and the stats prove it is not efficient.
Crowdfunding takes out the middleman or the gatekeepers and replaces them with the wisdom and the hearts of the Crowd to make better predictions as to the winners that get funded. Let me explain.
In James Surowiecki’s book “The Wisdom of Crowds” he maintained that large groups of people, even non-expert people, are very often smarter than an elite few no matter how brilliant those few may be. The author provides numerous examples of when groups have proven better than individuals at solving problems, fostering innovation, coming to wise decisions and most notably, predicting future outcomes. Intriguingly, group members don’t need to be particularly smart on an individual basis in order to be very smart on a collective basis.
Here are some interesting trading platforms that use the power of the crowd as prediction markets.
Hollywood Stock Exchange (HSX)
The HSX is a virtual, online stock exchange where traders buy and sell virtual shares in upcoming movies. The HSX sells the data collected from their exchange as market research to entertainment, consumer product and financial institutions.
Since 1996, the HSX has accurately predicted the box office receipts of thousands of movies. According to a study the correlation between the HSX’s predictions and actual opening box office receipts was calculated at 0.93 – not bad since a perfect correlation is 1.0. The HSX has also been used to predict Oscar winners, and so far they’re averaging about 92% accuracy.
Wouldn’t this number be refreshing when it comes to predicting positive start-up outcomes?
Although people self-select to be involved, meaning they choose to be involved. There is no screening mechanism to ensure these “traders” should be ardent movie or entertainment experts. This crowd is large and represents over 1.6 million traders. Such a large sample can be said to be statistically correlated.
Iowa Electronic Market (IEM)
The faculty at the University of Iowa developed the IEM to be an Internet-based teaching and research tool. It allows students to invest real money ($5.00-$500.00) and to trade in a variety of contracts. The use of the IEM is best known for the prediction of political election outcomes.
The University of Iowa has found that even 100 days before an election, the market price predicts the winning candidate about 75% of the time. Political polls predict only slightly more than 50% of the time, and political pundit predictions are way worse. A 12-year analysis of IEM trading indicated that the IEM consistently out-performs political polls in terms of not only choosing the right candidate, but also predicting the margin by which he or she will win.
These examples demonstrate the power of the crowd to make predictions. They do not just indicate the capability to identify winners and losers, but also the overall statistics provide evidence of their accuracy in doing so.
Crowdfunding works on the same principle. Backers vote for their project and they will use their own money to do so. They will back a project if they feel it is aligned with their interests, needs and beliefs. The collective demonstration of social proof is more powerful than any process of curation can ever be, as it elevates winners by using the collective shoulders of the crowd.
Crowdfunding backers, like customers, vote with their wisdom and heart. The current reward based platforms are showing that curation or due diligence does not have to get in the way of positive capital raising outcomes. Although some platforms do vet projects, this is more on the basis of suitability rather than financial metrics. In the end it is the people with compelling projects who motivate crowds to get on their side and provide them the needed capital, which is proving the disintermediation of due diligence.
What I mean is, due diligence is not necessary in predicting winners, and one has to contemplate whether it is necessary at all given the track record of the capital gatekeepers in the traditional investment arena to produce winners. Tapping into the wisdom of the Crowd may be much better.
The success stories of Crowdfunding may have inadvertently branded it as the sure-fire method to raising capital. At a time when the traditional methods have become increasingly complicated, ambitious entrepreneurs are now looking at Crowdfunding as the platform for them to achieve their dreams.
The overzealous entrepreneur could hastily jump on the Crowdfunding bandwagon and overlook certain factors that can easily make or break her campaign. The rules are many, but the key principles are a few. Here are five winning tips that all Crowdfunding enthusiasts should abide to when planning their campaign:
1. Passion, not hype
This may be the most advocated principle of successful Crowdfunding, but it can never be advocated enough. The value of genuine passion is innumerable. Talking about your journey and the road to starting your Kickstarter or Indiegogo campaign can make the mere participation in your project the ultimate reward. Sometimes all the backer wants is to be part of your journey, and that depends at how you are able to passionately convey it.
2. Know who your audience is
Perhaps the indisputable factor to successful Crowdfunding is clearly defining your target audience and the channels to reach it. Once this is in place, you are guaranteed that the most meaningful reward for your backers would be to see your project vision come to fruition, and any other reward on top of that would be the icing on the cake.
3. Calculate the costs of rewards
When setting the financial target of your Crowdfunding project, it is important to include the cost of rewards. This will ultimately give you a clear picture of the finances needed to mobilize your campaign. By overlooking the cost of rewards, you could find yourself using the money raised from your campaign to distribute rewards, and in effect eating up capital that can be otherwise used for your project. This raises the risk of eventually not having enough capital to mobilize the project after all funds have been raised, and nothing is more detrimental than the backers not seeing their funds transpire into the end goal of the project they initially believed in.
4. Monetary rewards never work
Giving out rewards in the form of money is ineffective. As a principle, rewards should always be related to the product your project is about, and consequently monetary rewards usually do not bear any relevance. But the biggest pitfall of monetary rewards is how they can make you look uncreative and not managing funds well. Contributors do not want their money to go back to them, since that’s how monetary rewards are usually perceived.
By Mo Saiid and Lyn Blanchard
What does Crowdfunding and dating have in common? Please read on.
The Crowdfunding ecosystem is very simple. It is comprised of the Crowdfunding campaign owners who are entrepreneurs or individuals looking for capital, the backers or funders that look to support specific Crowdfunding campaigns and the Crowdfunding technology platforms that act as intermediaries for these participants.
But why does Crowdfunding work? What makes it possible for complete strangers to share a common bond? In today’s blog I’ll explore the reasons why Crowdfunding works and the reasons behind the power of the Crowd.
The world is getting smaller – not that our planet is shrinking, but our knowledge about what is going on in the world is really influenced by “6 pixels of separation”. That is technology now can deliver events, information and news at a heightened pace allowing us to learn instantly about what is happening on our planet.
We learn more, we emote more and we just well, engage more. And sometimes, we even tune out more.
Crowdfunding is based upon the principle that people want to help each other. They want to share like-minded values, goals or ideals with those to which they feel close. This primary connection is rooted in motivations which are triggered by three expected outcomes or returns.
For Crowdfunding campaign owners and their respective funders or backers, motivation seeds the passion and interest for a cause or product which is aligned with shared social value. There is satisfaction to be obtained when engaging with something that helps others, improves a circumstance or makes a difference.
A social return holds a certain pleasure and contentment relating to a participant’s involvement where monetary or material rewards are of secondary importance.
Social returns are obviously prevalent in donation based Crowdfunding; but more often now Crowdfunding campaigns are being backed because they can lead to the betterment of society or a community of interest. The funder or backer seeking to engage in a Crowdfunding project does so for a deeper emotional affiliation that holds intangible and intrinsic value for them.
In addition to the social returns, backers may also look for a material return. In these instances backers will support a product concept and may wish to – a) receive the offering first thus giving the opportunity for bragging rights, b) get behind the offering because it might be viewed as worthy or cool or c) help a company in its early years of growth.
Crowdfunding campaign owners will take great care to design incentive schemes that will satisfy the material reward motivations sought by backers. These schemes are usually designed as a progression of rewards with the highest valued reward offered to a limited number of backers – such as only four premium rewards offered for those contributing $1000 each.
For example, a Crowdfunding campaign representing a new bicycle locking product could have as its highest reward an engraved product delivered to the backer and the product being named after the backer for his or her anting up the largest contribution.
The combination of reward schemes are endless, however one principle remains constant – the schemes must motivate the backer in return for their financial support and what is offered must have of perceived cherished value.
The campaign owner also benefits. This participant will get information of material value on such variables as pricing, product features and function sought by early customers, market segmentation and all sorts of marketing information that will help with commercialization plans. Early customer traction creates a direct link to customers and can also support follow on capital raise efforts beyond the current Crowdfunding campaign.
Note I have not used any reference to equity or lending based Crowdfunding for the reasons I have cited in my other blogs.
The financial return to the Crowdfunding campaign owner is obvious. However, little has been mentioned of the motivations of the Crowdfunding technology platform owner that provides the intermediation between backers and campaign owners.
There are literally hundreds of Crowdfunding platforms in operation around the world. Why? Because it’s about the money.
The backers and campaign owners drive profits for these platforms that ultimately take a percentage of whatever is raised. This can be 4 – 9% depending upon the platform’s policies. The motivations for Crowdfunding platforms are simple, provide an environment for those with ideas that need funds to meet those people that are looking to back them – and then take a piece of the action.
It’s the same principle behind why dating sites are so popular. Dating sites constantly spring up on the Internet because singles are looking for fresh approaches to establishing personal relationships. There is the hope of improving the odds of securing a “loving and happily ever after” mate through the process.
Crowdfunding does the same thing. It allows capital raising relationships to be established by improving the odds that entrepreneurs can raise capital from motivated members of the Crowd to eventually turn their dreams into reality.