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Crowdfunding via customers is the new startup capital

Wil Schroter, Fundable — Sun, 27 May 2012 13:00:07 +0000

When the JOBS Act was signed in April, the startup community gave itself a collective high five. Crowdfunding would enable startups to reach out to the whole world to get access to funding, not just a small cabal of investors living in a 20-mile radius of Menlo Park.

But hidden in the headlines was a much more powerful underlying trend. With the JOBS Act came the creation of an entirely new class of capital that could be far more valuable to startups: customer capital.

Meet the new investor class: Customers.

Instead of raising capital from VCs to build a product, entrepreneurs can skip the line and reach out to customers before the product is actually produced. It’s called a pre-order, but it has a twist. In this case, the pre-order is for a product that doesn’t actually exist yet.

We’ve all dealt with pre-orders before, whether it’s the new iPad or a blockbuster summer movie. But this time customers fund the idea of a product, with the hope that the object itself will someday follow. For example, the Pebble Watch raised $10 million on Kickstarter by crowdfunding from customers strictly through pre-orders. This is just the start.

A big, juicy new fund.

While there is a big, amount of capital available from VCs, angel investors and private equity folks, the amount of capital available for entrepreneurs when you count the customer market is much larger. And the audience is far more diverse.

The customer capital pool is not limited to the commitments of LPs or how much cash a newly-minted angel investor just netted from the Facebook IPO. It’s only limited by the quality of the ideas and the absorption rate of early adopters in all segments.

More importantly, the pledge of capital is available to startups before they build their product, which allows them to do important market testing before they spend a dollar of real money. Granted, crowdfunding isn’t the end-all, be-all of proving a market, but it sure beats the old model of “if you build it, they might come.”

A new twist on an old model.

Funding through customer capital is nothing new. Savvy entrepreneurs have been pre-selling customers for years in an effort to bootstrap businesses to profitability. It’s just that they were doing it out of necessity, not because it was the most efficient way to access capital — and certainly not because it was fun.

Bootstrapping was what you did to get your minimal product out to the market quickly. It was your cost of finding out whether anyone would ever commit to buying your product. But it took a lot of time and cost to simply ask your market, “Will you buy this?”

Context is king.

Instead of hitting up friends and family, ask a crowd.

Crowdfunding platforms have made it easier to access this funding, but it also has given entrepreneurs the context to ask this question at scale. Prior to having a crowdfunding platform, you could certainly build a website to ask your friends and fans to back your idea. But it would feel like a one-off attempt.

Platforms that aggregate crowdfunding backers provide a big pool of customer capital providing entrepreneurs with customers who are particularly willing and able to accept the risk that an idea may not come to fruition. The platform already presumes risk, and for an entrepreneur presenting an idea, that is an invaluable piece of context when asking for money.

The ability to query your potential customer base at scale prior to building anything addresses a lot of painful problems. First, you learn whether there is really anyone that wants your product. Your friends can tell you it’s the greatest idea and VCs can tell you it’s a horrible idea, but the only true indicator is a customer order. Second, you avoid wasting a year of your life building a product you thought someone might want, only to find out that you were incredibly off base.

Of course, a crowdfunded project can’t predict every market.Mark Zuckerberg could have presented Facebook and may have not found a single backer. It happens. Crowdfunding is just one indicator, but at least it’s feedback from real customers – not theoretical feedback from pundits.

The important point is that you can get feedback now, before you start spending lots of cycles, improving upon your idea in real time. Anyone that’s ever built a landing page to test a new concept on the Web (and failed miserably) knows exactly how valuable it is to test first and build the product later.

A true game changer.

Between providing early access to capital, testing new ideas in real time and potentially growing the entire pool of startup capital astronomically, the emergence of crowdfunding customer capital is about to change the startup game in a big way.

As of now the market is incredibly nascent. Funding a watch for $10 million sounds novel and grabs headlines. Ideally that kind of traction will be old news in the next few years as more companies are crowdfunded and the records for what they raise continue to jump.

In the meantime, the world just got a whole new startup fund. Let’s go do something amazing with it.

Wil Schroter is the co-founder and CEO of Fundable.com, a crowdfunding platform for startup companies.

Oliver Twist image provided by Corbis/Guy Ferrandis/Tristar Pictures.

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PRO: Apple recordings

Paul Sweeting — Fri, 25 May 2012 13:00:33 +0000

The case for leveraging consumers’ existing investment in TV service through DVR technology remains as strong as ever for Apple.And with last week’s TiVo Stream announcement, Apple seems to be growing more open to incorporating recorded TV content into its own video ecosystem.

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Can a sexual harassment suit shatter the glass ceiling in tech?

Carla Cook Thompson, Sharp Skirts — Thu, 24 May 2012 19:30:46 +0000

She’s right. She’s wrong. She’s justified. She’s litigious. She’s a hero. She’s a spurned lover. Whatever you think of Ellen Pao and her sexual harassment lawsuit against Kleiner Perkins, there are a couple of things we know for sure. She has sparked a watershed moment for women’s rights in the 21st century. And she is sacrificing her entire career for it.

I’ll let readers fill themselves in on the details, but the gist is that Pao is charging Kleiner with gender discrimination and retaliation, alleging that the partners in the firm excluded her from meetings and important discussions after a terminated affair with fellow partner Ajit Nazre. She is also alleging a broad atmosphere of discrimination at KP against women. It’s not my place to say whether her claims are legitimate. But that is beside the point.

Filing lawsuits against corporate behemoths isn’t easy. Alleging sexual harassment is even thornier. Pao feels strongly enough about what happened in her seven years at KP to take action that she knows will render her untouchable in the industry. Let’s be blunt (and ironic): this takes balls.

No matter what century we’re in, sexual harassment is an issue that is guaranteed to get the plaintiff a lot of nasty reprisals. The fact that Pao readily admits to sex with Nazre ups the ante on those reprisals – and how the defense will attack her in the courtroom.

Let’s be blunt about something else: someone’s finally had the nerve to stand up and say what we’ve all known for years. It is common knowledge that VC firms are one of the last bastions of boys clubs. Whether Pao specifically was excluded from meetings at KP and subjected to gifts of dirty books is still to be determined. But if she wasn’t, many other women have been, and it is for those women that Pao had to do this.

I made my own brief foray into the world of investing and, especially with a business that focused on female-led startups, I can assure you it wasn’t pretty. I still wince at the thought of one particular investor meeting, in which a smoothly flowing conversation about women entrepreneurs screeched to a halt when he asked, “Don’t you all catfight with each other?” Or the storied tech leader and investor who likes to call my company “that woman thing.”

Or the VC firm that bluntly stated they don’t want to be pigeonholed into supporting women’s ‘causes.’ Or – just one more please – the head of a large startup funding organization who told me to ‘try Meetup’ when I sought serious advice on franchising and licensing.

Women like Ellen Pao are the ones who change things for our gender as a whole. It is way past time for someone to try to make a chink in this armor. As Katie points out in her boys-club piece, out-moded views on gender are simply another way these firms are becoming dinosaurs.

I certainly don’t expect them to thank Ellen Pao for this lawsuit, but they probably should. She’s attempting to drag them into the modern age, something that must happen if they’re going to stay relevant. Kleiner Perkins is the Mount Olympus of technology venture investing. Changes that occur there will filter down into the entire industry.

But it’s especially frustrating that Pao will pay for her stance with her hard-earned career, whether she wins or not. One particular comment on the TechCrunch piece jumped out me. “Yishan Sparklepants Wong” who works at Reddit wrote:

“I doubt these are unfounded. I’ve worked with Ellen Pao and she’s not the type to complain or make frivolous allegations. In my interactions with her, she strikes me as someone who just wants to be able to work hard and get a fair deal….If you actually read the filing, the incidents go back all the way to 2006 and are quite detailed, so for much of the time it sounds like she tried to put up with it and go along.”

The men that still pull the strings of the tech industry need to take notice of this lawsuit and start making changes. Follow the model of 500 Startups, which has a bevy of female partners – and specifically seeks out women-led companies in which to invest.

Put more women on your boards, stack your tech conference’s agenda with female speakers, organize straight-talk harassment seminars in your company. Implement programs that help support women in technology, so it’s not longer as difficult to find “qualified women” for events or leadership roles. Then it’s not a matter of checking some gender boxes for your board or your conference, it’s a matter of selecting the best person who may or may not be male.

In short, Ellen Pao – and all the rest of us – want you to come out of your caves. It’s time to start evolving. As for women in tech, and in business overall, we need to support Pao vociferously. She is, in essence, taking one for the team. We should all tip our hat to her.

Carla Cook Thompson is the CEO of Sharp Skirts, a network for women who are building businesses.

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PRO: VC panel votes on Top 10 Tech Trends

Jo Maitland — Thu, 24 May 2012 13:00:28 +0000

Venture capitalists are paid to predict which technologies will be the game-changers and to invest in those to help them succeed. About 10% of their investments, historically, would hit it big, but that rate of success is rapidly declining and many think the model is broken. However, VCs do get to spend a lot of [...]

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PRO: Future prospects for the set-top box

Mari Silbey — Thu, 24 May 2012 06:55:46 +0000

Set-top box shipments will climb past 135 million in 2012 and will clear 150 million by 2015, according to iSuppli, which means the device has a critical presence in the living room. How does this long-unheralded category in consumer electronics stack up to the newer, feature-rich hardware on the market? This research note — part of a forthcoming collection about the digital living room — examines the device’s strengths and weaknesses, and its future prospects.

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The growing epidemic of page bloat

Joshua Bixby, Strangeloop — Thu, 24 May 2012 02:15:59 +0000

The average web page is now more than 1 megabyte (MB). This isn’t a case where bigger is better, it’s bad for site owners and for mobile users.

Back in December, I predicted that at some point in 2012 the average web page would surpass 1 MB in size. That point has arrived — a little earlier than even I expected. On May 1, the newest web page stats released by the HTTP Archive revealed that the average web page is now a whopping 1042 kilobytes (1024 kilobytes equals a megabyte).

What’s behind rampant page bloat?

To put things in perspective: at the time I made my prediction, the average page was 965 KB. That’s 8 percent growth in just four months. Doesn’t sound like much? Then consider this: Back when the HTTP Archive started tracking page stats in November 2010, a mere 18 months ago, the average page was an already hefty 702 KB. Pages today are almost 50 percent bigger than that.

If pages continue to grow at this rate, the average page will hit 2 MB by 2015.

The main culprits for this growth are images (which account for more than half of the average page size) and third-party scripts like analytics, ads, and social sharing buttons. But what’s really behind it is our insatiable desire for richer, more dynamic content — coupled with site owners’ desire to track user behavior and get us to share their content using every conceivable widget.

Mobile users are the biggest losers.

While bigger pages hurt performance for desktop users, too, the biggest victims of page bloat are mobile users. Not only does a 1 MB page take forever to load, it can also deliver a nasty case of sticker shock when you get your phone bill. To give you a for-instance, earlier this month I was traveling in Europe. Before I left home, I bought 25 MB of data from my provider for $100. In other words, I’m paying $4 per page.

And if your service provider doesn’t hit you with a huge bill, they’ll hit you with a data cap and throttle your service. A 2 GB data plan sounds like a lot, but if you watch videos, listen to music, and download ebooks, it doesn’t get you very far. (Consider that 1 MB equals about 20 seconds of medium-quality video or 45 seconds of music.) The proliferation of 1 MB pages will catapult you to your data cap that much sooner.

But this doesn’t only cost mobile users. Bloated pages cost site owners too. Bigger pages inevitably take longer to load. There’s a huge body of research that shows that when people visit slow sites, they spend less, view fewer pages, click fewer ads, and spend less time on site. This applies both to mega-sites like Amazon (which famously announced that for every 100 milliseconds of slowdown, they experienced a 1 percent drop in revenue) and smaller “mortal” e-commerce sites like auto parts vendor AutoAnything (which found that by cutting page load time in half, it grew revenue by 13 percent).

How much bigger can pages get?

Like it or not, this kind of growth is the norm, and it’s going to continue to be a problem for users. Sure, today’s devices, browsers, and networks are incredibly powerful compared to the clunkers of 15 years ago, but here’s the problem with our great big juicy hominid brains: you can pretty much count on the fact that if you have a team of technology geniuses in room A working to fix one problem, there will be a team of equally brilliant people in room B developing a technology that will create a new problem.

So while devices, browsers, etc. are always getting better, we’re also developing more and more bandwidth-hogging content. At best, the two factions are neck and neck. Where this will take us is anyone’s guess.

Joshua Bixby is president of Strangeloop Networks, a company that provides website acceleration. Bixby also maintains the blog Web Performance Today. He can be found @joshuabixby on Twitter.

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PRO: Carriers whine, but handset subsidies aren’t going away

Colin Gibbs — Wed, 23 May 2012 13:00:38 +0000

Mobile network operators are increasingly complaining about the high cost of subsidizing the iPhone and other smartphones to make them cheaper for consumers. But those subsidies give operators tremendous control over the handsets that run on their networks.

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PRO: Can Hertz shake up car sharing?

Adam Lesser — Tue, 22 May 2012 13:00:03 +0000

While good but not great growth has Wall Street punishing car sharing market leader Zipcar, which IPO’ed at $18 last year, zoomed to $28 and now sits at around ten bucks, the question on many people’s minds is: What about Hertz? The argument for Hertz successfully [...]

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PRO: Social commerce remains a licensing play

David Card — Mon, 21 May 2012 16:10:42 +0000

Right now, social commerce feels like a technology platform play rather than a retail business. According to our GigaOM Pro 1Q12 U.S. consumer survey, only 7 percent of social network users regularly shop on social networks. That’s a condition likely to continue for 24 to 36 months at least.

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PRO: Flash analysis: Facebook’s post-IPO prospects

David Card — Fri, 18 May 2012 20:45:15 +0000

Facebook just had the biggest initial public offering in tech history. During the week leading up to it, we tapped into the GigaOM readership to see what they thought of the social network giant’s prospects for the next two to five years. What will Facebook become as it grows up? What are Facebook’s best opportunities and key challenges?

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