Customer Crowdfunding: Not So Fast Entrepreneurs (Again!)

Crowdfunding

Previously published on Christopher Mirabile's blog ScratchPaper and published here with permission. view original post

I have written and spoken at length about the issues associated with equity crowd-funding of companies. And not long ago I wrote a piece entitled Customer Crowdfunding: Not So Fast, Entrepreneurs, which was about the pros/cons of customer crowdfunding at the product level (e.g. Kickstarter type fund-raising). In that piece, I made the point that, for all its virtues, customer crowdfunding does have some significant risks for entrepreneurs. It exposes your product plan to your competitors and the world, long before you have it in the market. In the piece, I list the many things your competitors can glean from your successful Kickstarter campaign (spoiler alert: market size, market demographics, market enthusiasm, your price point, your features, your design and look & feel, and how long until you can bring it to market.

  The original post is probably worth a skim if you are an entrepreneur contemplating a customer crowdsourcing platform. One of my key concerns is that small companies may essentially be giving up their only advantages if they go this route.

  Now, on top of those original concerns, which mostly boil down to generic and unavoidable by-product of the public nature of these platforms, I am alarmed to see a much more serious, pernicious and cynical issue come to light. This week’s WSJ had an article entitled P&G, General Mills Tap Into Startups. Subhead: “Alliances with Crowdfunding Site CircleUp Allow Big Firms a New Look at Trends.”

    Ponder that for a minute. P&G and General Mills are paying a crowdfunding site for the right to get all the key trend and traction data on the startup participants in order to spot more quickly anything that looks promising. The article says the big consumer packaged goods companies won’t disclose that they are paying, and CircleUp takes pains to point out that the companies offer mentoring and advice to the startups, but it doesn’t take a genius to see what is going on here. To wit:

CircleUp is providing trend reports to General Mills and P&G about startups in 18 categories, including pet foods, beverages, snack foods and infant products. The information provided includes which category had the most startups seeking capital each quarter and which types of companies garnered the most interest from accredited investors using CircleUp.com.
It is being carefully packaged to look like innocent trend data, but CircleUp admits that their alliance partners have direct access to the companies for value added mentoring and advice. Talk about a wolf in sheep’s clothing.

    In their defense, CircleUp points out that the access to these companies is hard to come by, and that big strategics like this are the desired acquirers of young start-ups. That is true as a general matter, though no statistics or examples of this happening are cited in the article. But what is also true is that consumer packaged goods such as food are an area with notoriously low barriers to entry, and the trend or idea plus a little head start is often the only thing that you get by way of a barrier. Moving fast and executing well is often all a start up can do to assure success.

    While big companies may not be great at coming up with innovative ideas, once given an idea, they can be pretty good at moving fast, and executing well through their already-existing distribution channels. They are also pretty good at using their scale to bring their costs down and crush the margins of smaller scale players.

    Traditionally for them, the fresh idea is the only thing they have been missing. Now that CircleUp is serving those entrepreneur’s ideas up on a silver platter, that problem is finally solved. The big CPG companies can finally stop wasting money on innovation, focus groups and R&D, and just pay a small fee to CircleUp for access to turnkey business ideas. How efficient.

    Now, if all an entrepreneur is looking to do is flesh out a concept enough to flip it to a big buyer, this kind of platform might be worth the risk. That scenario is one possible outcome. But as I said in my earlier post,

for entrepreneurs who dream of building something at scale, [crowd]funding at the product rather than company level may not be such a great shortcut. You give up your competitive edge by losing the element of surprise and under-the-radar momentum. And in so doing, you give up the one and only advantage smaller, more nimble competitors have over big companies: they can be more creative and innovative.

    Creative and innovative enough, you are betting, to be able to build a following and get going before the big guys discover the market and come in and out-execute you (which they will: over time it is always the execution that matters more than the idea – see this discussion of the myth of the first-mover advantage or this piece in Inc. Magazine for more on that.)

Using customer crowdfunding, entrepreneurs might be able to make a quick buck cashing out a single product on a crowdfunding platform, but I don’t think they can build an enduring company.  

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  You can follow Christopher on Twitter @cmirabile and on Google+.

    For more on this topic, Christopher will be speaking at our Understanding Crowdfunding for Investors and Entrepreneurs Roundtable on March 27.

 

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