Crowd Funding: Customers as Investors

By Andrea Ordanini

March 23, 2009

It’s called crowd funding. Customers invest sometimes as little as $1 in a product—often an album by a new musician, or clothes or jewelry from an aspiring designer. The customers then help promote the product by posting messages on the Web. Their incentive: a cut of the profits in proportion to their investment. They share in the risks as well, but each person’s risk is low because he or she is part of a crowd of investors.

A similar concept exists in charitable giving, in which people pool contributions, usually via the Web, to support various works and initiatives. But now some online companies have shown that such an approach may be fruitful for businesses, too.

Consider SellaBand.com, a start-up launched in 2006. Unsigned artists set up a free page on SellaBand.com, where they can post as many as three songs. Visitors to the site then listen to the music free and can invest (with a minimum of $10) in artists they consider promising. When artists reach $50,000, SellaBand uses the money to help them produce an album of songs that are then sold as CDs and downloads through SellaBand.com and other online vendors.

Profit Sharing

Investors, meanwhile, are encouraged to help promote the music in online communities. It’s in their interest to do so: After costs and a 10% share for SellaBand, revenue from each album is split 50-50 between the artist and the investors. About two dozen new artists have been recorded since the summer of 2007. In the best case so far, investors have earned about $5 for each $10 they invested, says Johan Vosmeijer, chief executive and co-founder of Amsterdam-based SellaBand.com.

A similar business, Slicethepie.com, based in Reading, England, lets visitors to its site (www.Slicethepie.com) invest from $1 to $15,000 in albums the company helps produce, and earn a proportionate share of the album’s sales.

Additional benefits from such models: The artists can leverage a powerful distribution channel with no costs. The investors get to help influence what musicians become successful. The companies, meanwhile, get the biggest share of the revenue while offloading some of the risks and costs of promoting new talent.

Crowd Pleasers

Similar companies are emerging in the fashion industry, such as CatwalkGenius.com, a venture of Dublin-based IQL Ltd., launched in June 2007. Aspiring designers sell samples of their work on the site. Customers can invest in designers they like in increments of £10 ($14), plus a £1-a-share processing fee. When a designer amasses £50,000 ($70,000), the company says it will use the money to help the designer develop and sell a new line. IQL co-founder Helen Brown says she expects the first designer to reach £50,000 by year end. Once sales begin, she says, the company, designer and investors each will get 30% of revenue; 10% will be split among Web sites that help promote the lines.

The typical investment has been £10, Ms. Brown says, though some have invested in the £40 range. Shareholders can ask to be reimbursed anytime up until the designer reaches £50,000.

Another variation involves T-shirts. Digital Stampede Inc., a Chicago-based online retailer, early last year launched Cameesa.com, a site where free-lance designers post T-shirt ideas. Supporters invest $20 to $80 in designs they like. Once a design attracts $500, Cameesa arranges production and sells the shirt on the site, typically for $17 to $20. Designers earn a fee of $250, plus $2 per shirt after the first 250 sold. Supporters get a shirt and a small share of the revenue as store credit; for each shirt sold, $1.50 is split among the investors according to their share. When an investor’s account on the site reaches $25, he or she can ask for a check.

Investors earn a few dollars on successful shirts, says Andrew Cronk, chief executive of Digital Stampede, who says his business is more a way of supporting designers than a tool for investors to make money. Supporters of designs that don’t reach the $500 target can get reimbursed.

A few sites in other industries use crowd funding as well. But our research concludes that the approach works best with products for which customers feel a strong personal attachment—products like music and designer goods. Without that bond, customers are unlikely to support a product beyond simply buying it.

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