Communications of the ACM
Raising Money the Old-Fashioned Way
Crowdfunding for technology gains traction
Credit: iStockPhoto.com
While the Statue of Liberty was being built with French money, major American donors were slow to provide the funds needed for its pedestal. Only when publisher Joseph Pulitzer put out a call in his daily New York World newspaper did donations start flowing in — more than 100,000 of them, most for under a dollar. Thus the giving masses welcomed the "huddled masses," and the world's great icon found its home.
In contrast, technology initiatives have long depended on deep-pocketed governments and venture capital firms. That is, until now, as the growth of online crowdfunding sites is inspiring project leaders to turn to age-old public subscription models to inspire both investment and altruism. You won't find them all on the big crowdfunding sites like Indiegogo, though: they often find their audiences on tech-specific funding platforms, using methods unknown outside the technosphere.
Chip In, Cash Out
For technology investing, crowdfunding's impact is likely to remain small compared to that of traditional channels for quite a while. Estimates by the Coleman Fung Institute for Engineering Leadership at the University of California, Berkeley, project it will be somewhere less than $6 billion, compared to the $9 billion-plus available through just one tech-centered venture-capital firm, Accel Partners. Those figures assume that restrictions by the U.S. Securities and Exchange Commission (SEC) will loosen up sufficiently in the wake of the Jumpstart Our Business Startups Act (JOBS Act), passed in April 2012. It was widely praised on its enactment, although lingering delays in its implementation by the SEC have created uncertainty-fueled wariness.
Fundable business funding platform CEO Wil Schroter is unsure how much the JOBS Act will affect the small-scale investors who form the base of traditional crowdfunding. "You could say it significantly increases the number of people who can and will invest," he says, "but I haven't seen a lot of instances where people wanted to give money to startups but couldn't." Jenny Kassan, co-founder of the Sustainable Economies Law Center and CEO of Cutting Edge Capital, worries that rules created by the JOBS Act "might be so onerous to comply with that it won't really help." She favors state-regulated Direct Public Offerings, which avoid many of the SEC's requirements, at the cost of being able to solicit only residents of targeted states.
Opinion among traditional financiers is similarly muted. Naval Ravikant, founder and CEO of technology funding portal AngelList, notes that the Act doesn't change the need for guidance from experienced investors. "Our model of allowing people to invest online relies on somebody sophisticated as the lead," Ravikant says. At the same time, he won't dismiss the Act's benefits altogether. "One good thing about JOBS Act is that it puts a limit on the amount that non-accredited people can put in. With a dollar-cap limit and a lead investor in place, we might look into it."
Money for Nothing
Generally speaking, crowdfunding initiatives involve much smaller projects — and more modest figures — than those handled by AngelList. They also tend to be less focused on investment and more on the public good. According to David Martlett, founder and executive director of the National Crowdfunding Association, technology projects in particular gain something besides money when they crowdfund: the crowd's collective wisdom. "Technology and entertainment are the two driving forces behind crowdfunding as we know it. What tech does well that entertainment can't is crowdsource ideas. You don't want to say, 'Hey, help us cast our movie.' But in tech, it makes sense."
Many technology projects don't have a product to sell, so they're not appropriate for the dominant "presale" model, in which funders receive the finished product when it's ready. That's notably the case for Internet infrastructure improvements, says developer and writer Eric S. Raymond. "For example, take Internet time servers," he says. "Everyone relies on them, but they don't have any obvious commercial incentive. How do you sell time service? Trillions of dollars of online commerce rely on it, and it's being maintained by one guy in Maryland. There are examples like that all over the net."
Part of Raymond's solution is to start a non-profit institute, currently in development, to ensure the health and continuity of such projects. For his own open-source projects, he's also testing the commercial open-source marketplace Binpress, and the crowdfunding platform Gittip, which is unusual in that it allows only repeating, weekly donations. As founder Chad Whitacre says, "We've tried the one-off donation button, specifically in open source, and that hasn't substantially changed the game. I want people to be fully funded and able to depend on Gittip to pay their bills. It's about being freed up to do the work that you love and were going to do anyway." (Nearly $7,000 currently moves through Gittip each week, with about $450 going to its top recipient.)
In contrast to Gittip's model of regular support, the "bounty" model lets donors offer a one-time payment to whoever makes specific improvements to a technology. ("Bug bounties" are common among companies, with Facebook, PayPal, Google, and dozens of others offering cash rewards.) Striving to coordinate such efforts among open-source projects is Bountysource, whose CEO Warren Konkel stresses the need for a funding platform to define and engage its audience in creative ways. "By focusing on specific communities like developers, we can create more robust tools," he says. "We integrate with issue trackers like GitHub, Bitbucket, Launchpad, Bugzilla, Trac, Jira, et cetera, and can offer better services because of it. Instead of commenting on an issue with '+1' to show support, soon a comment like '+$10' could create an actual bounty."
We Built This City
Fundraisers have long known that contributions provide something as important as money: community engagement. Those who contributed to the Statue of Liberty became personally invested; they could point at the completed structure and say, "I did that." Donors who support a technology project are similarly likely to follow its progress, tell their friends about it, and provide follow-on help when needed.
That secondary benefit may help quiet the fears of those who worry that money could have a corrupting influence on open-source projects. Bountysource's Konkel further points out that crowdfunding will only change the venue of payment, not its fact. "One of the biggest questions we get is, 'How does introducing money into open-source software work?,'" he says. "'Do you alienate people or create rifts in the community?' We say, 'Money has always been a part of open source, it's just not always been apparent.' At the end of the day, code is what matters, not motivations."
Tom Geller is an Oberlin, Ohio-based science, technology, and business writer.
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