Crowdfunding Bounces Another Inefficient Intermediary

My column from the Nashua Telegraph on June 20, 2012….

For me, the changes in the music industry are the most obvious example of how the connectivity of the Internet can combine with new technology to transform an industry. The emergence of digital recordings that could be freely shared online changed the music business permanently. Revenue from the sale of CDs dried up for most performance artists. This brought calamity and in some instances death to several huge record companies, who historically had clipped huge profits from the sale of music.

So the business model in the music industry has been changing. Musicians now use social media to connect directly with fans, and play as many live shows as they possibly can. They build a fan base peer to peer. The traditional record album, which featured 10 or 12 songs, is disappearing, probably for good. Truthfully, young music fans don’t even know what albums are. They find their music online and enjoy it one song at a time. Online subscription-based services like Spotify seem positioned to be the primary vehicle for delivering recorded music to listeners.

Without a doubt, these changes have been tough on musicians. But as the new model solidifies, additional opportunities for musicians to get their music to the public are beginning to surface. One of these opportunities involves the use by musicians of crowdfunding to raise money to support their music. Crowdfunding enables musicians to leverage their fans’ resources to help them get their music into the public domain.

So what is crowdfunding, and how does it work? The best-known crowdfunding site is probably Kickstarter. It can be found at www.kickstarter.com, and you have to see what is happening on the site to believe it. At Kickstarter, artists, authors, musicians and entrepreneurs can list their project and offer individuals the opportunity to directly contribute to them. Contribution opportunities are generally offered to the public in tiers. A person could choose to invest, for example, $1, $100, $1,000 or even $10,000 in a given project. Investments at each level are “rewarded” by the issuer with perks, gifts and other items listed by the issuer on the Kickstarter site.

The key to the Kickstarter formula is that in order for the listed deal to close, its target fundraising goal must be reached before the stated deadline date. Let’s say I am a musician with an idea for a new song and video. I decide to use Kickstarter to raise $10,000 to fund the project. I decide to close the opportunity Aug. 31, 2012. That means that unless I raise the $10,000 before that date, no contributor credit cards are charged. If I hit or exceed my number, then on the closing date, Kickstarter charges my supporters’ credit cards, and after clipping a fee, remits the balance to me. It really is that simple.

So as a musician, I will want to make sure my fans and all my other contacts know about the listing. I will want to leverage my available social media tools to make sure people line up to contribute. I’ll need an effective but brief video so I can explain exactly the project I have in mind. If I’m successful in raising the money, I can record my music and video the way I want to, without interference from any inefficient intermediaries like record companies and agents. And Kickstarter is proving just as effective with entrepreneurs seeking funding for their ideas.

Kickstarter also can be used to establish credibility for an idea or concept with more traditional sources of funds and support. On Monday of this week, author and social media guru Seth Gobin listed his upcoming book release on Kickstarter. Gobin wanted to raise $40,000 in 30 days. He hoped this would demonstrate to a doubting publisher that the book would sell. As of Tuesday morning, Gobin had secured over $193,000 in pledges. His fans liked the concept and came out in droves to support it. I suspect this might get the attention not only of Gobin’s publisher, but others as well.

When you stop and think about it, crowdfunding done right has the potential to be a powerful, transformative technology. The Kidstarter website boasts several extraordinary success stories. Some product offerings have far exceeded their target goals. The crowdfunding process serves the dual purpose of empowering the producer, while at the same time solidifying the relationship between that producer and its customers. Inefficient intermediaries are removed from the equation.

The economic future will be about creating wealth, not taking wealth. Those who make their living as inefficient intermediaries will continue to be threatened by new technologies that empower the wealth creators. The middle ground between the players in transactions is getting shaky and getting smaller. The message is clear: if you are not a value creator, technology may render you irrelevant.

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