Creative Alternative Financing – Crowdfunding & Crowdsourcing: Part I

Creative Alternative Financing – Crowdfunding & Crowdsourcing: Part I

On May 3, 2011, I participated in the panel discussion titled "Creative Alternative Financing - Crowdfunding & Crowdsourcing" at the 2011 MBE Annual Meeting organized by New York & New Jersey Minority Supplier Development Council. I was honored that my co-panelists were David Rose, founder and CEO of AngelSoft, an angel investor and serial entrepreneur, and Douglas Castle, a seasoned advisor, director and trustee to emerging and growing companies.

David Rose spoke about the emergence and rapid expansion of crowdsourcing. Crowdsourcing is an amazing resource to start-ups that struggle with financing early stages of company development. Crowdsourcing offers an economical way to outsource projects that would typically be performed by an employee or an independent contractor. For example, most start-ups need a name, a logo, and/or a website designed by professionals. Now, instead of contracting one company and hoping for a satisfactory end result, a start-up founder can post their project on a crowdsourcing site like www.crowdspring.com, announce the amount of money the winning contributor would receive, and get tens or even hundreds of completed projects from which to choose. The founder would then select the winning contribution and pay only to that one contributor.

Crowdsourcing is not only suitable for start-ups but can also be used by seasoned businesses. Crowdsourcing may be a way to get work done in times of high demand, or a way to get fresh ideas about strategic decisions (such as, for example, whether or how to develop a certain product).

A good illustration of crowdsourcing is the 2006-2009 Netflix competition to create a better algorithm for recommending movies. Even though only one winning team received the coveted $1 million prize, hundreds contributed their solutions to the company. Interestingly, only the winners had to publish their algorithm (other submissions remained private). See www.netflixprize.com. A more recent example is the Doritos and Pepsi MAX's 2011 Crash the Super Bowl contest. Consumers submitted a total of 5,600 ads, out of which six ads were aired during the Super Bowl broadcast. The winners received generous cash prizes and, of course, a trip to the game. For more information, see http://www.fritolay.com/about-us/press-release-20110207.html.

Despite all the good things about crowdsourcing, one needs to be careful about the quality of submissions and the high likelihood that additional follow-up work may be required to revise the submissions (which may be difficult to obtain from a crowdsourcer). In short, crowdsourcing results are surely unpredictable, but it is worth a try.

Read more commentary from Arina Shulga on the legal aspects of operating new and growing businesses at Business Law Post.