Could crowdfunding revolutionise design?

In essence, the idea behind crowdfunding couldn't be simpler: a company or entrepreneur makes an online pitch and it then becomes possible for a global audience to decide whether and to what extent to back it. Donations can be small or large and can secure the investor anything from equity in the company, a financial return on the investment or a product – right down to a t-shirt or just the warm glow that derives from having helped a good idea on its way. Probably the best known crowdfunding website is kickstarter.com, which operates what is known as a 'reward' system, whereby investors receive recompense based on the size of their donations. These could be as little as a few pounds up to thousands. In some instances, investors may pay enough to receive the end product of the project to which they are donating. However, Kickstarter itself is careful to state that it is not a store. Those who consider themselves to be paying for a product may well find themselves disappointed or waiting a long time – this is a much riskier model than many realise. However, there are notable successes. Perhaps last year's most successful Kickstarter project was launched by a trio of MIT students and post-graduates who designed the Form 1, a desktop 3D printer capable of printing very high-resolution objects, and priced at about $2,500. Initially seeking $100,000, by the time the parent company Formlab's fundraising campaign ended in October, it had accepted almost $3 million in investment/orders for the device. However, the Formlabs story may yet turn out to be as much cautionary tale as shining example. Just a month after busting its funding goal so spectacularly, the company found itself being sued for patent infringement by 3D Systems, a giant of the 3D printing industry. Perhaps even more significantly, the suit also names Kickstarter as a defendant for serving as Formlabs' sales agent (its claims of not being a store notwithstanding), a development with the potential to derail not only Formlabs, but potentially Kickstarter and even the crowdfunding model as a whole. Formlabs has said the lawsuit won't stop it from delivering its 3D printer to more than 1,000 buyers. But the company will now have to spend a great deal of time and money defending itself against the suit. The Formlabs example offers an interesting microcosm, then; one that display both the strengths and weaknesses of this funding model. On the one hand, the ability to raise that degree of funding in a short time and to gain a great deal of free publicity and credibility is obviously a huge boon to any fledgling business. On the other hand, having to do your pitching in a public forum means that your potential competitors have the opportunity to anticipate, analyse and even counteract your product long before it even hits the market. This problem is familiar to Alastair Buchanan, co-founder of CADScan (Eureka, March 2013), whose CADScan 3D scanner recently exceeded its £80,000 funding target on Kickstarter, reaching £97,264. "Ultimately, it's a public site," he says. "You have to explain in quite a lot of detail what you're doing and people ask you technical questions that you'd perhaps rather not answer publicly, but since they're putting their hands in their pockets, you have to talk to them. The other factor, of course, is that your potential competitors can buy one of your machines on there and ask these questions as well. Thinking through all the questions you're likely to be asked beforehand is incredibly useful." However, this kind of inquisition can be of benefit from a design point of view. Says Buchanan: "They call them 'investors' on Kickstarter, but they really are customers – they're buying the product at the end of the day. And if they tell you what they want, you have to listen. There are certain tweaks you can make to the design. The major one is the 'macro mode' that we've just agreed to do. That means you have a second turntable much closer to the scanner and can scan smaller objects in much higher resolution. So we have some flexibility in the design." For all that, however, the design can only be altered so far. "You can put new ideas out there, but there is limited scope in terms of what you can do," says Buchanan. "You can refine an idea, but I don't think you can really change it that easily. It has to be at a certain level before they'll let something on there. It has to be a functional prototype." Overall, Buchanan's experience of this model has been positive. "You certainly get customer feedback very quickly and things become very clear to you very quickly. If a lot of people are saying the same thing to you, then it's often correct. So it's certainly a very good way of speeding that process up," he says. For all that it is the most high-profile example of crowdfunding, Kickstarter represents just one model. In addition to the reward model, there are also purely altruistic models that allow investors to back ideas they like with no acquisitive model. At the other end of the scheme, however, are sites that allow investors to loan money to creditworthy businesses and collect interest. However, the model currently felt to be most potentially disruptive is one that allows the mass market to buy equity in the companies they fund. This 'equity crowdfunding' model is the one that many believe has the potential to transform the funding landscape. One such person is Simon Dixon, CEO of Bank To The Future, a company that offers a range of models. He says: "The point of crowdfunding is that it allows people rather than institutions to determine who gets funded – that's the point of it. The second point is that it has to bring in a new source of finance or we're not really doing anything here. We're not trying to regurgitate angel money in a new form. We're trying to allow and introduce a new source of finance." He is insistent, however, that crowdfunding should not be seen as simply an easy option for those looking for capital. "Crowdfunding can certainly be a fast way to raise capital," he says, "but it is as hard as raising money from a business angel. It has to be challenging to get funding, but it shouldn't be expensive… There are people who make the pitch and then just sit there and hope to come back in 90 days and collect the money. It doesn't work like that." Luke Lang, co-founder of equity crowdfunding site Crowdcube agrees, saying: "There's nothing more frustrating than an entrepreneur who thinks they can just sit there. You really need to put some commitment and energy into the process if it's going to work." While stories such as Formlabs' and CADScan's are encouraging, the majority of crowdfunding successes have tended to be in more easily-grasped and/or low-capital intensive. So is there really scope for more complex businesses such as engineering to succeed in this format? Says Dixon: "It's too early to say. We're still a niche. We've only raised £1.6bn as a sector. I do believe that things like bio-sciences, which have massive capital and long life cycles and multiple funding rounds are a bit too complex for investors to understand. At the moment, there is definitely a bias towards a certain type of business that people can grasp relatively easy." In the future, however, Dixon has little doubt that this will change. He says: "As the industry grows, I think we're going to see ever more sophisticated niche platforms capable of meeting certain needs and congregating certain communities. One of the models I think is going to emerge is the model of an expert performing due diligence before the pitch goes live and then allow people to co-invest alongside that expertise. That would suit areas that are particularly technical." Lang concurs, saying: "I think that B2B propositions find it a bit more difficult at the moment, but I suspect that may be more to do with the level of sophistication of the actual investors. In three, four or five years' time, I think you'll see that sort of sophisticated investor" Ayan Mitra, founder of Crowdbnk [sic], is clear that the crowdfunding model is set to be disruptive regardless of sector. "Every product has a crowd," he says. "As the industry evolves and more people know about crowdfunding and are financially educated, you're going to see that change. This is going to be huge in terms of disrupting the corporate funding mechanisms." But what about the banks? Are they simply going to sit back and let crowdfunding take all this market share? Dixon is dismissive of the idea that banks see this as a threat, saying: "Only two types of bank lending to SMEs are happening at the moment: positive PR and the Government forcing them to lend via Project Merlin… Banks are getting too hard a time at the moment because they were never meant to be in the market of lending to SMEs. That's our market and that's our territory. I think that banks are really happy to have somewhere they can send those customers they definitely don't want." Regardless of the model or sector, Dixon makes it clear that he believes crowdfunding is bound to grow into a genuinely disruptive business with the potential to revolutionise the financial marketplace and to give ideas that might otherwise never have seen the light of day a real chance. "It's very early days," he says. "As our sector grows, there's so much scope for it to evolve. Every single financial product is going to turn into a crowd product in one form or another."