There is no doubt that 2012 has ushered in a new era of internet funding. Social networks have matured so that not only are you connected to your friends and family, but also to THEIR friends, creating a ripe atmosphere for viral sharing and instantaneous news. Now, artists, inventors, entrepreneurs, and designers are beginning to take advantage of these network effects to assess marketplace demand and acquire capital.
This funding revolution has mainly been a game changer for creative types that are looking to fund an album, video game, or new tech product, but it hasn’t really changed the way capital is raised to create software products.
Why are software products different?
There are a number of reasons why software products haven’t done as well on crowdfunding websites as other types of projects. The best way to gain some insight into the problem is to analyze consumer buying behavior and how it varies from category to category.
Many startups follow a similar path when attempting to establish a subscription-model internet business. The rule of thumb seems to be that you should develop a base of loyal customers via a freemium model before you begin charging for extra or key features. Why? People want software for free, especially B2C software. Therefore, you can imagine that it can be difficult to get consumers excited about a software product or service with reward-tiers when their mentality since 1995 has been to expect a freemium model rather than pay for a product and receive rewards (the actual product being among them).
B2B software buying behaviors are a little different, but rather than go into that, I think most of us can agree that there are very few businesses on crowdfunding websites that are backing projects. It is primarily a consumer driven marketplace.
How can this change?
Well, the other way that individuals can benefit from a proposed software project would be to have partial ownership of the project. Consumers could get excited about these types of products because of the backer’s industry knowledge or experience, which may lead them to believe that the software product solves a large problem better than other software solutions, or simply that they think it is an interesting idea.
This is why the legalization of equity crowdfunding is going to be huge for software products and why everyone in the business and technology community should be excited for late 2013.
However, there are still some awesome crowdfunding models that entrepreneurs can use. Recently, there has been some interesting news regarding student entrepreneurs and how they are beginning to utilize crowdfunding.
Upstart is an emerging crowdfunding site that recently launched an initiative where students or recent graduates can raise money for a business opportunity using their future income as collateral.
Check out Omri Mor from Seattle, WA who has used Upstart to raise $50,000 for a new music platform that fosters the support and discovery of new artists and bands. Notice that unlike project crowdfunding websites like Indiegogo or Kickstarter, Omri was funded by only 12 backers as opposed to the typical number of backers that support a project campaign (>70). This could be because Upstart is only open to accredited investors rather than the general public.
Another great example of young entrepreneurs utilizing crowdfunding is Vincent Lucero who raised $25,000 from 13 backers for a game studio that specializes in mobile and console game design. Coming from the University of Washington, Lucero has a good GPA, strong track record of dedicated work ethic, and now works at Google. Keep in mind that the collateral for this investment is an individual’s future income.
