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Is Crowd-Funding Upstarta-Compatible?

At one of my recent talks, I got a question about whether crowdfunding (such as Kickstarter) breaks Upstarta Principle #1 (“neither a borrower nor a lender be”). Luckily, it was something I had already thought about quite a bit. Lucky because while it’s perfectly valid to not have an immediate answer to something (you can always follow-up with an individual later), actually having some form of answer – even just one that leads to a useful discussion – is more interesting and beneficial for the crowd present.

But back to the question… it’s not an entirely straightforward as there appears to be a case of borrowing: a group of people interest in what you’re doing give you money in the hope that you’ll succeed. Basics of investment, right? Not quite. The difference is quite interesting and actually goes to the heart of the difference between Upstarta companies and others.

An investor puts money into a company with the objective to get more money back later (either in bulk or over time). While it is certainly also the company’s intent to make money, it may not normally do so at the rate the investor requires, and also it actually has to deliver products or services which are what it makes money with. So this results in a triangular yet in-equal business arrangement where the company needs customers, but it actually operates primarily for the investor. This is in some ways similar to a commercial TV network that needs viewers but actually makes its money by advertising thus its clients are the advertisers not the viewers!

Contrarily, crowd-sourcing is money from future clients. An early crowd-sourcing example  I know of about is UK-based Demon Internet (an Internet Service Provider). While the Wikipedia story differs somewhat from the version I heard from an early co-worker of the founder of the company, it went roughly like this: around 1992 people in the UK were asked for interest in a new ISP and they would a cheque to a PO Box; if 100+ people were to do this, the ISP would be sufficiently funded and start its business. This worked exceedingly well and the company’s GBP 10/month became a benchmark for others as in those days Internet was generally time-charged (still is in some places!) rather than flat rate. Revolutionary.

As can be clearly seen from the Demon Internet example, the people who put the money in were also the direct beneficiaries: the company delivered a service they wanted. They simply paid their internet service subscription one year ahead. Apart from company overheads, the funding didn’t go anywhere else.

Kickstarter and other crowd-sourcing “facilitation companies” operate with the same mechanism. They act as an escrow-service, holding on to the money until the project is fully funded. Provided the facilitating company is trusted, this is of course much more reliable than the receiving company just using a PO Box 😉

All that said, that doesn’t mean that all crowd-sourced ventures are Upstarta companies. Funding is not the only thing we look at to see if a business idea makes sense. Some ideas are very interesting but just not viable as a business concept – either outright or in that particular form. When they are put up on a crowd-sourcing site, those ideas in particular might either not achieve their funding goal, or not (be able to) deliver. The latter is of course worse as then the money has been received and spent, but no service or product is delivered to the early investors.

There has been some analysis of Kickstarter outcomes (Behind Kickstarter Crowdfunding Stats) and it shows some of this problem. Exact tracking is apparently difficult because Kickstarters essentially makes projects that don’t reach their finance target disappear. But more than that, I believe the “unable to deliver” fails are a very important and serious aspect that deserve much more scrutiny, and I see no reason to not have all that fully public.

I think that if you have a sane business idea, getting your first 10 or 100 customers through a crowd-sourcing approach is perfectly valid. And it could also be a valid idea as a one-off rather than as an ongoing business.

Enabling Innovations

Enabling Innovations: human-machine interfacing

Recently, a few really interesting products have seen the light of day and they appear to indicate a pattern in a particular space, in this case medical sensor/measuring/visualisation equipment in the medical space. But the market disruption caused by these products is much broader than that.

Late 2010 David Albert introduced a cheap ECG system using simple sensors built in to a shell around an iPhone. He originally presented the system via a video which got an awful lot of attention really fast. One article I spotted about it was Your Heartbeat on an iPhone but as it wasn’t an actually available product yet (for either development or general use) I thought I’d better wait and see whether this stuff actually got to market. A year and a half later the system is not yet available for use with humans (no FDA approval so far), but there is a $199 model for use in veterinary environments (AliveCor Vet). I presume that apart from the FDA approval it’s actually identical 😉

This morning, I received a Neurosky MineWave (EEG sensor) headset in the post. See the Brain Interfacing – Finally post on my personal blog for some initial fun with it. For $150 you now get the basis capabilities of EEG at home. And not only that, you can build new applications and uses using the input stream, including controlling devices and games.

Both of these products are examples of enabling innovations. We all know that the price of things comes down over time, but what we often don’t realise is that at certain points, because of key components also becoming much cheaper, smaller, lighter, etc, things that were previously restricted to hospitals, laboratories and other expensive and specialised environments suddenly become available to “the masses”. I’m not saying that everybody will be using these things, nor that specialised expertise in the area is now obsolete – but for many simple tasks these tools are absolutely sufficient and thus a real enabler. It fundamentally changes the market (that previously only contained expensive equipment for a very limited audience). If companies in this realm don’t realise this (or reckon that because it used to be medical and sophisticated specialised equipment their market won’t change at all), they’re going to be sadly sorry really quickly.

In addition to people with simple needs no longer needing a referral to a facility with the expensive gear (low end disruption: in this case, the issue can be handled directly by a doctor without referral), new things become possible (new market disruption: in this case, at home with self-monitoring – and completely new uses of the technology). As always, I see the latter as a much more interesting space as that’s where the true innovation tends to happen. Low-end disruption is still relevant, however, as it directly affects the existing players in the market and it’s just interesting to watch whether and how companies handle this. Generally they don’t handle it, or much too late and then very badly, but I’m always willing to be surprised!

If you have more information on the adoption of these particular products, or other enabling innovations you’ve spotted, please do write in.

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About a screw: not everything read on the Internet is true

Swedish media production company Day4 recently conducted an experiment on Internet media and the Apple community. They drew a screw with a special-patterned head and posted it anonymously via Reddit. It spread like wildfire.

Just some odd sites, you reckon? No. Try a search on “apple screw” and see for yourself which big names picked this up like almost everybody else. Since no further information existed, all of the commentary in the articles is extrapolated from thin air, with presumptions based on Apple’s actual past actions.

A phrase like “Apple May Be Working On A Top Secret Asymmetric Screw To Lock You Out Of Your Devices Forever” doesn’t even hold up to very basic scrutiny. Disregarding the simplified misuse of the word asymmetrical, it’s not that hard to make/copy a tool for almost any screw head design, from scratch (either from plastic or a metal). Even if the whole thing were true, tools would have been produced very swiftly – regardless of any legalities (which would be a valid topic, considering the US DMCA legislation).

The group at Day4 created the following chart plotting the distance from the source versus the perceived level of truth. Nothing new there either from a psychological perspective, but it’s good to have these things pointed out every once in a while:

  • don’t just believe everything you read/see (don’t just disbelieve either, that’s almost as invalid);
  • journalists, and people pretending to be journalists, can be (and often are) very lazy;
  • if you are a proper journalist, always do your job thoroughly (as others may not);
  • and last but not least, building an image (as Apple has) of being seen to be capable of initiating this kind of idea is not super. Choices have consequences, always (often delayed) and the people making such decisions may not consider the long term.

Truth chart

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The Economics of Spam

David H. Reilley, Jr. (Google Inc, formerly Yahoo!) and Justin M. Rao (Microsoft Research, formerly Yahoo!), have authored a paper on the Economics of Spam. It does a decent job of dissecting how and why spam “works”, and how various legislative initiatives such as the CAN-SPAM act in the US have had relatively little impact – that is, they haven’t helped reduce spam or make it less of a problem.

The full manuscript is available in PDF.

Spam is (overall) profitable for those who engage in it, even though the spam methods tend to be illegal. The things that are sold and the means of selling tend to be illegal anyway, so advertising in an illegal manner doesn’t really stretch their ethics or risk.

But more importantly, the authors estimate that society loses $100 for every $1 of profit to a spammer. This once again proves that not all economic activity is good. Regardless of profit, when the cost to society is that large, I would think it wise to not even get close to being involved with it in my business.

Many people don’t even realise that when they (for instance) purchase a list of email addresses they are likely breaking some local laws, and they may even make some money from it, but I think it’s just not right. If they, once informed, persist in using such marketing means, they lose all credibility with me. Unfortunately, many businesses to engage in spamming activities. Just choose to don’t be one of them.

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Patching the US patent system

The Electronic Frontier Foundation posted Can You Believe It? Legislation that Would Actually Help Fix the Patent System, about a new bill introduced by two US Representatives. The “SHIELD” act (Saving High-Tech Innovators from Egregious Legal Disputes) simply states that if you sue someone over a computer hardware or software patent, you better have a reasonable and good-faith belief a defendant actually infringes a valid patent before it sues. Otherwise, you’re up for all the costs.

I think it’s an excellent initiative. While not really fixing the patent system, it makes the now rife patent trolling particularly in the space of software patents unprofitable. Fundamentally I believe that software patents are a mistake, but I’m also a pragmatist. Software patents are not going to disappear overnight. However, any person or corporation with money (troll or not) can currently bully a small innovator, the mere threat can put them out of business regardless of whether the claims have merit. This is because the small innovator cannot even afford to let it go to court now, the process itself would bankrupt them even if they’d win. That is a hindrance to both innovation and valid economic activity – clearly that is not the intended purpose of the patent system. The patent system was intended to provide an inventor an exclusive time period to benefit from their invention either directly or through licensing (and as a sideline, recoup up-front costs) while having the details of the invention publicly available – thus promoting innovation, not hindering it.

The proposed bill is US legislation, but with a much broader effect. For instance, technically Europe doesn’t even have software patents, but any place that interacts with the United States through free trade agreements has some form of exposure to the US way of handling Intellectual Property, no matter how broken it is.

EFF point out that the “no frivolous claims or you pay” system has long been in place for copyright infringements and other such cases, so as a concept in the space of Intellectual Property rights it’s not new at all. It makes legal and logical sense sense and puts the US patent system in line with the rest of the US IP legislation, but no doubt there’ll be vigorous lobbying by parties that have an interest in keeping the system broken. It is a good sign that US Reps. DeFazio and Chaffetz stick their head out in this way.

For the broader case of software patents, see the Defend Innovation website. You can add your support there too.