Bill Gates observed last year “we may be in an economic downturn, but an innovation upturn”. Indeed. But if you’re a start up business seeking capital for a game-changing idea how can you make that a reality?
Here are a couple interesting ones:
P2P Banking
If your idea is too radical to get past a risk-averse traditional bank, start a fund that people who understand your risk a bit better can invest in themselves. A good example of this is a small open source hardware community in the USA led by Justin Huynh and Matt Stack, who have started their Open Source Hardware Central Bank. Wired magazine likens their concept to “a community of Facebook friends borrowing and lending among themselves; a peer-to-peer bank.”
The bank isn’t yet fully up and running as a federally regulated lending institution, but it plans to allow those in the open source hardware community to make investments in specific projects, aiming to collect returns ranging from 5 percent to 15 percent from the successful sale of the projects.
For those whose who receive funding from the bank they benefit (in addition to seed capital) from the community’s deeper understanding of their operating environment in theory allowing them to be more nimble, and take risks a traditional institutional investor may have not be prepared to.
Crowd source funding and business planning
Another concept of funding that relies on a close community of like-minded people is to crowd source both the funding and business planning from a community. The benefits of shared expertise, knowledge, and flexibility are obvious, but unlike the P2P model above, the dialogue between the business and the crowd is much more two-way. This could be good or bad, depending on how the business is managed and run.
One dot com platform that was established as a means to facilitate this is Big Carrot - which starts the funding process by first focusing on what investors want (the prize) and then structuring a process for other investors to firstly shape what they desire and then secondly for individual/businesses to submit solutions (like a tender) to claim the funding. The decision on who is chosen is voted on by the community. See the chart below for full process.
To date, Big Carrot has not been a huge success with only one significant major claimed prize - eighteen months ago - Ben Spink who was awarded USD $8,622 for his solution of creating an open source alternative to Apple’s Dot Mac service.
Industry Funding Competitions
There are, and have been, other tender-based competitions such as Google’s Android Developer Challenge which awarded 46 developers $25,000 each to further continue their development. The aim of these competitions is to grow an industry that will have a trickle-down benefit to those large backers who fund it. In Android’s case Google as the main web-based search engine of Western countries stands to benefit greatly when mobile search becomes popular. But to make mobile application use popular first requires a diverse range of different (non search-based) applications for people to use.
There is also a live competition called the Open Screen Project Fund set up by Nokia and Adobe with up to $10 million in funding available to mobile application developers with exceptional ideas.
Conclusion
The main differentiator between the different funding sources relates to the source of the capital. Top-down submission based programs and many crowd sourcing models require the idea creator to sacrifice control of the idea and its direction to a large degree. They also sacrifice part of their intellectual property due to their open nature. This is less prominent in the P2P Bank model which has investors having less control/input into the business they’re investing in, and allowing the community peers themselves to reap rewards directly from each other, instead of from a large industry sponsored pot - however this model is yet to become reality.
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Geek note on the Open Source Hardware Central Bank logo from the group: “Naturally, the text around the logo reads “Open Source Hardware” in ASCII, there’s wreath of resistors representing overcoming resistance (buh dump chhhhh), and a course a fancy set of circuitry in the middle, and a hexadecimal base 16 set of stars around the center..”
