Small Business

Scoring Money from an Online Crowd


Crowdsourcing to raise cash for creative artists is catching on, but the model may not apply as well to entrepreneurs seeking venture funds

The popular Dutch gothic-rock band Nemesea wanted a record deal but had struck out with major labels. So when they heard about SellaBand.com, which launched in August, 2006, they signed up. The Dutch Web site promises to connect underground musicians with enough fans to finance a professional recording. Its crowdsourcing process appealed to Nemesea because it meant that instead of trying to convince one deep-pocketed record company to invest, a wide pool of fans could be recruited for small buy-ins (see BusinessWeek.com, 1/18/07, "Tapping the Wisdom of the Crowd").

The site works like this: After musicians register on SellaBand, their fans, called "believers," can purchase $10 "parts" of the group online. The money gets held in escrow until the band raises $50,000. Then it becomes the recording budget, and SellaBand helps connect the participating band with professional producers and studios. Believers get limited editions of the album. SellaBand puts three songs online for free and sells the rest through the site at 50¢ per download, splitting the profit evenly—one-third to the band, one-third to the believers, and one-third to SellaBand.

Part Fan, Part Owner

Within three months, believers from 50 countries made Nemesea the first band to reach the threshold. In the year since the site launched, only seven artists have reached $50,000, but fans have contributed more than $1 million in total to nearly 5,000 bands. The next band poised to make it, Australian rockers Vegas Dragon, have raised $35,000 since signing up in November.

Pim Betist, creative director and one of the founders of SellaBand, says crowdsourcing works for the music industry because most of the market is controlled by a handful of risk-averse major labels and there's a huge underground that wants to break in. His company, which he expects to turn a profit in the next 18 months, connects the artists with their market. He thinks the model has potential for other industries. "I'm being contacted on a weekly basis by at least seven people who have a business idea that contains crowdsourcing," Betist says.

Other examples are popping up. The British Web site A Swarm Of Angels has raised £25,000 ($50,000) toward creating a £1 million ($2 million) feature film, to be distributed free online. Another Britain project, My Football Club, tapped into global soccer fervor to raise more than £1.3 million ($2.6 million) from 53,000 fans in less than four months to purchase a British team. The site says it is in talks with four clubs right now.

Creatively Inclined

Could entrepreneurs use the same method to raise seed money? Serial entrepreneur Steve Poland tried earlier this year with a project dubbed Ringside Startup. Poland wanted to raise $20,000 from users to put toward a Web-based business, bringing them into the process by seeking their advice on his blog. But after two months he had just $580. The problem? He could only ask for donations, rather than offer investments that would pay dividends, because selling shares of ownership in the company would require him to go through a costly public offering process with the Securities & Exchange Commission. "If I was able to give away equity, I would have gotten a lot more people pumped," Poland says.

Why did the model that worked for Nemesea fail for Poland's venture? Because people have an emotional connection to art that they don't have with businesses, says Michael Sikorsky, chief executive of the Calgary-based crowdsourcing site Cambrian House. "If people are struggling artists and they want to paint more, I end up going and buying their paintings that are way overpriced because I want to support them," he says. "When I tell people that I'm setting up a company and I want them to give me some money, they always expect something in return."

That's why the crowds that power SellaBand are presented as believers, not investors. They buy in because they like the music and want to see the band succeed, not because they expect to earn big dividends or sell their shares on a secondary market. Same goes for the 53,000 soccer fans and the swarming angels trying to make a movie. The novelty of owning a tiny piece of something creative outweighs the monetary value.

Capital Innovation

At Cambrian House, community members submit and rank each others' ideas for businesses. For now, the system is designed to pick the best proposals and connect entrepreneurs with the talent—developers, designers, marketers—to execute them, but Sikorsky expects crowdsourcing will someday be a viable source of startup funds as well. "I totally believe that the users want to become more deeply invested as owners," he says.

Jay Parkhill, a business attorney who advised Poland during the Ringside Startup experiment, disagrees. He says the same securities laws that protect naive investors from pyramid schemes make it impossible to crowdsource startup funds. "I think there is room for a model like that but it's so far away from where the SEC is and has been historically, and there's so many other things that the SEC is dealing with, that it's an uphill battle," Parkhill says. "Raising capital is not a very good place for innovation."

That's not keeping people like Betist from trying. He's already registered several other "Sella-" domain names for potential future ventures. As Nemesea guitarist Hendrik Jan put it, "You can 'sella' everything, probably, so there are lots of possibilities."

John Tozzi is an intern for BusinessWeek.com.

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