IndieGoGo is a crowdfunding platform that connects entrepreneurs with product ideas to their would-be customers. An entrepreneur with a product idea can start a campaign on IndieGoGo to introduce the product and explain the development and funding needs. The other side of the platform, customers, can review campaigns and “back” the products they are interested in by essentially pre-purchasing the product as a way to fund its development. Essentially, IndieGoGo is leveraging crowds to change how innovation is funded.
What kind of changes does this model produce?
- Supply and Demand: the IndieGoGo model reverses the traditional dynamics of supply and demand. Typically, a company will consider its own competencies and use a collection of assumptions to supply a product, and true demand (actual willingness to purchase) is only discovered once the product has been launched. IndieGoGo allows demand to dictate what is supplied, and products that do not generate enough demand are not invested in.
- Supply chain: because the delivery date is in the future, the entrepreneur can plan production of their first batch according to a known demand level (no speculative inventory), allowing them to conserve resources at an early stage when cash flow is particularly critical. The platform is the channel to customers so the entrepreneur keeps a greater share of the revenue to invest in scaling after launch
- Investment: entrepreneurs do not have to invest upfront and take on demand risk. The funding process reveals initial demand, so the decision of whether or not to invest, as well as level of investment, is driven by proven demand.
- Marketing: the entrepreneur does not have to invest in extensive pre-revenue marketing and advertising. Once the first batch is delivered, good products will benefit from word-of-mouth advertising before the product is then commercially launched at a greater scale
Entrepreneurs are incentivized to seek crowdfunding as they can bring their products to market at a low cost – they don’t have to pay heavily in equity or debt servicing to launch their products. Use of the platform also provides them with many of the benefits listed above. Customers are incentivized by the “perks of backing” (typically being able to pre-purchase the product at a discount from the intended retail price), as well as satisfaction from their preferences being influential in investment decisions that they are personally removed from.
The platform is reliant on cross-side network effects between product entrepreneurs and supporting customers to drive value. IndieGoGo does not assume any liability for product quality, but negative experiences with the actual products are likely to drive customers off of the platform, creating substantial reputation risk.
The traditional investment model usually involves seasoned professionals reviewing business plans, so the plan has to be defensible before it is funded. With IndieGoGo, the entrepreneur’s funding needs are not verified, so there is a greater risk of funding shortfalls and failure to deliver.
Value Creation and Capture:
The changes that IndieGoGo creates (as listed above) both create value and mitigate value destruction (e.g. by preventing investment in unpopular ideas) for platform participants. The platform also creates value by using scale to offer support to entrepreneurs at a lower cost. Support mechanisms include: analytics, marketing and promotion, and fulfillment support.
IndieGoGo monetizes through a 5% commission on total funds for each campaign. Given that IndieGoGo has an asset-light and low-risk model, there may be pressure in the future to lower the commission rate.
Scalability of the platform is feasible, because of the asset-light model that IndieGoGo uses. However, as the number of campaigns grows, it will require improvements such as:
- improved search capabilities (currently limited)
- greater categorization of campaigns
- lowering costs to bring more customers on to the platform
- more mechanisms to create visibility for individual campaigns
- more robust support mechanisms (e.g.analytics)