Entrepreneurs and investors have a growing interest in building and funding companies that integrate people, planet, and profit. But despite market demand for goods and services with environmental and social value, startup ventures based on these values are typically perceived as higher-risk or lower-return, and often struggle to maintain their unique identity as they trade equity for capital.
Crowdfunding can be a powerful tool that enables a socially responsible company (SRC) to overcome these challenges, resulting in more and better opportunities for socially responsible investing (SRI). But how does the power of “the crowd” empower new startups and reduce risk for investors?
A Crowded Space
Crowdfunding’s popularity has surged over the past 5 years, with over $5 billion raised in 2013 alone.(1) Some companies have been very successful pre-selling a consumer product, such as the Pebble smartwatch, which raised over $10 million on the Kickstarter platform, from an original goal of $100,000.(2) New technologies that are not consumer products but that appeal to environmental concerns have also been successful, most notably Solar Roadways, which raised over $2 million on the Indiegogo platform to develop solar panels for road surfaces.(3)
With the increasing visibility of high-profile crowdfunding success stories, many startups have turned to non-equity (“rewards-based” or “perks-based”) crowdfunding platforms as an opportunity to reduce or replace traditional seed-funding. Because of this, the startup crowdfunding space has ironically become very crowded — entrepreneurs are understandably attracted to the idea of equity-free seed funding. But the reality is, most startup ventures that pursue crowdfunding fall well short of their funding goal. For example, Kickstarter’s statistics show that, as of the writing of this article, 64% of technology projects fail to raise even 20% of their funding goal.(4)
Socially Responsible Startups
Despite the challenges of raising seed money through a crowdfunding platform, socially responsible startups can benefit greatly from crowdfunding — regardless of how much they raise. SRCs may take various corporate forms, such as a state-specific Benefit Corporation(5) or Social Purpose Corporation(6), and may also pursue a third-party certification that factors in environmental, social, and governance (ESG) and Corporate Social Responsibility (CSR), such as the B Corporation certification(7). But regardless of how an SRC startup defines its social and environmental purpose, developing and executing a crowdfunding campaign is the perfect opportunity to accelerate the startup’s development, define its identity as a company, and gain valuable exposure to like-minded people. The end result is a stronger, more mature company that is more attractive to later SRI or Impact Investing.
The Impact of Shared Values
Socially responsible companies are creating new ways of doing business that integrate their values deeply into business practices and even corporate by-laws, while growing a profitable company. They generate economic value both by delivering a cost-effective product and by meeting the social & environmental desires of their stakeholders. When preparing for a crowdfunding campaign, the SRC startup must anticipate a large amount and variety of engagement from potential stakeholders within the crowd, because the economic value proposed by the SRC includes its own nature as a company. People and organizations who show interest during the crowdfunding campaign are doing so not only because they are interested in purchasing the eventual product, but also because they feel the company is aligned with their ideals. Because social and environmental responsibility is embedded in the DNA of an SRC, when it reaches out through the crowd, it naturally connects with people and organizations who desire to actively support its values. In essence, these early supporters are practicing what one might call “Impact Crowdfunding”.
They Grow Up So Quickly
An SRC’s crowdfunding campaign also functions as an accelerator to develop many of the important elements of an established business. The opportunity for widespread media exposure requires the creation of compelling marketing materials, and necessitates critical thought and planning around the structure and goals of the business. This entry into the public eye acts as a trial by fire, forcing the business into a more mature state. After running a crowdfunding campaign, a startup has gone through business characterization, product development, a marketing cycle, and potential product delivery to end customers — all within a shortened timeline. A post-crowdfunding SRC represents much greater value because of the business and marketing experience of the startup team, increased media exposure, potential working capital from crowdfunding contributions, and a supportive and engaged community who could become future customers.
Better Startups Through Crowdfunding
The crowdfunding ecosystem has the potential to spawn an increasing number of viable SRCs which are then available for Impact Investing or other types of SRI. Not only can crowdfunding produce more SRCs to invest in, but these resulting companies have a better value proposition and a lower expectation of risk. An investor, especially during seed funding, is investing in a startup’s people as much as in the company and the product. Through crowdfunding, the startup team has developed the critical ability to both lead and follow — to lead from its social and environmental vision, and to follow the feedback and enthusiasm of its potential customer base.
Crowdfunding, when combined with SRC startups, produces ventures that are in a unique position to be vehicles for profitable investment in a socially responsible manner. Want to contribute to Vitruvian’s campaign?
About Vitruvian Energy: Vitruvian, a Seattle-based Social Purpose Corporation, has launched an Indiegogo crowdfunding campaign for its EEB biofuel. This biofuel can power a vehicle, blend with gasoline and diesel, or produce clean electricity.They believe that all organic waste materials can be captured and recycled to produce green products and clean energy. For more information, please visit vitruvianenergy.com and follow @vitruvianenergy.
About the Authors: Zack McMurry and Todd Robinson are the founders of Vitruvian Energy, a Social Purpose Corporation based in Seattle, Washington. They have launched a crowdfunding campaign for their biofuel made from sewage treatment waste, www.indiegogo.com/projects/community-sourced-biofuel