A different game

Harvard Business School hosts a blog, "Working Knowledge", that it describes as "a forum for innovation in business practice". Topics can range widely, with ten top-level categories that include business history, etrepreneurship, finance, marketing, operations and strategy.

One recent post, written by Michael Blanding, asked the question "Is crowd-funding a poor investment?". Three faculty members with backgrounds in investment banking and entrepreneurial management weighed in on the question, generally with the idea that crowd-funding won't help the average company or the average investor:

"The global brand-name angel investors will be able to leverage it to raise more money for their companies much more quickly," says [HBS professor Josh] Lerner. "If you are a rock- star Internet guru who has founded a company and needs to make more money, it would be much more efficient to use crowdfunding than calling 10 of your friends in Silicon Valley."

Such a result would likely lead to the opposite of the future envisioned for crowdfunding, allowing some big projects to get the lion's share of funding, while more experimental entrepreneurs lose out. "It would be a winner take all kind of market," says Lerner with a shrug. "VC has always been an unfair game, and this will probably make it more unfair."

Lerner's colleagues were comparably dismissive:

[HBS senior lecturer Michael] Roberts elaborates: "Imagine a world in which there are millions of unsophisticated investors who don't have the time or experience to evaluate these businesses. Would you expect their returns to be higher or lower than the VCs who have spent decades doing this? "I can't imagine this will become an investment vehicle with attractive average returns," he says.

A reluctance to open the floodgates was echoed by HBS associate professor Ramana Nanda:

The question: Is having so many untested companies competing for relatively scarce dollars is a good thing? "On the one hand, you could say it will democratize entry and allow for more experimentation to take place," says Nanda. "On the other hand, skeptics will say that these are companies that should not have been funded in the first place, and when it's time to scale up and they approach VCs, they will have a hard time getting further funding."

Toward the end of the post, Nanda offers a scenario in which local businesses may gain support, but it is a rare bright spot in their overall assessment of crowd-funding.

The comments in the post reminded me of conversations that are also happening in media-driven businesses these days. One example is embedded in Clay Shirky's presentation, "Authority in the age of open access", a talk I wrote about last October. Shirky sees three patterns characteristic of open approaches:

  • Openness itself is a baseline characteristic or core value; everything else emanates
  • Openness produces both new and surprising kinds of results
  • The "serious" and the "silly" get all mixed up, and this will continue for some time

The last point is important. We struggle to decide how the "serious" and the "silly" get sorted out. That takes time, and we tend to dismiss potentially important developments while that work goes on.

Another example emanates from what happened when we democratized the tools of production in the music business. The immediate result was seen as a glut of badly produced music, but the business is migrating toward something else, even as I type.

The short story is this: yes, crowd-funding won't replace venture capital. It may make it smaller; it may make it more effective by culling some of the marginal VC applicants.

But I think dismissing crowd-funding now is a mistake, as its true purposes have yet to be uncovered. The same is probably true for self-publishing platforms and evolving business models for literary agents. We don't know what we don't know.

A bit of disclosure: I have done work for Harvard Business Publishing, which is wholly owned by Harvard Business School. In college and business school, Michael Roberts was a classmate. Everything contained in this post is derived from publicly available information.

About Brian O'Leary

Founder and principal of Magellan Media Consulting, Brian O’Leary helps enterprises with media and publishing components capitalize on the power of content. A veteran of more than 30 years in the publishing industry and a prolific content producer himself, Brian leverages the breadth and depth of his experience to deliver innovative content solutions.

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