Three Massive Funding Opportunities for Everybody Outside Silicon Valley

Back in June I gave a presentation at downtown Orlando as, well, frankly, the warm-up act for Urban Rethink’s panel discussion on Wired for Venture Capital. As a former Silicon Valleyite and startup marketeer in Seattle’s  Internet 1.0 (aka 1994-1996) tech scene,  it was awesome to meet  and hear some of the folks behind Orlando’s emerging startup scene, people like Kyle Steele of DocCaster, Derek Gallo of Avectra,  Greg Pollack of Envy Labs and Orren Davis who organized  Startup Weekend Orlando.

Let’s be real: It’s not easy doing tech in Central Florida. Unlike Mountain View, San Francisco or Seattle, Orlando is not one of the bastions of venture funding.

My own personal theory is that  when the crux of the regional economy is built around the 40 M people that don’t live here (aka tourists for the Central Florida theme parks), there’s a diminished sense of the value of  the 2.7 M people who actually live here.( Until October 2011, Florida’s Department of Economic Opportunity was known as the Governor’s Office of Tourism,  Trade and Economic Development  — as though tourism and economic development were inextricable linked.)

So it’s all the more awesome that the tech community here darts around from small cafe meetings, creative hubs like Urban Rethink and Central Florida Tech meetups, moving between the giant tour buses heading to cruise ships, Disney resorts and mega-malls.

Luckily, when it comes to getting funding, geographic location is getting increasingly irrelevant.

For unless you’ve been vacationing in  Kazachstan for the past four years, it’s no secret that funding  – whether to reward singular talents, subsidize a group creative project or seed a startup has changed enormously. And for the better.

Particularly for those of us who live outside the bastions of venture funding, far from the Sandhill Road crowd, it’s comforting to know the democratizing access to capital is in full swing. Whether you’re looking for $5000, $50,000, $500,000 or $5 million,  there’s no better time than now.

Mypresentation  below covers the relatively new opportunities outside the hallowed realm of venture capital funding, namely open challenge prizes, reward-based crowdfunding and equity based crowdfunding. A mash-up of market overview and practical advice,  I hope you’ll find at least one of these new funding venues intriguing. For as I describe in Slide 26, there’s a form of funding to match different analytical and organizational styles, whether you are indie or part of a fully fledged LLC or S Corporation.

Readers can access the bookmarks within my Crowdfunding Stack on Delicious to see the sources for the research summarized in the presentation.


Crowdsourcing + Open Innovation Fuel a Multi-Billion Dollar Prize Market

(This is Part 1 of a 2-part posting.)

One of the fabulous things about the internet and this era of user-generated content, social platforms and collaborative technologies is that they have made us keenly aware of the many talented people out there. It’s silo-breaking, allowing us to identify and access the genius talents of individuals outside our organizational borders. It’s community building, allowing realization of team strengths and the development of new social skills that magnify group intelligence. 

Best of all, the new social web has built-in PR: a resident blogosphere which writes up and actively discusses these team collaborations, many of which, like the DARPA Red Balloon Challenge, light up the public imagination of what’s possible. No where is this more apparent than in the emerging world of incentive-induced prizes and contests, where a cash reward is offered to encourage pursuit of a specific goal.

As I wrote in an earlier post, nothing so woke me up to the potential value of contests and prizes in changing the rules of business-as-we-know-it  as the NetFlix Prize, attracting over 51,000 contestants with the hope to win $1 Mn for improving a movie recommendation engine. There’s consensus that NetFlix leveraged that investment extremely well in terms of received R&D benefit, marketing community brand building and much more.  In fact, there are marketing lessons in the NetFlix Prize that any prize sponsor or challenge seeking organization can learn from.

According to a recent post on the TechPresident blog, the latent potential of such success-contingent prizes has not been lost on the White House which issued a directive on open innovation in January.  Two weeks ago, the Office of Management and Budget  released guidance to federal agencies on how they could legally arrange contests to seek ideas  for using technology to promote innovation, open government and other national priorities. The message is clear: “Go forth and crowdsource.”

To facilitate the agencies’ action on this, the White House is launching  a public website within the next 4 months which agencies can use to “advertise” and promote their challenges  Adding momentum to the initiative, Michelle Obama simultaneously launched her “Apps for Healthy Kids” contest, part of her Let’s Move campaign.  The contest invites software designers, game developers and others to build fun and engaging tools to motivate children to eat better and engage in physical activity. It has  built-in lesson to agencies watching too as the contest design requires using the USDA nutrition data set. What a clever and constructive way to build a better user interface to what would otherwise be fairly dry and abstract data to kids.

Starting with a great example is smart, but how will federal agencies new to this learn the intricacies of both crowdsourcing and contests? (Obviously, DARPA, NASA and a few others within the fold have talents to share.)


Enter McKinsey’s Roadmap for Understanding Prizes

For those seeking to understand how to successfully construct prize contests and challenges, the OMB memo references a 2009 McKinsey study “And the Winner is…Capturing the Promise of Philanthropic Prizes” . This  124 page report describes McKinsey’s research, case studies, a rather comprehensive database of prizes as well as  their future potential. But what makes the report extremely valuable is that it leverages the knowledge of sponsors and administrators of some of the best known and successful large-scale prizes, including interviews with experts from NetFlix, The World Food Prize, the X Prize and many others.


The Attention Rivetter: A  $1-2 Bn Big Prize Market

What’s capturing a bit of attention right now is that McKinsey estimates there’s a $1- 2 Bn Prize market today in the U.S. – and it’s growing.  They point out that the dollar amount for prizes over $100,000 has tripled in the last decade to $375 million a year, expanding particularly in the area of incentive-induced prizes.

Now with part of  federal agency budgets to be unleashed soon, there’s more money to add to the prize pot. As Thomas Kalil, Deputy Director for Policy at the Office of Science and Technology Policy at the  June 2009 incentive2innovate conference  reminded conference attendees,

When you consider that the government invests a total of $150 billion in research and development, there’s a bit more room for experiment in this area.


Starting Point: What Types of Prizes Exist?

One of the more useful thought tools within the”And the Winner is…” report  is a description and analysis of  six archetypal prize types. ( The diagram below modifies the original McKinsey exhibit to include some of their examples for each prize category.)


Source: McKinsey’s “And the Winner is….” Report

We are all perhaps most familiar with their “Exemplar” form of prize, one, like the Nobel prize, which sets a standard for excellence in a field. But there are newer, less familiar prize forms here, ranging from the narrow  “Point Solution” (eg. NetFlix prize) in which a specific challenging problem is posed to the broader “Market Stimulation” type, the canonical example of which is the X Prize portfolio, in which real world market conditions are emulated inside the challenge.  Perhaps nothing so raised public perception of the raw power of prize development as the $10 million Ansari X PRIZE, which helped ignite the development of the private spaceflight industry.

The diagram is great mind food for considering the types of prizes your own organization might consider, depending upon your goal.

What prize can your organization offer? Will your organization build and implement prizes? Or will your organization seek to win one of the prizes to the benefit of your brand’s value?

If I’ve inspired you to read McKinsey’s “And the Winner is…” report, that’s great. That was one my goals. But bear in mind that while there’s a groundswell of interest in prize mechanisms to address complex problems and identify emerging markets and a growing corpus of knowledge, the report makes clear that the intricacies of successful execution are non-trivial.

In my next post, I will continue this topic, summarizing some of the business efficiencies associated with prizes that are wooing government as well as commercial ventures, despite the complexities. I’ll also identify some of the pre-game players who stand to win one of the near-term “prizes”,namely, building the infrastructure itself for the new prize-driven government and commercial markets.




Six Marketing Lessons of the NetFlix Crowdsourcing Experiment

Here we follow up on the marketing highlights of last week’s post on the $1 Mn NetFlix Prize announcement.

Why did the NetFlix Prize attract so much attention?

Here’s one reason.

At a time when many companies are still afraid of social media   –  here’s NetFlix crowdsourcing their engineering knowledge, offering up customer data, knowledge often safeguarded inside a company’s IP sanctum sanctorem.

It’s bold.  As many other  news sources and this blog reviewed last week, it’s probably the best use of crowdsourcing to date.  And, to many,  it’s scary.

What specific lessons does the NetFlix Prize teach  that can deployed inside and, more importantly, outside, your own company?  I see six lessons for companies. (BTW – what’s scary about any of this depends on which, if any, of these lessons appears alien to your company culture.)

1.  Share with your industry’s research community.

In order to improve their recommendation engine’s accuracy in predicting the movie likes of their subscribers, the starting point for the NetFlix contest was their offer of a precious data set:  100 million ratings from over 480 thousand randomly-chosen, anonymous customers on nearly 18 thousand movie titles.

To win and take home a prize, the NetFlix contest rules also specified

….. you must share your method with (and non-exclusively license it to) Netflix, and you must describe to the world how you did it and why it works.

 If you look at Wikipedia’s definition for the open source process, we see from the first few paragraphs that NetFlix pretty much followed it. (You only need  substitute the word “database” for “source code”) In the full open source tradition,  NetFlix didn’t  just sequester the submitted solutions for their own company use – they fed it back into the community knowledge base.

2.  Maximize the number of prizes you give away.

In many ways, NetFlix really offered many prizes to many different shades of stakeholders. (BTW- here’s a key concept in crowdsourcing. Broaden your definition of who is a company stakeholder.)

 Note several of these “prizes” are free, posing no additional cost of goods for a company. (This doesn’t mean some of these prizes, such as the customer data set, aren’t tricky to manage, as NetFlix’ current vexations with consumer privacy advocates now show.)


3. Keep them motivated for the long haul.

Tough challanges like solving a design problem, optimizing a movie database recommendation system for subscribers, can take months or years to make progress. In fact, the more valuable the problem being solved is to your company, the longer it will take.

The answer: Milestone or Progress Prizes. Per the NetFlix contest rules

Serious money demands a serious bar. We suspect the 10% improvement is pretty tough, but we also think there is a good chance it can be achieved. It may take months; it might take years. So to keep things interesting, in addition to the Grand Prize, we’re also offering a $50,000 Progress Prize each year the contest runs. It goes to the team whose system we judge shows the most improvement over the previous year’s best accuracy bar on the same qualifying test set.

 Complementing the Progress Prizes, NetFlix offered a leaderboard  for the contestants and media to watch.

 Why is this  gaming approach a key strategic element? Not only did this give contest entrants a sense of momentum, more significantly, it allowed NetFlix to incorporate incremental improvements into their product along the way.

4.  Use competitive energy.  Build in a “Last Call”.

After each prize submission, NetFlix  made  a public announcement that allowed all other teams to submit a better alrogithm within a 30-day window.

(For an idea of the sporting drama this lent to the final days and even minutes of the competition between BellKor’s Pragmatic Chaos and The Ensemble teams, check out Wired’s piece.)

Marketing-wise, this “Last Call” phase resulted in heightened PR and media attention to the contest, with the top tier media and techno blogosphere all tracking the contest’s progress with bated breath.

5.  Keep the attention of the virtual talent — even when it’s all over.

To maintain the momentum (and perhaps preempt advances of companies seeking use of the newly identified talent) NetFlix launched a new contest on the very same day of the award announcement.

6. Warning: This new marketing territory may be No Country for Old Men

 Okay – this one’s definitely scary.

It’s a new day when open systems, crowdsourcing and bold marketing combine.

Are the rules changing?

NetFlix along with the many others bravely deploying crowdsourcing indicate they are changing.

Too often marketing and engineering are separate silos within a company.   What NetFlix did here breaks across several  silos, brilliantly interweaving a marketing initiative in and out of the R&D process, while also outreaching to the wider research community – giving them a virtual engineering department of  51,000.

For those  afraid of open source process as putting their IP at risk – perhaps its time to think of the risks of not doing it, namely, much longer product cycles than your competitors.  

As in the movie No Country for Old Men, it really pays to know in advance what you’re looking at: Is it an oxygen tank or an air compressor used as a weapon?  So too could be crowdsourcing in the hands of your competitors.  PH…SSSST!


Useful new articles from others

ComputerWorld: Crowdsourcing takes Center Stage at DEMOfall 09

EbizQ   Crowdsourcing: Five Reasons it’s Not Just for Startups Anymore



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