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Friday, July 29, 2011

Startup Enablers: Crowdsourcing

7:26 PM Posted by Deepak Nayal No comments
This is the third post in the Startup Enablers series. The first two covered key enablers that have helped accelerate the growth of startups and cloud computing as an enabler, respectively. This post is about crowdsourcing as an enabler.

Crowdsourcing is about outsourcing a task to the general public, a community or a group of people. So, for example, if a company wants to launch a marketing campaign, it can reach out to general public through let's say internet, involving people in creating the campaign and then promoting it through their respective networks. And so a task which is generally done by a team of people or an agency, is now done by tapping into the talents and tastes of the general public. All of us use crowdsourced products in our daily lives - Wikipedia is probably the best and most commonly known example; multi-national FMCG companies use crowdsourcing for product launches and marketing campaigns. Crowdsourcing has been a common thing in technology industry for years. The whole opensource movement is a kind of crowdsourcing, in which technical minds from all over the world collaborate to develop software applications. In fact, technology industry has taken it a step further, and now it is common for companies to expose the functionality of their products as APIs so that other developers can create their own applications on top of it, creating a community around the original product.

The stupendous growth of internet and advancements in web technologies have been the biggest benefactors in the rise of crowdsourcing, as now more people can be reached out and can contribute to online initiatives. With time the impact of crowdsourcing will become even greater. It has proved to be very useful to organizations, as it can lead to implementing projects faster (more hands), cheaper (free or nominal amount) and with better quality (more eyes watching). It is these benefits of crowdsourcing that can prove to be very beneficial for startups - which are generally short of time, money and resources. An organization/startup can get a lot of its requirements crowdsourced - from data mining and forecasting (Kaggle) to branding (Brandtags) to designing (99designs) to software development (Topcoder) to even fundraising (Kickstarter). In addition to that, crowdsourcing can also be leveraged as a business model. The companies mentioned above have already utilized the power of crowdsourcing in their innovative business models. One of the greatest recent commercial startup success stories, AirBnB, is a excellent example of crowdsourcing.   

In addition to the crowdsourcing version used in software industry, another fascinating version is used in the field of funding and is [surprisingly!] called crowdfunding. Crowdfunding is about getting your project funded from general public or community, instead of just a handful of investors. Some of the most successful crowdfunding platforms are IndieGoGo and Kickstarter. These [and other] crowdfunding platforms have helped thousands of projects raise millions of dollars to fund their activities. Crowdfunding is a fascinating model as it has the potential to become one of the primary sources of financing projects in future, decreasing the dependency on more traditional sources of investment (such as banks, lenders and, to some extent, angels and VCs). As more startups get funded, more products and services get generated, eventually adding more value to the economy. 

Power Of Masses
Crowdsourcing is the game of masses, and so it has even greater potential in large developing and populous countries, such as the BRIC nations. Currently around one-third of the world's population lives in China and India, however, they have internet penetration rates of less than 30 and 10 percent respectively (as of 2009). Considering that scale is the most important factor here, imagine what will happen when these emerging Asian giants reach the internet penetration levels of their advanced western counterparts. Let's compare two of my most beloved countries - I am a citizen of one and resident of another - to give you some perspective - 

source: CIA Factbook

Population (est. 2011)
+62 million
+1180 million
Internet users (2009)
+51 million
+61 million 
Internet penetration (internet users/population
80-85 percent
6-8 percent

The figures for internet users are relatively old here, but as you can still see the potential of crowdsourcing for growing economies is massive! India with just 6-8% penetration level still has almost the same number of internet users as the entire population of UK. Let's workout a hypothetical crowdfunding scenario in India with only 10% internet penetration to understand the potential of crowdfunding.

+1180 million
Internet users (with 10% penetration)
118 million 
Crowdfunding volunteers for a startup (~5%)
5.9 million
Average amount given by each volunteer
INR 1 (less than 2.5 US cents)
Total amount raised (1 USD = 45 INR)
~USD 131,000

That is a lot of money for seed capital for most of the startups! In case you have not noticed, this scenario is hugely underplayed as far as internet penetration (10% !?) and average amount raised are concerned. To give you an idea, we have taken an average amount to be less than 2.5 US cents here, while average pledge in Kickstarter in 2010 was more than USD 70. As this scenario shows, increased internet penetration when combined with crowdsourcing can do wonders for the startup community in these emerging Asian giants. 

Startups Will Lead The Way
What makes crowdsourcing so effective is that it harnesses two great powers/ideologies - openness and masses. Though crowdsourcing is not very common even today, I believe startups will lead the way here and will come up with game-changing business models, leveraging crowdsourcing, that will grow much faster and will have far greater impact than their larger established competitors. I have especially high hopes from emerging economies, such as BRIC nations, as their large populations and fast economic growth will enable crowdsourcing to generate greater benefits not just for businesses but also for the people. 


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