Crowdfunding’s Café Society

Crowdfunding is nothing new. The term was popularized about a decade ago, thanks to an attempt by entrepreneur Michael Sullivan to create a videoblog incubator “based on reciprocity, transparency, shared interests and, above all, funding from the crowd.” But the concept itself is much older. For example, after New York Governor Grover Cleveland rejected the use of city funds to pay for a base to support The Statue of Liberty, Joseph Pulitzer came to the rescue by launching a crowdfunding campaign in The New York World, which reportedly raised about US$100,000 from more than 160,000 donors.

Crowdfunding, of course, really didn’t gain much traction in the United States until the early 2000s, when musicians started using the Internet as a platform to tap fan bases to fund digital recordings. As a result, the concept today is widely associated with the digital world. Recently, however, a new type of crowdfunding—one with a physical platform model—has emerged.

First appearing in China, the new model is based on the same basic formula used online by fundraising sites like U.S.-based Kickstarter, which is a symbiotic system between three essential elements: innovator, platform, and investors. However, the new model combines these three elements in an innovative way in conjunction with the Internet and a physical business establishment, such as a café.

Such businesses are already established in Beijing and Vancouver and are under development at various stages in other entrepreneurial hubs, including Toronto, Seattle, New York, Silicon Valley, and London (U.K.). The early success of these enterprises proves that this crowdfunding model has great adaptability. And based on the increasing media and regulatory attention, people seem to be taking notice. Learning from the experiences of early the adopters who have made this concept work can provide an innovative business model with great future potential.

THE FIRST SUCCESS STORY: 1898 CAFÉ

In October 2013, 100 former students of Peking University formed the 1898 Café, the first crowdfunding café of its kind. The café was established to serve the university’s entrepreneur alumni community and was defined and positioned as a platform with a focus on stimulating the entrepreneurial spirit of Peking University, offering an outlet for cutting-edge business ideas and an opportunity to pool available resources to maximize chances of success. Investor numbers quickly grew to 200, including entrepreneur alumni from a diverse range of disciplines, such as finance, energy, media, education, law, and technology.

Yang Yong, the café’s founder, came up with the idea of crowdfunding via a physical platform. Originally, Yang wanted to raise money to establish a physical meeting place where the various isolated entrepreneur alumni groups of Peking University could connect. Yang began with the idea of offering memberships to alumni, combined with the concept of crowdfunding that was emerging in the United States, and developed a rather complex business model that blurred the lines between members (customers) and investors.

One of the most revolutionary features of this physical platform model is the concept of investors being members of the establishment. Therefore, in a strict sense, each investor is actually a shareholder in this model. Each shareholder has equal rights within the platform, and each member receives a membership card that is credited according to the amount the person invested. This not only creates a sense of ownership, but encourages members to frequent the café to use their membership card privileges. They spend money on food and drinks, which drives café revenue, and they interact with other members. Yang describes the physical platform model as offering shareholders a sense of ownership and belonging, as well as a psychological incentive to actively participate and contribute.

COMPARISON WITH CONVENTIONAL BUSINESSES

This physical platform model of crowdfunding is not unlike conventional businesses, but with some significant differences. It emphasizes the equality of shareholders and stimulates and takes advantage of the inherent human desire to self-organize and self-manage.

The physical platform model typically adopts a two-tier management framework. The first tier comprises executive, supervisory, and secretarial committees that are responsible for building and maintaining the platform. The executive committee, which usually consists of seven to 11 elected shareholders, is responsible for the overall management strategy of the café. Members serve one-year terms, and no single member can serve more than two consecutive terms. The supervisory committee audits financial transactions. The secretarial committee manages daily interactions among members, and executes the decisions and orders of the executive committee.

The second tier manages the daily operations of the café itself. These people are not shareholders, but employees with expertise in the service and café industry. This approach guarantees that the café itself is a viable business and avoids the problems that inevitably arise when a group of shareholders interferes in day-to-day business operations. A healthy and stable business is crucial; without it, the platform (as an incubator and accelerator) is unlikely to succeed.

The two-tier management system differentiates the platform from other café businesses, which generate profit by selling products and services (food and drink). The mission of the physical platform is to facilitate and enhance entrepreneurial activity; the café is simply the instrument via which this occurs. The two-tier management system ensures that the operational needs of the business and the expectations of the shareholders both receive adequate attention to ensure sustained success.

In this model, the shareholder is also the consumer and the administrator. The overlapping nature of the roles makes business operations more transparent. Shareholders are directly involved in the entire process, from designing and operating the platform to receiving returns. The underlying principle is participatory democracy; there is no one single dominant “leader” in the business structure.

COMPARISON WITH WEB-BASED CROWDFUNDING

Physical platform crowdfunding is a new business model because it combines and preserves capital-accumulation and Internet mind-sets, but in a platform that is counterintuitive to the status quo of crowdfunding. Physical platform crowdfunding differs from web-based crowdfunding in at least two ways. First, in traditional crowdfunding, an online platform is established to seek out potential investors. In the physical platform model, a physical establishment, such as a café, is the platform through which investors (shareholders) are sought and selected. That is, the platform, with a pre-specified focus, finds the investors—not the other way around. This process ensures that all shareholders brought in share similar ideals, entrepreneurial mind-sets, and risk tolerance. The platform eventually becomes a hub of shareholders who form a focused and efficient capital base for launching start-ups. For example, the 1898 Café was set up with a specific focus: to serve entrepreneur alumni of Peking University. The 1029 Café was established in Vancouver one year later. Its aim was to gather the best and brightest people from the region’s Chinese-speaking community (approximately 400,000 people) and link them with academics, experts, and entrepreneurs from other ethnic groups to create a multicultural and multinational base of knowledge and resources.

Although this form of crowdfunding uses a physical platform, rather than an online platform, the role of information and communications technology is still essential to the business model’s growth. The Weixin (WeChat) social media system has hundreds of millions of users in Chinese communities around the world. It provides an instantaneous communication tool for spreading the word about physical platforms, and it exponentially raises public awareness and sparks interest in entrepreneurs looking to grow their own start-ups.

The second major difference is that the physical platform crowdfunding model is not simply about accumulating funds. The model is more concerned with accumulating people and ideas by offering a physical meeting place for entrepreneurs and potential investors to meet and discuss business ideas. Other web-based crowdfunding models such as Kickstarter focus on fundraising, but tend to pay little attention to accumulating ideas. Therefore, they do not explore the full scope of crowdfunding as a potential driver of innovation and entrepreneurship.

COMPARISON WITH INCUBATORS AND ACCELERATORS

The physical platform model is different from a traditional start-up incubator because it is designed to encourage constant interactions, not only among members but also with interested parties from the outside (e.g., non-member patrons and the general public). In traditional incubators, an early-stage entrepreneur brings in a project for start-up funding and expertise support. At most, these incubators host formal events and activities, such as road shows and project meetings. However, a physical crowdfunding platform creates many dynamic and informal opportunities for participants to interact, which enhances understanding, trust, and communication within and beyond the shareholder group. Therefore, the physical platform model goes beyond the traditional incubator by connecting people through various formal and informal interactions. Such strong connections use direct personal contact to facilitate investment in, and development of, entrepreneurial projects.

The traditional incubator model also tends to build one-to-one relationships between entrepreneurs and their designated mentors. In contrast, there are no designated mentors in the physical platform model. Instead, any interested and experienced entrepreneur member or non-member patron can be a mentor for an entrepreneurial project, whether it has been brought in from the outside or generated at the physical platform. Each participant brings unique expertise and experiences to the platform community, providing adaptability and flexibility for the platform to support a wide variety of start-ups.

Also, traditional incubators usually avoid connections between the various projects being supported. In contrast, connections among projects develop naturally in a physical platform, as a by-product of the relationships established among participants. This network effect makes efficient use of the pool of resources created by the platform community.

A final comparison is the fact that the physical platform for crowdfunding is not set up as an incubator or accelerator, although it may serve both purposes to entrepreneurs at different stages of their careers. Indeed, the physical platform model can provide combined benefits beyond those of both incubators and accelerators. For instance, the shareholders of a physical crowdfunding platform usually include successful entrepreneurs, as well as those who are still at the beginning of their careers. Young entrepreneurs find it hard to establish a resource base (both tangible and intangible), but the physical platform allows capable professionals to more easily realize their entrepreneurial dreams. This is because early-stage entrepreneurs have a place to communicate and interact with successful entrepreneurs. New entrepreneurs can share their innovative ideas with seasoned industry veterans and thus more quickly move to the funding stage. The physical establishment provides a face-to-face venue for communication and cooperation that is not possible over the Internet. Entrepreneurs can glean experience from older experts, recruit angel investors, and broaden their professional networks simply by visiting the café. Each café has a focus or theme (e.g., Peking University alumni in the case of the 1898 Café), which fosters trusting connections and makes it easier for an entrepreneur to attract funding from within the community.

Successful entrepreneurs join the platform community to expand their networks and social capital, seek out promising young entrepreneurs, source creative ideas for further business development, and identify reliable and diversified investment opportunities. With an insignificant investment of time (mostly their excess capacities or idle resources), this group of established entrepreneurs can gain a sense of belonging, achievement, and satisfaction by mentoring an early-career entrepreneur, or they can enjoy the personal and professional satisfaction of guiding a younger business partner. The physical platform provides the venue for this type of relationship building and idea exchange to occur in a concentrated and efficient manner between an early-career entrepreneur and an established entrepreneur.

KEY ISSUES IN BUILDING A SUCCESSFUL PHYSICAL PLATFORM

A physical platform can be used to create a tightly knit network of people, resources, ideas, and investment that is highly active and flexible enough to take on a myriad of different entrepreneurial projects. However, a platform that gathers a group of shareholders from diverse ages, genders, races, and industry backgrounds inevitably creates friction. Therefore, it is critical that the mission of the physical platform be clearly defined and specified at the outset. A common goal helps create a tolerant and inclusive environment in which a wide variety of ideas co-exist and collide, stimulating innovation and creativity.

Several other issues must be considered to ensure the long-term sustainability of a physical crowdfunding platform:

  1. A physical crowdfunding platform requires trust; without it, the venture will not survive. A physical platform enterprise must employ rigorous procedures for selecting shareholders. At the 1898 Café, new members must be recommended by an existing member. Therefore, participation is based on the implicit trust of an existing member, who is already trusted by the shareholder group. This creates a class of “vetted strangers”—people who are not well-known by most members but are vouched for by certain trusted members. This powerful concept increases the available pool of resources beyond a small group of friends without sacrificing trust, which is usually the case when investing online. Selection based on member recommendation also ensures that shareholders share a similar vision and complementary resources.

At the 1898 Café, the selection of potential new shareholders depends on the recommendation of either the platform founder or a small group of “super-core” shareholders. The members of this group understand how to build a successful physical platform crowdfunding operation, and they are willing to invest time and effort to ensure its success. The 1898 Café allows no more than five “super-core” members, and each is responsible for selecting at least three friends to join the platform. No super-core member may recommend more than 10 potential new members, in the interest of keeping the platform’s power balanced. The initial recruitment by the “super-core” group creates a first wave of new shareholders, of about 20 members, who then are given time to mesh and firm up the platform beyond its bare-bones status (a vetting process that should not be rushed). The selection of this first wave of shareholders is crucial to maintain the focus of the combined group while making sure this group is much more resourceful than the smaller “super-core” group. Members of the first wave of shareholders are each asked to recruit three new members to create a group of about 50 core shareholders, who have now accumulated enough combined resources to cover the overhead costs of a physical establishment, such as rent, repairs, maintenance, and staffing. This process ensures that everyone in the core is closely vetted and linked to someone else in the group, cementing the platform’s foundation. At this point, the platform business—often a café—can be opened. Meanwhile, all the core members, especially the new ones, continue to recruit and recommend new shareholders.

This type of shareholder-based development approach appears to be similar to door-to-door selling (direct sales), except that it is selling a concept and a belief, not a product. The process ensures that each shareholder is closely associated with others in the group, and that each individual relationship between members gradually adds up to a network of relationships. It is similar to the ancient Chinese practice of constructing wood structures where not a single nail is used. Instead, the structure stands on the collective strength of multitudes of small connections of nooks and weight-bearing joints. The selection process also helps super-core shareholders better understand the platform’s purpose and direction as they promote it to potential new members. This selection mechanism yields quality candidates because all the existing shareholders tend to recommend people who they believe are more excellent than themselves to join, as a way to prove and protect their status and reputation in the shareholder group. A new member must be endorsed by a majority of the executive committee, and there is a three-month grace period during which time the new member can withdraw and receive an unconditional refund of the initial investment. The grace period is designed to give participants sufficient time to think about the value of joining the platform.

There are some legal and structural limits on membership of a crowdfunding platform. For instance, at the 1898 Café, the first 100 shareholders pay an initial investment of ¥30,000 and the second wave of 100 shareholders pay ¥50,000. The difference is based on risk; the early shareholders face higher risks and more challenges in establishing the platform, so their investment load is lower. As the platform grows, so does its reputation, impact, and potential. This greatly reduces the risks for new shareholders and increases the market of candidates interested in joining. Members who join later have a higher initial investment threshold, but the essential member-to-member relationships and the one-member-one-vote structure of decision-making remain unchanged.

  1. Formal rules and procedures need to be established to mandate that all shareholders participate in the physical platform. For example, the Vancouver 1029 Café mandates that each member must host three seminars or themed activities each year. This helps ensure that something is always happening at the Café that increases both the visibility (and financial viability) of the platform business and the level of shareholder participation and engagement. The Beijing 1898 Café encourages participation by requiring that each member take part in a “café manager for a day” program. On their day, “café managers” work the morning service shift; in the afternoon they network with entrepreneur patrons to share their expertise and ideas; and in the evening they present a start-up investment idea or other event. Early-stage entrepreneurs usually use the day as an opportunity to sell their ideas and projects. Established entrepreneurs also take the opportunity to recommend their own projects, or simply enjoy the day role playing and serving drinks and food, and chatting with friends and partners about potential entrepreneurial projects. By running these events and programs regularly, the café keeps each shareholder wholly engaged in the platform crowdfunding process—physically, mentally, and emotionally.
  2. A physical crowdfunding platform, such as a café, needs enough capital to survive even the most conservative operating circumstances. Based on observations and first-hand experience, the ideal amount of combined financial resources of the core group should be three to five times the annual operating cost of the platform business, assuming no profits whatsoever. This amount allows the platform business to operate for at least three to five years, with any surplus put into reserve. If the platform business is not self-sustaining after that time, the shareholders can withdraw and count the experience as one that has built relationships and networks in the local business community. At the 1898 Café, 200 core investors gathered ¥8 million, which was enough to run the café with no revenue for eight years.

Platform founders need to raise enough combined capital to sustain initial losses and to build a group of loyal consumers in advance of launching the new business. Because shareholders have credited membership cards, they will frequent the café. They are also likely to promote the business to friends and family because their combined investor–administrator–consumer role instils feelings of pride and psychological ownership. Increased foot-traffic from non-member participants helps grow the platform business (e.g., café), builds stable revenues, and reduces operational risks in the early years. In this way, the physical platform creates a viable business and supports its crowdfunding goals.

In China, the success of the 1898 Café has brought on many imitators. These cafés have opened to great fanfare, but many have struggled to survive and many have failed. For instance, cafés in Changsha and Dongguan, with starting resource pools of ¥645,000 and ¥700,000, respectively, have been sold due to operational difficulties. The Beijing “Her Coffee” café was launched by 66 female shareholders with a resource pool of ¥1.32 million. It opened to a wave of media attention but closed a year later because of poor sales and the absence of a professional management team.

These examples show that simply opening a café with a group of close friends will not work. Most of the failed cases were focused on the business of selling coffee. They did not have the vision of a platform where investors and entrepreneurs can interact and exchange ideas and proposals. While they might have talked about building a physical platform for crowdfunding, the reality proved otherwise. Lessons learned from these examples point to some or all of the three fatal flaws of physical platform crowdfunding; namely, lack of familiarity and trust between the super-core and the next wave of core shareholders; insufficient funding or a poor venue location; and poor operational management. All these factors contribute to a lack of principle-driven direction, a loss of clarity and transparency in operating both the business and the platform itself, and a decline in shareholder interest in the core mission, which is fatal to the cause.

THE FUTURE OF THE PHYSICAL PLATFORM MODEL

The formal and informal social interactions inherent in physical platform crowdfunding make it vibrant and adaptable. It is flexible enough to survive mistakes and remain open to innovative ideas, and it will evolve to take advantage of new business opportunities.

Nevertheless, several issues need further exploration:

  • Despite a highly decentralized participatory structure, the physical platform model needs an initial founder who will expend an enormous amount of energy to motivate and focus the efforts of others. Without this effort, the platform will dissipate and fail. It is extremely important that the right person be selected (by the “super-core” group) as the initial founder and remain committed and enthusiastic.
  • The two-tier management system may create a communication barrier between the executive committee and the professional management group, which needs to be overcome by establishing operating rules and clearly specifying the roles and responsibilities of each group. The profitability of the café cannot be the key focus of the platform, but it cannot be ignored. It takes effort to ensure that the interests of one group do not overlap—or worse, conflict—with those of the other.
  • To date, successful physical platform crowdfunding businesses have had no more than 200 shareholders. On the other hand, a platform’s vibrancy depends on a continuous injection of fresh ideas and perspectives. It may be important to understand how to maintain a vibrant platform after the upper limit of shareholders has been reached. A possible solution may be found in a system based on venture capital, in which mechanisms exist to facilitate investors to join and leave.
  • In a multi-party, fully representative leadership model, the decision-making process has to accommodate the wishes of all voting members. This creates compromise and makes it less likely that bold choices will be made, even with a centralized management group. In a traditional public company, the controlling shareholders—inevitably a smaller group—impose business decisions on a larger number of minority shareholders. In the physical platform model, decisive and efficient decision-making and leadership is replaced by the combined expertise and knowledge of the 200-member group. Therefore, if crowdfunding cafés and similar businesses are operated correctly, they must be capable of translating this fundamental weakness into an intrinsic strength.

New problems will undoubtedly emerge as the physical platform model matures, but this is not all bad. The process by which a business model debugs itself by generating and addressing issues is exactly the path to mainstream practice. The most innovative part of the physical platform concept is the blending of investors, operators, and consumers in the totality of the business. This may have enormous applications beyond crowdfunding. Merging three traditionally separate business factions and pooling resources among them makes it possible to quickly and efficiently generate business results and do big things with little money. This creative business model could be a revolutionary change for existing businesses and industries looking for a different way to manage and operate. A company (particularly a small or medium-sized enterprise) that adopts this model could drastically reduce its start-up risks and be better able to survive beyond the initial self-funded period. The model creates a venue for investment to meet innovation in all industries.

The concept of physical platform crowdfunding originated in China, but can be applied internationally. It represents the ideals of Internet crowdfunding realized in a concrete, face-to-face manner, and it challenges traditional business models. Revolutionary new concepts and models are needed to push businesses forward. The best model is the one that creates the best business possible. The physical platform crowdfunding concept belongs to the whole world. It has an unfathomable range of applications that are only limited by the ideas of innovators.

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