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Is crowdfunding the silver bullet to expanding innovation in the developing world?

Qahir Dhanani's picture
What’s holding back innovation in the developing world? Despite great need and great opportunity, investment in innovation is still primarily a developed world phenomenon. Unequal resources and economic returns tend to lead to more investments into minor innovations in the developed world rather than investments into major innovations in the developing world. While there are some bright spots of innovative ideas taking hold in the developing world, on the whole, these are the exception rather than the rule.


 
In recent years, crowdfunding has often been heralded as a potential silver bullet to solving this conundrum. Broadly defined as underwriting new ventures, ideas, and products with small contributions directly from people, usually using online platforms such as Indigogo, Gofundme, and Kickstarter to name a few, crowdfunding has achieved commonplace status as an engine for innovation financing. It is viewed as a particularly promising source of resources in parts of the world where markets are not efficient and where capital is very scarce. For innovations in the developing world, crowdfunding eliminates the middle man and allows individuals to make contributions and investments directly to projects they are passionate about. Some have suggested that crowdfunding may even allow developing countries to leapfrog developed countries in the financial infrastructure required for innovation.
 
Behind this optimism lies the faith that the crowd will support innovation. However, a new large-scale study of crowdfunding gives food for thought. The authors examine over 50,000 crowdfunding projects across 9 different categories to examine how funding is affected by claiming a project is useful or novel:
  • Projects identified as “novel” experience a 200% increase in funding;
  • Projects identified as “useful” experience a 1200% increase in project funding;
  • Projects identified as both “useful and novel” experience a 26% decrease in funding.
You read that correctly. Being labeled both “useful” and “novel” – two key descriptors of something that is innovative – actually reduces project funding.
 
Why does this matter? Simply because a product must be both novel and useful to be innovative. Novelty that is not useful may have value as a curiosity, but lacks practical application. Usefulness by itself has value, but it does not bring a new solution. These findings are not only surprising, but also disappointing. They suggest that despite individuals choosing to hype-up their support for innovation and make contributions through crowdfunding platforms, in reality, they do not walk the talk.
 
Relying upon the “wisdom” of the crowd to identify and support innovation in developing (and developed) economies may therefore not be an effective approach. Instead, perhaps this job should be left to more expert sources of capital and investment, such as angel investors, whose aim is to identify and finance new solutions. Indeed, most successful startups today, ranging from Google to Uber have benefitted from angel investors. In the developing world, a focus on strengthening angel investor capacity and networks – including through the use of online platforms – where both entrepreneurs and investors have greater interaction, mentorship, and synergies, may therefore more genuinely support the growth of innovation.