Connected communities of makers: Crowdf(o)unding
This blog was originally posted on academica.edu beginning of April 2014.
Ideas are abstract and novel concepts that arise in the mind. One thing is the idea that nests in your head and another completely different thing is to communicate that idea to others in a way that they will understand it. It is reasonable that ideas need more extensive explanation than things that are not new. So ideas that are the result of long and complex cognitive processes are even more difficult to explain. So this is precisely what the present text is for: to roll-out the background information of my idea so that it will become fully graspable to anyone who wants to read and understand it.
About innovation
I will start this text with the topic of innovation and from here I roll out all the steps that will finally lead to my idea. Especially nowadays that everybody seems to be using the expression 'innovation', the first question that comes to mind when thinking about it is: what is it? Out of several sources I have coined this definition and found it to be most spot-on:
'A new thing or system, which didn't exist before. It is neither a solution to an existing problem nor the satisfaction of current demand, but it generates value by itself and is, therefore, adopted by a large number of people over a certain period.'
Now that we have answered this question I have another question related to the aforementioned topic that is much contested:
Who does trigger off an innovation? The strategists, the designers, or the technologists? Donald A. Norman, the author of books like 'The design of future things' or 'The design of everyday things' has until recently always claimed that the designers were the ones responsible for setting off innovation. To the dismay of the designer's guild, he reconsidered in favor of the technologists. Now he is convinced they are in the end the real innovators.
Another question worth asking is whether it is the individual or rather the group that brings about innovation? Probably people like Gandhi, Jobs, or Lagerfeld are or were probably convinced that they are the sole generators of innovation in their respective fields. By contrast, Tim Brown, author of 'Change by design' and Roberto Verganti, author of 'Design-driven innovation', believe that it is mainly a group that produces innovations.
The innovation of the last two decades
These questions have led me to identify changes that happened during the last two decades and that could be considered an innovation according to the definition given before. These innovations have been probably developed by individuals and groups together; by technologists but also in collaboration with designers. Sometimes the technologist was also a designer. The next list is an enumeration of a few of them:
New forms of hierarchical organizations. The open-source operating system Linux was created through a new collaborative organization. This way of organization was quite innovative because it was quite flat and based on voluntary work. The result of this organization is perfectly competitive with other operating systems.
New forms of exchange. Napster, as a peer-to-peer file sharing service, was probably the most famous form of exchange because it was shut down by court order due to copyright infringement. Despite its unlawfulness, this way of exchanging intellectual property is quite innovative because it led to a more current understanding of the value of music and changed distribution efficiency. This in turn provoked that the whole price structure for an intellectual property based on digital information changed to smaller apportioning.
New ways of communication and information consumption. Due to new online tools, the functions of classical peer-to-peer communication (direct and by telephone) and classical information media (newspaper, radio, TV) are transforming, transposing, and merging. New programs for online teleconferencing (e.g. Skype), social media (e.g. Twitter and Facebook), forums, and online communities have transposed this industry from one-to-one or one-to-many communication to a many-to-many communication. They can be considered a disruptive innovation because it is starting to cause the cessation of classical journalism, TV, or radio.
New ways of financing. Although not (yet) fully replaceable the established functions of the credit services sector are seeing new competitors arising with new forms of managing credit and equity capital. These are not just mere customer-centric and designful banking services like moven.com or simple.com. These are programs that are causing a more fundamental and substantial change in this industry. Credit capital is started to being increasingly mediated through peer-to-peer credit services. So crowdfunding is doing the same for equity capital.
Turking is a task performed by crowds of people recruited through an online medium. Turking tasks usually require lower intellectual skills but are still not accomplishable in an acceptable quality by computers. Amazon Mechanical Turk (AMT) is probably the most widespread online instrument for turking. Here we are talking about a new way to obtain and allocate resources. Today turking is about accomplishing micro-tasks for micro-payments, but this could change in the future. Not only the complexity and the corresponding remuneration of those tasks could change but also the resource as well as the remuneration could become different.
Almost all democracies in the world are representative democracies. As opposed to direct democracies, this means that elected officials represent a group of people. Today Switzerland is probably the only direct democracy. A discourse analysis of recent movements like for instance 'Occupy Wall Street' shows a growing demand for more co-determination. The 'Piratenpartei' (Pirate Party of Germany) is a political movement that supports 'enhanced transparency of government by implementing open source governance and providing for APIs to allow for electronic inspection and monitoring of government operations by the citizen' (Wikipedia). The before mentioned demand and new technological possibilities could transform representative democracies into much more direct ones.
Bitcoin is a new currency that is not controlled by a central bank, but by participants. These bitcoiners invest in mining capabilities to find new currency units. This peer-to-peer payment system and digital cryptocurrency are subject to uncertainty and volatility due to its aversion from institutionalized central banks. Nevertheless, it has a huge potential to change the way the world makes payments because of its efficiency concerning transaction fees and independence from the influence of governments and politics.
All of these changes have not been all transformations that could mean a paradigm shift. There have been other fundamental changes for instance in education.
The evolution of an innovation
You probably have heard what you will read next a few times, but this time from a different perspective. Now, what do all of these changes have in common? What is the golden thread of all the aforementioned changes? The internet. This technology of networked and talking computers allow us to shift from one-to-one or one-to-many type of communication to many-to-many type of communication. This communication allows for the self-organization of people digitally connected.
However, did all these changes happen at once? No. First technologists invented the internet protocol suite for military purposes. Then that technology was made available to the public. Later on, the technologist Tim Berners-Lee invented the 'World Wide Web'. This intuitive interface between the internet and the user lets the newly created connectivity blossom one step further because through the WWW any user, even the most technologically illiterate person could access information and start exchanging information with peers. This new technology changed the behavior of the people using it. So this change in behavior made other technologies in turn surge.
One small but probably important change in behavior is for instance the way people order and sort out digital objects. At the moment, we can observe a shift from the traditional tree-structure ordering to the tag- attribution ordering. The tree-structure ordering is an inheritance from a more linear-based off-line world with a manageable amount of information. The tag-attribution structuring, however, belongs to the digital world. It was probably born out of the logic of large databases. Here chunks of information receive attributes but are not allocated to a logical tree. This way tag-attributed digital objects receive an order more according to the functioning of the human brain, which works more like a network of different interrelated issues. DevonThink is a program that offers both types of information ordering, Evernote as well as iCloud from Apple, however, only provides the tag-attribution ordering.
So in the last 20 years, since the internet became available to everyone, there has been an interplay of new technologies and socio-cultural changes. These changes in behavior cannot be explained by the behavior of each or the sum of the components of the system, but the new behavior emerges due to interactions among the components of the system.
Due to the mentioned interplay and the emergent nature, these socio-cultural changes are not foreseeable, but we have reached a point in which we can observe the evolution in the sophistication of the programs or, how I call them: 'interaction catalysts'. Within this context, we can define interaction catalysts as digital instruments that live up to the socio-cultural changes. An example: Protestants from the 'Indignant' movement convey a feeling of heteronomy, of being subdued to external powers of policymakers, corporations, and a financial system that is not human-centered. These feelings are on one hand most probably a consequence of more interaction due to new communication technology, and, on the other hand, asks for new interaction catalysts that live up to this new demand from society. Maybe political parties like the 'Piratenpartei' will start to develop and to offer these types of catalysts in return.
New types of business value chains
From a commercial point of view, one of the consequences of this evolution is a spectrum of new types of business value chains. On one side we have the classically established companies characterized by their rather steep hierarchies, few rights of co-determination, opacity & closeness, a strong orientation to efficiency and profit, codification of processes, and behaviors. So on the other side, we have new types of organizations (open source) that are flat with high rights to a say, open and transparent. Efficiency and profit play a minor role due to crowdsourcing and unremunerated labor. The first type of organization was born out of limited technological possibilities of communication whereas the second type emerged purely from a massive, asynchronous online interaction. The processes of collaboration and the behaviors are the result of this interaction and are not subdued to an imposed codification. According to Charles Leadbeater, in 'We think' we are starting to see hybrids along this spectrum. Red Hat, for instance, is a company that sells open-source software products to companies.
The golden threat
So the golden thread of all the mentioned socio-cultural changes is not just a network of talking computers. The evolution of interaction catalysts that adapt technology to human demands lets discern the following most obvious and important common patterns:
The disappearance of the classical intermediaries: These are the agents
between the producer and the consumer. The intermediaries have traditionally been an insurmountable central interface between the producer and the consumer. There are several industries in which we can observe the disintegration of these established intermediaries. The producer, the product, and the consumer still prevail though. The component that is fading away is only the classical intermediary.The disappearance of centralization: With the intermediary also the centrality of its interface role is vanishing as well and allowing for more decentralization. Due to the global character of the internet (as well as the institutionalization of English as the 'lingua franca'), the reach of any offer is almost borderless. Furthermore, the tools for creation and dissemination have become available to a vast amount of people. Almost anyone can create designs, write articles and books or compose music, and make it available online.
The disappearance of the passivity of the consumer: The consumer is not anymore merely accepting or rejecting a product for a certain price. Formerly acceptance or rejection was the only way a consumer was able to give feedback about a certain product. Nowadays the possibilities of evaluation have become much more sophisticated. The consumer can give thumbs up or down, the consumer can write reviews and make these publicly available, for instance in Amazon. This way the consumer has received a high influence on the product as well as on the price. The most empowered consumers were Eric von Hippel's lead users. These are consumers that face needs way ahead of the bulk of the marketplace. They were used to finding out the design of future products.
The disappearance of efficiency preconditions: because of the digitalization and the internet the cost of the distribution of intellectual property is tending to zero and, therefore, traditional requirements for efficiency formerly necessary for the distribution of intellectual property are starting to lack validity nowadays. Before the hackers of Napster invented a new interaction catalyst (peer-to-peer file sharing) to exchange music files, music titles needed to be bundled in albums to justify the cost of storage and distribution on data mediums. The respective rules and laws that came in unison with these efficiency requirements have been challenged by the hacker community. The established high costs of albums mismatched the new de-facto cost structures enabled by new technologies. The industry finally reacted to this new demand by creating iTunes. This system allowed for single music titles that can be downloaded over the internet and for a very low price. This allowed, on the one hand, for a smaller apportioning of intellectual property and, on the other hand, for higher customization of the product delivered.
Two industries can be used to showcase these identified patterns: journalism and credit & equity financing.
Journalism
For journalism, the product is information, and the classical journalistic industry brought information on paper from the source to the reader in a more or less elaborated or transformed way. The reader was rather passive, and the motivation was being informed and entertained. The environment in which journalism was born and thrived was characterized by a certain scarcity of information. Nowadays the demand for information and entertainment can be satisfied at several different digital spots with massive affluence of information. Now there are digital versions of the classical newspaper service like The New York Times (nytimes.com), which is probably the most representative one. However, some new competitors offer classical news over the digital medium, for instance, the Huffington Post (huffingtonpost.com). However, the main competitors are yet other substitutive offerings. There is for instance the social media and the blogosphere but also simple eMails can be counted within the group of substitutive offerings because they attract massively the consumer's attention. These services also offer the consumer to become part of the service. Social media like Facebook give people the possibility to express and showcase themselves. The blogosphere goes one step further because it transforms information to a higher degree and, therefore, fulfills a more journalistic function. So the classical intermediary is becoming less important and decentralized, less expensive to distribute, and more interactive. One of the first places in which the wind of change has been taken seriously is probably the Netherlands. Here two young entrepreneurs have been able to unite all major newspapers and magazines on one digital platform: blendle.nl. This platform is 'itunised' journalism because it atomizes the product into smaller pieces. In other words: readers will only pay very small amounts for the articles they actually read.
Credit and equity financing
Banks have been so far the classical intermediaries of the credit and equity financing function. They have received money from people in exchange for a certain yield and lend to other people in exchange for the before mentioned yield plus a bank's share. Now we can observe the rise of what is known as peer-to-peer banking (p2p) over internet platforms. On the 12th of February 2014, we have almost 41 different peer-to-peer lending and borrowing services in the United Kingdom. The world's oldest peer-to-peer lending service is the British platform called Zopa (zopa.co.uk). So what equity capital is concerned crowdfunding seems to be the peak of the iceberg that will probably revolutionize how private funds are allocated in the business market. As of today the most famous crowdfunding sites like kickstarter.com or indiegogo.com have still a donation-based character. This means that the crowdfunding initiative is used for charity, proof of concept, early idea validation, and customer pre-order. Nevertheless and according to a press release from Kickstarter 'on March 3, 2014, Kickstarter passed $1 BILLION in pledges. That's $1,000,000,000 pledged by 5.7 million people to creative projects.' This speaks volumes about how people have changed their behavior towards more co-determination concerning which private initiatives should be supported financially. Also here we can see that the intermediary is losing ground and the future perspectives do not look very favorable for the classical credit and equity functions.
Bundling and managing resources
So now we have seen two types of established industries, but what about other industries and their respective companies? What is happening within the education sector for instance? Isn't the situation very similar? The Ivy League universities in the USA have recognized the paradigm shift and according to academicearth.org are preveniently offering around 415 free online courses. In the end, the question remains: Aren't all established 'off-line' companies just intermediaries? Don't they all 'just' bundle and manage resources? So which are those resources that traditional companies bundle and manage? The following resources could be considered to be the most important ones:
Employee’s work
Raw material
Raw information
Financial assets
Know-how like processes, connections, and information
Tools like production assets, office space, and other working gear
Intangible assets like branding and credibility
One thing is clear: all of these resources are contributed and managed by people who have some relationship with that off-line intermediary.
Some time ago one of my acquaintances was laid off. Within less than two years half of the workforce of the company, she worked for had to leave, as well. This was the typical situation of an unfriendly takeover in which the newly gained employees were slowly but steadily replaced by the acquiring company's breed. All of the released employees together had enough skills and knowledge to easily create a new company. Their contributed resources would then have been their work, their combined know-how, and probably also some of their money. The main missing resource to get these people back together and start working again would have been the bulk of the necessary capital to start creating value. However, all of these employees together with a sound business plan could have convinced any bank or venture capitalist to provide the missing funding.
So what was really missing? Probably a person with the right leadership skills like trustworthiness, business acumen, and leadership credibility. This person would drum up these former employees back together and create a new participating structure, organize a new hierarchy of work and care for the necessary fundraising. Wouldn't these tasks be also manageable by a digital and online tool specially designed for these tasks? This piece of software needed to accomplish three things:
create a participating structure: register and value each one’s contribution
organize the collaboration of the new employees in the form of project management
manage the necessary fundraising by attracting funders
The other day a friend of mine who owns a small software company in Berlin (arillo.net) showed me his company processes. Even though this is a small company they have programmed and set up their project management software. I was impressed to see that it had all the elements from rather sophisticated project management tools: todo-lists, scheduling, hierarchy, and authorization structure, issue tracking, portfolio, and resource management. So we can assert that we already have software for organizing collaborative work, at least for a manageable amount of employees. However, all of this project management software is a nice add-on. Linux wasn't created using project management software. This means that people can organize themselves with very simple and flat structures of value creation.
So we can claim that the problem of how people collaborate over an online medium has already got tested solutions. So, again, what is missing? Probably a digital system that values and manages each one’s contribution, be it money or another resource as listed above.
Money could be accounted for as equity or credit capital. Equity capital means that the investor is co-owner and has voting rights. This investor will receive dividends whenever the company generates profits, but unless there is an active market for the shares the investor will not be able to receive back the invested sum (or principal). Credit capital is lent money and does not entitle to the right of co-determination in the company. The creditors are due to receive back the money lent plus a certain yield. Both types of capital should be rather easily manageable by such a digital intermediary. The problem surges with all the other types of contributions, the non-monetary resources. Here lies the crux of this new digital intermediary. Maybe a system that works like an auction? This functionality would need much design thinking to work and be accepted by a vast majority of people.
Connected communities of makers
Now imagine there is not a bunch of employees with know-how who have been fired and willing to create a company with an already defined business purpose. There is only one person with a vision or just a very unsharp idea of what could become something extraordinary.
According to a Swiss newspaper, there is a new habit that most parents in the occidental world have: Indoor-Kinder. These are kids who are being over cared for by their parents. In line with this new trend or behavior and without taking notice of its implications, we could imagine a mother, who worries very much about her kids, and she would like to know where they are at any moment in time without her being present. Let's call this mother Martha. She thinks that it could be a great idea to have an app that would give her the exact location of where her kids are. She looks in the app-store, but she does not find anything. During a stroll through the park, Martha meets her friends and also parents. Her friend Ana, whom she tells about the idea, welcomes such an app but has never heard of anything like that. Jeff thinks that such an app could only work if each kid would be equipped with a GPS device. However, of course, children break and lose many things they are supposed to be wearing. So this device, Jeff thinks aloud, needs to be well protected and firmly attached to the kids at least during the day. Ana has got a new idea: "why not a fancy bracelet". "Yes, let's call it Whimyk-band as a shortcut for 'Where is my kid'" responds Martha.
Now, this could be the seed idea and feedback conversation for a new business and product idea. Now, this is usually a state of realization at which most of the peoples' ideas die. They end up just being wishful thinking. Now, what do these potential founders have? They have an idea, which promises to be successful because it is born out of a very current necessity. What they most probably are lacking is time, money, and know-how. So these are resources others could be contributing to this idea.
In a first step, the before mentioned digital intermediary could publish Martha's, Ana's, and Jeff's ideas in a 'New ideas list' and propose the three founders a participatory and organizational structure. In an initial step, each of them gets a 5% stake. The remaining 85% remain free and to be floated to other possible contributors. From an organizational point of view, the three of them would receive the title of founders and would jointly take any further decisions. All of this information is published and in the first phase, interested contributors could start a creative feedback conversation or simply press the thumbs up or the thumbs down button. In the next phase, the founders and the interested contributors could start building an implementation plan that asserts which resources will be needed and a further organizational structure.....
The rise of Liquid Companies enabler
As the reader can see I am trying to develop the wheel that invents the wheel: a platform of connected makers that allows the creation of online evolved undertakings. I like to call them 'liquid companies' because they would have evolved by crowdsourcing all kinds of contributions online. All of this needs to be developed in a design thinking way, I suppose, that is by having a creative conversation, building prototypes, testing and failing, and starting anew until we have a final working prototype most of the testers feel comfortable with.
