Ouya has been turning heads in the online funding industry. This month the company raised $6 million making its crowdfunding campaign the second largest of all time. In the process, the company has become crowdfunding’s poster child for unknown yet talented upstarts looking to break into established industries.
For the uninitiated, Ouya is an open source gaming console that will compete with Microsoft’s Xbox, Sony’s PlayStation and Nintendo’s Wii. According to Ouya’s founder, the dominate positions that these companies hold limit options for consumers and has lead to increasing frustration in the gaming industry. The astounding success of Ouya’s crowdfunding campaign provides evidence that a great number of people outside the company not only feel the same way but are willing to finance a change.
Despite Ouya’s success, many question the long term viability of its business. Will donors to its crowdfunding campaign really turn into loyal customers of its products or were they just swept up in the enthusiasm surrounding the campaign? Will developers spend time to create games for an upstart gaming console with a limited amount of initial users? Is Ouya’s product actually good? Will the company be able to deliver consoles to supporters of its crowdfunding campaign as promised?
These are legitimate questions and ones best addressed by gaming industry experts. As crowdfunding industry observers, we are best suited to comment on the structure and effectiveness of the crowdfunding campaign itself and the implications to the questions posed by Ouya’s dissenters. Looking through this lens, we draw two conclusions.
The first is that crowd funding has worked spectacularly for Ouya. The company has generated 40K customers for its products and unquantifiable levels of media awareness for its cause in the span of a few weeks. These accomplishments alone have given the company an unlikely yet legitimate chance to break into the tightly held gaming console industry.
The second conclusion is that Ouya’s success while spectacular might be just the start of crowdfunding’s underdog story. Chapter 1 of this story is donation based crowdfunding with the second, more powerful (and yet to be written) chapter being equity crowdfunding. Donation based crowdfunding creates significant opportunities but also comes with some limitations. Equity crowdfunding has the possibility to address some of these concerns and create even greater opportunities for small companies looking to establish lasting enterprises.
Here are 5 lessons from Ouya for equity crowdfunding:
1) Patient Investors vs. Short Term Supporters. When receiving equity, investors have a vested interest in seeing a business succeed in the long term. Because Ouya’s crowdfunding donations were essentially pre orders for its product, supporters have no financial incentive to stick around if the company hits a bump in the road or if it has issues with its first production run.
2) Permanent Funding vs. Pre Order Financing. Equity investors provide permanent capital that can be invested in growing a business long term. Pre order structures used in many crowdfunding campaigns like Ouya’s provide cash to the company upfront, but then much of that cash is used in producing and distributing the very products the donors ordered instead of being invested in long term business initiatives.
3) Equity Crowdfunding Delivers Marketing Benefits Too. With a small marketing budget Ouya was able to produce 40K customers for its previously unknown brand in a few weeks. Equity crowdfunding platforms like SeedInvest will have advanced social networking tools that will deliver these same marketing benefits. The difference is that SeedInvest will also be able to raise long term financing for businesses. If companies like Ouya raise equity from crowd supporters many would likely become paying customers as well. Equity Crowdfunding = Funding and Customers. Now that’s powerful.
4) More Time to Run the Business. It has been reported that Ouya raised equity from friends and family and also spoke informally with venture capital firms before its crowdfunding campaign. Equity crowdfunding platforms allow young businesses to streamline this typically arduous process leaving founders more time to focus on building great companies.
5) Raise More Money. The average donation based crowdfunding campaign raises $5-10K while data from equity crowdfunding platforms in Europe shows that average equity raises are closer to $200K. Raising money has not been a problem for Ouya ($6 million and counting), but many startups will likely be able to raise far greater amounts of money through equity crowdfunding than through donation based crowdfunding.
This post was written by SeedInvest on July 27, 2012