The blockchain-based crowdfunding platform Pledgecamp has raised $17 million in a private funding round and is advised by Randi Zuckerberg (Founder/CEO Zuckerberg Media), Matt Curcio (VP Data at Ripple), and Keith Teare (Founding shareholder at Techcrunch) in the lead up to its $3 million public token sale.
Founded by Kickstarter serial crowdfunding veterans Jae Choi, Eddie Lee, and Sam Pullman, the San Francisco company is trying to change the current crowdfunding model with a Backer Insurance escrow model that uses smart contracts.
Choi, Lee, and Pullman launched several crowdfunding campaigns on Kickstarter, raising $2.2 million, which remains in the top 1 percent of campaigns on the platform.
However, they claim to have realized the inefficiencies for participants — particularly investors — in a startup project. Investors are burned by projects that fail to deliver and are usually left with little recourse to recover funding. The subpar outcomes are a result of misaligned incentives between participants in the process, they claim.
According to “The Economics of Crowdfunding” written by Cumming and Hornuf, of all the projects on Kickstarter, up to 85 percent of them delay product delivery while 14 percent do not deliver at all.
Further, the incentives of centralized platforms do not match the market participants. “If platforms intend to operate in the market over a considerable period of time, they should, in line with Rochet and Tirole (2003), have good incentives to serve the interest of all market participants including the investors,” They say.
Intermediary platforms such as Kickstarter receive their portion of the fundraising campaign through a listing fee, which is collected regardless of the outcome of product delivery. Therefore, the incentive for the platform lies with the success of the fundraising campaign rather than the result.
According to advisor and media figure Randi Zuckerberg, “You can do a lot with crowdfunding to support entrepreneurs, but it’s still a bit of an antiquated model because backers put money into projects and they don’t always know if that project is going to pan out. Especially in this new economy, there’s a lot of trust that goes into interactions with strangers. It’s going to be more and more essential where we develop mechanisms where money is held in escrow or is phased out depending on certain milestones being reached.”
Pledgecamp uses a blockchain-powered platform that creates a decentralized market where incentives are aligned. Creators can make campaign deposits where providing transparency to backers through items such as identification documents, business plans and intellectual property registrations help earn their deposit back.
Rather than centralized platform control, the ecosystem of participants governs the curation of campaigns, reducing barriers to entry and improving scalability.
Assurances for backers (investors) are accomplished through Backer Insurance smart contracts that hold the native token in escrow for funded projects. Backers subsequently can vote on the approval of pre-determined milestones and can receive a portion of their funds back if the project fails to deliver.
“If crowdfunding 1.0 was about opportunity, crowdfunding 2.0 is defined by accountability,” says Jae Choi, the CEO. “It’s a perfect moment to apply this new technology to a long-standing problem.”
The inherent ability of blockchains to create trust-minimized, decentralized marketplaces has also opened the door for projects to utilize the “Wisdom of the Crowd.” Platforms such as the Ethereum-based Augur prediction market are predicated on this concept and drive honest market curation through a token incentive structure.
Pledgecamp supplements their crowdfunding model with an open and decentralized marketplace for participants to contribute skills to startups as part of the broader ecosystem.
Crowdfunding is a multi-billion dollar industry that is on a collision course with the emerging technology of blockchains. The next-generation of crowdfunding will empower creators and investors in a global ecosystem to build innovative solutions by overcoming the problems of trust and accountability.
That said, time will tell if the world needs a blockchain-based Kickstarter, and if the crowd is interested in adopting the new currency and format.