Relying on a community to perform tasks for you: Crowdsourcing

By Xavier Forneris

Innovation can not be reduced to hardcore R&D. Developing a new way of doing business, of procuring or delivering a product or service, is a valuable form of innovation, even though no patent is filed. A very interesting innovation in the private sector is the utilization of “the masses”, meaning people like you and I, multiplied by millions. I am referring to the “crowdsourcing” concept.

What it is

For Jeff Howe, who coined the term in a 2006 Wired magazine article (see reference at the end of my post), crowdsourcing is simply:

The act of outsourcing tasks traditionally performed by an employee or contractor, to an undefined, large group of people or community (a “crowd”), through an open call

The community is the “crowd”; the open call is more often than not made on the web, by posting requests on the internet. We can say that crowdsourcing is a variation, an evolution of the well-known “outsourcing” concept. But outsourcing is so last century. Crowdsourcing is the latest thing…or is it?

How new is it?

Although the term only appeared in 2006, a reporter for memebern.com named Stuart Thomas went back to the history books and found that this “new” concept is actually quite old. I hope Stuart will not mind that I use two of the examples he’s providing, which I loved. In 1714 the British government made an open call to the public and offered a cash prize to anyone who could offer a simple and practical method for determining with precision a ship’s longitude. Under Napoleon I, the French government offered a cash prize to anyone who could devise a cheap and effective method of preserving large amounts of food. Of course Napoleon was concerned about a special kind of “food security”: he wanted to make sure that soldiers of the Empire waging war in far away lands would have ample and safe food supply. There are more examples in Stuart’s article, which I really recommend reading if you are interested in the subject (and want to know whether these two historical crowdsourcing initiatives led to any innovation). The point here is that “crowdsourcing” is not as new as some would like you to believe. But the web has been a tremendous enabler…once more I would say. It allows to reach a broader audience and therefore to more efficiently and effectively publicize and then manage the crowdsourced projects.

Who is using crowdsourcing?

You may think that the strategy is mostly used by non-profits and small firms or individual business owners and other start-ups in an effort to cut costs. Sure, but not only. In fact “everybody and their brother-in-law is doing it”. Let me give a few examples:

According to Stuart Thomas (Memebern, Sept. 15, 2011), Iceland is crowdsourcing its new constitution while Microsoft is crowdsourcing aspects of Windows 8. These entities are not exactly your typical feldgling start-up or NGO.

Artists and writers are doing it: best-selling author James Patterson invited members of the public to write 28 of the 30 chapters of his book, AirBorne. That’s crowd-writing. Another example is Wikipedia. What is it if not an encyclopedia written by the masses?

Local governments are doing it: the city of Salt Lake City has been using crowdsourcing for transit planning.

Even scientists are doing it: an astronomy project (Galaxy Zoo, 2007) relied on 150,000 stargazers to classify millions of pictures of galaxies. The task is not complicated but it would have taken several lifetimes to the members of the research team. With the power of the masses, it was done at a comete’s speed…

It is used in advertising. A famous example, cited by Wikipedia, is Doritos (snack food), which crowdsourced the production of an ad for the Super Bowl. Football and Doritos fans had a chance to win a cash prize, a trip to watch the Super Bowl, and the proverbial “15 minutes of fame”.

Entrepreneurs are using it, especially start-ups and small companies, for a range of needs, from designing their e-commerce website to raising capital. The latter is called “crowdfunding”.

But now, large firms are also coming to it, as reported in the Wall Street Journal (17 January 2012). The Journal cites AOL which used crowdsourcing last year to get an inventory of its video library; it adds that AOL, Microsoft, and LinkedIn have all used the services of Amazon’s Mechanical Turk crowdsourcing service (over 500,000 registered “workers” from 190 countries).

The applications are infinite. At this stage of the paper, if you are a parent, like me, you can’t help having this inner dialogue: “Are my children crowdsourcing their homework? No way! I don’t think so. I hope not. They can’t do that. Can they?”.

Why it works

According to Jeff Howe (quoted in Wikipedia) the concept depends essentially on the open call. Because it is an open call to a group of people, it naturally gathers those “who are most fit to perform tasks, solve complex problems and contribute with the most relevant and fresh ideas.” Howe further explains that because technological advances have allowed for cheap consumer electronics, the gap between professionals and amateurs has been diminished. As a result companies are now able to take advantage of the talent of the public. Promoters can tap a wider range of talent than might be present in their own organization. My take on this: the masses are more creative, innovative, and smart than you and I would have thought. And if businesses find that it’s cheaper and faster than traditional outsourcing or hiring temps, they’ll keep using it.

Is money always involved?

Not always. Some projects offer monetary incentives, cash prizes, but not to every participant. Usually it’s only the person who found the right solution who gets the compensation; there’s a competitive aspect to many crowdsourced projects. But other projects only offer to the contributors a chance of fulfilling a hobby, the satisfaction of having contributed, of working collaboratively, with a community, of being publicly recognized.

Is this ideal, a panacea?

Sadly, like most things in life, it’s neither ideal nor a panacea. There are most certainly fields that do not lend to crowdsourcing because of issues of confidentiality, security, liability. Also, crowdsourcing doesn’t always produce the quality results one is looking for. Contributors are usually not protected by a written contract. Companies are not guaranteed that the contributors will remain involved throughout the duration of a project. Also, it can be abused to source cheap or even unpaid labor. Harvard Law School professor Jonathan Zittrain talks about the risk of “digital sweatshops”, reminiscent of the Nike-China factory scandal of years ago. Facebook faced these criticisms in 2008 when it began its “localization program” inviting users in each country to translate for free. To address these risks, the ‘crowd’ is increasingly vetted in advance, selected and professional ‘brokers’ facilitate the exchange between outsourcing companies and the ‘crowd’. An example is offered by Amazon.com’s Mechanical Turk, which empowers firms, developers and creators by “lubricating the relationship between them and crowdss”, and by “creating a platform through which crowds and employers communicate and perform transactions in a way that is safe for both parties”. Other examples of this trend towards professionalization and intermediation include OnForce, Elance.com, Innocentive, CrowdSpring, and Guru.com.

What functions lend themselves to crowdsourcing?

As mentioned above, not every function can be crowdsourced; as the CEO of a company, you would perhaps outsource what you perceive as support or back-office functions (accounting, travel services , IT, some but not all functions of H.R, etc) but you would not outsource to someone you do not control an activity that is your core competence. The same caution probably applies to crowdsourcing.

ScalableWorkforce has identified 5 business areas that lend themselves well to crowdsourcing:

1. Problem-solving (medicine, biotech, science, manufacturing and engineering)

2. Design (designing clothes, designing websites…)

3. Simple, general, or routine tasks (transcription services, surveys, copy writing, proof-reading, editing, internet research, etc.)

4. Testing (particularly for software, games, websites…). Who would make a more enthusiastic tester of a new video-game than a hardcore gamer? I bet some would pay for the privilege and opportunity to be the first users…

5. Customer support: sometimes the enthusiastic (and unpaid) users of a product can provide better information to other customers than the manufacturer’s staff itself.

In closing, I would be interested in knowing what you think of crowdsourcing. Is it a fad or something that is here to stay, that has great potential? In which field? Have you used crowdsourcing and, if so, where you satisfied with the experience? If you haven’t used it yet, for which task or project would you use crowdsourcing?

Source / Read more:

“The rise of Crowdsourcing”, Jeff Howe , Wired, June 2006.

“Big Firms Try Crowdsourcing”, Rachel Emma Silverman, The Wall Street Journal, paper edition, Jan. 17, 2012.

“9 examples of crowdsourcing before crowdsourcing existed”, Stuart Thomas, memebern.com, Sept.15, 2011. Retrieved at: http://memeburn.com/2011/09/9-examples-of-crowdsourcing-before-%E2%80%98crowdsourcing%E2%80%99-existed

“10 examples of how crowdsourcing is changing the world”, The Social Path, May 29, 2009. Retrieved at: http://www.thesocialpath.com/2009/05/10-examples-of-crowdsourcing.html

 “Crowdsourcing Business Examples”, ScalableWorkforce (undated). Retrieved at: http://www.scalableworkforce.com/crowdsourcing-history-background/crowdsourcing-examples-in-business/

2011: The Year of the Failed IPO Comeback

By Xavier Forneris

In my January 6 post, I talked about the Internet IPO’s of 2011, indicating that most of them had been either disappointments or total flops. I gave the example of the much-anticipated Zynga IPO (in December 2011). Zynga closed its first day of trading at 5% below the offer price; by Dec. 30, it had lost almost 6%. In fairness to Zynga, I could have mentioned bigger losers:

  • Friend Finder Networks (IPO in May 2011) fared even worse: at the first day close it was 21.5% down; by year-end, it had lost a whopping 92.3%, trading at 77 cents, from an offering price of $10. 
  • Tudou, the Chinese online video company, listed on the NASDAQ in August (offering price $29) and finished the year at $10.5, a 64% decline.
  • Renren, a social networking internet platform, also from China, was listed on the NYSE in May, at an offering price of $14 and ended the year at $3.55, losing almost 75%
  • Demand Media, the Santa Monica (CA) online content publisher was offered on the NYSE at $17 in January; it closed the year 61% down, at $6.65.

The other Tech or Internet companies that had IPO’s in 2011 and closed the year on 30 Dec 2011 with a stock price lower than the offering price included Pandora Media, Zipcar, Boingo Wireless, and Yandex. To be fair, I also mentioned a few successful Internet/Tech IPO’s in 2011: LinkedIn, Jive Software, Angie’s List, Zillow, Groupon, Fusion-io and Bankrate, all closed the year at a price that was above their respective offering prices. A few of them actually had a quite impressive performance:

  • LinkedIn gained about 40% between its IPO (May 19) and Dec. 30, the last trading day of the year. This was probably the best or one of the best-performing IPO’s of the year, across all industries, in the U.S.
  • Jive Software gained 33.33% between its IPO (Dec. 12) and Dec. 30
  • Angie’s List gained 23.85% between its IPO (Nov 17) and Dec. 30
  • Zillow gained 12.4% between its IPO (July 20) and Dec. 30.

But in spite of these few successes, the fact remains that we can’t call 2011 a successful year for Internet IPO’s. In fact, I mentioned a grim finding by Birinyi Associates: 19 of the 31 Internet and Social Media companies that went public in 2011 are trading below their offering price. Acccording to Renaissance Capital, stock of Tech companies that went public in 2011 have fallen 15%.

I’m not picking on Internet businesses. I did also mention that it was not just the Tech or Social Media companies that were on that “rocky IPO boat”. As 2011 showed the signs of a prolonged global economic slowdown and a worse-than-expected European fiscal crisis, and as the public anger at Wall Street only grew stronger (evidenced by the “Occupy Wall Street” movement) companies that dared to go public in the U.S. did not fare extremely well, across sectors and industries.

Collectively, IPOs that went public this year lost 13% of their value, the first negative return since 2008, and about two-thirds of companies that went public this year are trading below their offering price (Source: IPO Boutique).I have not looked at European IPO’s yet but I suspect that they did not fare much better. Because of the adverse environment and tepid investor reaction, several companies that had lined up for IPO’s chose to postpone them and to wait for “better days”. Those include, for instance, GSE Holding, FusionStorm Global, and Luxfer Holdings. As in the Tech sector, there were a few successes. One of the most talked about was the IPO of luxury clothing and accessories company Michael Kors Holdings Ltd., which was priced higher and sold more shares than expected.

Will 2012 be a better year for IPO’s, especially in the U.S.? I wish I had a crystal ball…Much will depend on the global outlook and how Europe manages its debt crisis. But you can bet that IPO’s will be watched very closely, as a bellwether for the overall economy. And no IPO will be observed more than that of Facebook, if Mark Zuckerberg indeed decides to go ahead with the IPO, as the rumour has it, perhaps in the first half or maybe the first quarter of 2012. Other closely watched Internet IPO’s will be those of Yelp (the reviews site) and Gilt Groupe (an online retailer), if they also get confirmed.

Those brave souls that decide to go public in 2012 should probably rely on proven tactics such as going for smaller deals (for instance 0ffering only 10% or less of the outstanding shares) and setting a conservative/lower offering price, to stimulate demand and increase chances of gain for investors.

2011: Not a good year for Internet IPO’s. Does it matter?

By Xavier Forneris.

In a previous post, I talked about the “mixed success” of the Zynga IPO. Some observers were less kind and called it an IPO flop. Introduced at $10 (NASDAQ:ZNGA), the share price first surged to $11.50 before falling and closing the day at $9.50, or 5 percent less than the initial price! This was bad in itself but it was also in sharp contrast with LinkedIn’s first trading day after its own IPO, closing at $122.90 from a starting price of $45 per share.

The problem is, it’s not only Zynga. According to research firm Birinyi Associates, 19 of the 31 Internet and Social Media companies that went public in 2011 are trading below their offering price. A sobering observation if there is one.

According to Matt Linley (in one of his Dec 19 posts in Business Insider), 9 of the 16 tech companies that went public in 2011 were under-performing their IPO offering price by the end of the year. The difference in numbers between  Birinyi Associates (19/31) and Matt Lynley (9/16) may come from different definitions of “internet” and “tech” companies; or it may be that Birinyi’s research covers more markets/countries than Matt’s piece. Anyway, they reach the same conclusion: over half of Internet IPO’s in 2011 were disappointments.

I would now like to discuss why disappointing flotations matter. It’s not just that the folks who buy stock in the IPO lose money. After all, savvy (or connected) investors who play the IPO game should expect a certain risk level. But a more serious concern in my view is the ripple effect which we could see, both at national and local levels. Let’s start with the local level: in an excellent article recently published in the San Jose Mercury News – a great source of information for Silicon Valley aficionados-, Peter Delevett identifies some of the effects that disappointing IPO’s of social media businesses (such as Zynga) can have. In short, he explains that some firms that were contemplating a flotation may be thinking twice now. He adds that this could “dampen the wealth-generating effect a raft of initial public offerings can have on Bay Area employment, housing prices, and luxury auto (sales)”. This would be unfortunate, especially in our depressed economy, but Delevett then mentions other effects, which I view as more problematic for the economy. Delevett explains that if the venture capital (VC) firms can not take the start-ups public, they would have to either find buyers for them, inject more funds into them or, worse, “pull the plug” and let them die. It’s not only a one person’s opinion. As a matter of fact, the article quotes two Silicon Valley insiders who seem to share this sentiment:

Tim Young, founder of Socialcast, a start-up:

There are going to be a lot of walking dead start-ups that can’t close that third or fourth funding round

Mike Smerklo, CEO of Service Source:

“As soon as the public market investor starts to pull back, it has that ripple effect on the whole funding cycle”.

So, what will Internet, Social Media, and other Tech firms do in this difficult and unpredictable environment (which is of course largely influenced by, and reflects the state of, the overall economy)? Delevett identifies several possible developments:

  • A number of start-ups may decide to remain private, postponing or cancelling their flotation plans.
  • Start-ups will have to look for alternative source of financing.
  • Firms that decide to go public, may choose to sell a relatively small percentage of shares to “stimulate” demand. That was in a way the tactic implemented by Groupon and LinkedIn when they both offered less than 10% of their outstanding stock in their IPO’s. 
  • And other firms deciding to go public may set a lower than expected offering price for their shares, again in an effort to stimulate demand.  

I fully agree with Delevett. I hope that valuation will (finally) get the attention it deserves. IPO strategists will devote lots of efforts to identifying the “right offering price” but also the “right time”. Timing is a critical factor for IPO success. For instance, I agree with Matt Linley (see his post on LinkedIn’s IPO) that LinkedIn did its IPO at a much better time (May) than other Internet companies that went public later in the year and faced much more difficult market conditions.

How big of a problem is all of this? How many internet and tech firms are concerned? It’s difficult to say but one indicator we can use is the number of Internet companies that already filed to go public. According to Hans Swildens of Industry Ventures , also quoted in the same San Jose Mercury News article:

“There are 65 tech companies on file to go public , and it’s pretty clear that all these guys are not gonna be able to go out”.

But I don’t want to end on a sour note. To be fair, some Internet IPO’s were a success in 2011:

  • LinkedIn gained about 40% between its IPO (May 19) and Dec. 30, the last trading day of the year. This was probably the best or one of the best-performing IPO’s of the year, across all industries, in the U.S.
  • Jive Software gained 33.33% between its IPO (Dec. 12) and Dec. 30
  • Angie’s List gained 23.85% between its IPO (Nov 17) and Dec. 30
  • Zillow gained 12.4% between its IPO (July 20) and Dec. 30.

I will continue to follow these firms’ stock price in 2012 and beyond to see how they perform over time. I’ll also come back to the issue of excessive valuation and to the risk of a new internet bubble in future posts; this one was about the effect of “IPO flops” on the Internet/Social Media start-ups and their financing needs. In a next post I will also explain that it’s not just Internet companies that had a “bad IPO year in 2011”. As we will see, there were many disappointing and less-than-successful IPO’s last year, across industries. The ripple effects discussed here for Internet companies will largely apply to other sectors of the economy.

Note from the Author / Sources:

I want to thank Peter Delevett whose article has inspired me to write this post. I have borrowed quite liberally from his article – the version I have read in an East Coast newspaper was a little different and longer than the one that can be retrieved through the Mercury News website (title and link below). But I have used some of Peter’s quotes and ideas to support the argument I have been trying to make for the last month, namely that the hype and buzz we observe around social media can lead to irrational investment decisions and to discarding hard facts as irrelevant. I raise the issue of excessive valuation and expectations because the same pattern was observed before the 1999-2000 Internet bubble. As a big fan of Social Media and the Internet, I sincerely hope that we are not in a bubble. I will never try to predict a bubble; this is way beyond my competence, but I think the possibility deserves to be discussed. Following are the main sources I have used for this post: Peter Delevett’s article and two excellent posts by Matt Lynley. If you are interested in the above-mentioned issues, I strongly recommend that you read these 3 pieces.

Zynga’s flop could hurt some start-ups, Peter Delevett, San Jose Mercury News, 01 Jan. 2012. Link: http://www.mercurynews.com/business/ci_19618020?IADID=Search-www.mercurynews.com-www.mercurynews.com

Most Tech IPO’s this year were total busts, Matt Lynley, Business Insider, 19 Dec. 2011. Link: http://www.businessinsider.com/year-in-ipos-updated-2011-11

Why LinkedIn’s IPO was a big success when almost everyone else was a bust, Matt Lynley, Business Insider, 19 Dec. 2011. Link: http://www.businessinsider.com/linkedin-had-the-best-tech-ipo-of-the-year-by-a-huge-margin-2011-12