Music and Movies. Games and Software. Books and Art. Research Results and Design Concepts. Ideas. So many great things are available in digital form - and can be copied.
The digital copy is powerful: Once a digital good is created, we could give everyone a copy for free! But if we give the goods away, how do we fund creators?
Fund I/O aligns the interests of creators and their customers, by getting the incentives just right: Literally everyone benefits from making the good available to the widest possible audience at the lowest possible price.
Customers are guaranteed the lowest price - no matter when they buy, no matter how much they pledge.
Creators earn more revenue, face less financial risk and enjoy a wider audience.
Everyone gets a clear path towards release of the product under an open license.
The crowdfunding process has three phases: the initial crowdfunding campaign, subsequent sales, and finally the release of the digital good under an open license. Each phase follows simple rules and is best illustrated with an example.
Goal: Raise $1 million in 30 days to cover the costs of developing the product.
Backers pledge how much they would be willing to pay for one copy of the product.
Fund I/O determines the lowest price that covers the costs. Backers who pledged at least this threshold price will receive a copy. Those who pledged less won't.
Every backer pays the same thing: just the threshold price, no more. This way backers have an incentive to pledge as much as they would truly be willing to pay for the product.
The second phase of Fund I/O starts when the product is finished and sales start. Every backer receives a copy for free. Other customers can buy copies.
Revenues are split. Half goes as profits to the creators. Half goes as refunds to backers and other customers who purchased the product before.
The more people buy the product, the lower the price.
Yet, nobody has to wait for the price to drop. If you purchased early, you will get refunds as the price drops. If you think the current price is too high, just submit your pledge to Fund I/O and the price may go down.
The more people buy the product, the lower the price for everyone. And the lower the price, the more people can afford to buy the product!
When the price reaches a minimum level, that has been determined in advance, previous customers will not receive further refunds.
At this point the product is released for free, under an open license, for everyone.
This release can include any digital assets created during the development, allowing everyone to improve upon and develop the product further.
The creator's profits are maximized at the same time that the minimum price is reached. So creators have an incentive to make the free release happen.
Fund I/O is not one fixed mechanism - Fund I/O is a toolbox that can be adapted to many use cases. The three phases can be mixed and matched at will. Moreover there are a number of important variations to the model above. The three most important variations are:
What if backers want to give more money than the average price? Fund I/O can allow backers to set their own minimal price level any way they like. As backers do not receive refunds below their minimal price level, their pledge works just like a donation. Donations can be tied to rewards, if desired. In this way, Fund I/O can accommodate both backers who cannot afford to pay more than they have to, as well as donors who want to contribute a lot.
Fund I/O can easily be modified to raise as much money as possible during the crowdfunding phase, instead of just raising a fixed amount. The threshold price is simply set such that crowdfunding raises the largest possible amount, or such that the highest of a fixed set of stretch goals is reached. During sales, the price is then still lowered as fast as possible, following the rule that profits are split between backers and creators.
Fund I/O can be used for more than just digital goods. Fund I/O works for all goods that have significant economies of scale. Whenever a product has large fixed costs and small marginal costs, Fund I/O can not only finance the project, but moreover Fund I/O provides a smooth transition from low volume high cost production to high volume low cost production. Fund I/O excells at helping projects with high fixed costs achieve the scale at which they take off.
There are a number of blog posts that go into detail on various aspects of this mechanism. A good post to start with is this one:
Much more can be found here:
The above posts also contain references to the academic literature on the subject.
No. All the customers receive are refunds. No customer can ever receive more than they themselves paid.
Fund I/O is about customers paying for a digital good because they value it themselves. Fund I/O is not about investors buying a share in a venture because they expect it to be profitable.
It does not have to be! Fund I/O also offers an option for each customer to set their own minimal price level. This way customers can determine themselves if they want to be altruistic and forgo a large part of their refunds in order to allow others to benefit more quickly from lower prices and a release under an open license. Or, if they cannot afford to be altruistic right now, they can choose to get full refunds, in case the digital good is ever released for free. Note that in this case, the digital good will only be released for free if enough customers are altruistic to some degree!
Customers can pay more than the threshold price, if they really want to!
As mentioned above, Fund I/O can offer customers the option of setting their own minimal price level. If a customer wants to pay his full pledge to the creators, all they have to do is set their minimal price level equal to their pledge. Creators are free to offer rewards to backers who do so, in order to recognize their contribution.
On the contrary. Customers have a guarantee that they will receive a full refund, when the price drops in the future. The refund mechanism gives customers an incentive to buy as early as possible: in this case they will get access sooner without spending more than they have to. In fact, customers can pledge $10 even when the price is still at $20! If enough customers pledge $10, the price will drop automatically.
There is only one exception to the rule of full refunds: If the project uses a fixed "minimum price level", then customers will not receive refunds below this level. In other words, as soon as the digital good becomes freely available to everyone, they will not receive further refunds. See above.
Because Fund I/O does not require customers to pay their full pledge (unless there is no other way to fund the project), it gives customers incentives to reveal how much they value the digital good. This translates into higher pledges from more backers. Whether this will raise more money in total depends on the project. But because prices for the digital good drop as the project becomes more successful, the digital good will certainly be available to a wider audience.
People only have very little incentive to donate to a project if it is going to be freely available anyway. Theoretical models show that donation-based crowdfunding methods for digital goods without access restrictions will raise several orders of magnitude less money than methods with access restrictions. While in practice, people are more altruistic than the entirely self-interested agents assumed in those theoretical models, practical experience still shows that generally crowdfunding campaigns with access restrictions are more successful. This is discussed in greater detail here.
No. Creators commit right from the start to the eventual release of their product under an open license, given that clear conditions are met. The creators' profits are maximized if and only if the open release happens - so they have incentives to see it through. Conversely, customers have an incentive to refrain from unlicensed copying: both because of the refunds they receive and because of the goal of achieving an official "free" release of the product they care about. A longer answer is given here.
What do you think about Fund I/O? Comments are welcome!