In high school, while his friends occupied themselves with finding dates to the prom, Ben Kaufman was busy seeking novel ways to let customers help design his company’s products. His first startup, iPhone-accessory company Mophie, debuted four products at MacWorld in 2007, designed with input from attendees. Kaufman sold thousands of the units, leading to the sale of Mophie later that year to a competitor.
At 23, Kaufman has expanded the idea with his year-old startup, Quirky. The company offers product inventors access to a community of 22,000 engineers and designers who help the inventors refine their ideas in a freewheeling, Internet-enabled brainstorming session. Recent hit products include the Switch, a $79 modular pocket knife with 18 switchable attachments. To date, Quirky has 45 products for sale, including housewares, toys, and electronics.
The company receives revenue in two ways: Inventors pay $99 to join the Quirky community, and Quirky keeps two-thirds of the profits from product sales. The inventors and designers receive the other third. Kaufman says the Quirky community receives about $25,000 a week, a number that is steadily rising.
“Collaboration and bringing more people to the table is going to be the way of business in the future,” Kaufman says.
The technique Quirky and other new companies are using to affordably grow their businesses is known as crowdsourcing, a term coined in 2006 by Wired magazine reporter Jeff Howe. Instead of hiring a staff of expensive designers and paying them whether or not they come up with great ideas, Quirky brings thousands of designers together online and only pays the ones who succeed. The cost advantage for a startup is obvious.
Kaufman isn’t the only young entrepreneur using the crowdsourcing business model. Many of these innovators have spent their formative years immersed in crowdsourcing, so it’s natural for them to be drawn to the business model, says Ross Kimbarovsky, a former longtime business consultant and attorney who got bit by the crowdsourcing bug himself. Kimbarovsky is cofounder of two-year-old design and writing marketplace CrowdSpring.
Kimbarovsky offers several examples of crowdsourcing companies young entrepreneurs teethed on: collaborative online encyclopedia Wikipedia, cheap-photo site istockphoto.com, and trendy T-shirt company Threadless, which has its customers design the shirts.
“As young people experience businesses like these, they get their own ideas of ways they could create different types of crowdsourcing businesses,” Kimbarovsky says.
Crowdsourcing doesn’t just tap customers to help create products. Startup Sproxil uses crowdsourcing in a completely different way — to help pharmaceutical companies detect and stop the sale of dangerous, counterfeit versions of their drugs.
“In essence, it’s a 911 for fake drugs,” says Sproxil founder Ashifi Gogo, 29, a Dartmouth College Ph.D. candidate who was born in Ghana.
Instead of hiring an army of detectives to track down the perpetrators, Sproxil asks all the medicine’s consumers to verify their prescription’s legitimacy by texting a unique ID number on the package to the company via their wireless phones. The company then feeds this information to government officials, who can more easily track down fast-moving counterfeiters.
After several years of market research and testing, Sproxil launched its service in February in Nigeria, where Gogo says 70 million residents have cell phones. In this initial test market, drugmaker Merck pays to have Sproxil’s package labels put on its diabetes drugs. The program has received strong support from the Nigerian drug safety agency, whose director’s diabetic sister died after using counterfeit insulin.
“We said a good pilot would be 100,000 labels,” says Gogo. “This year, for just this one product line in one country, we got orders [from Merck] for 4 million labels.” That order is expected to translate into revenue this year of more than $1 million.
One of the most successful recent crowdsourcing innovations brings people together with a different goal — to pool their purchasing power and get great deals. Andrew Mason, 29, dropped out of the University of Chicago’s public policy school to start a company that eventually became the smash-hit deal purveyor Groupon. The company e-mails subscribers one substantial discount deal each day. The crowdsourcing angle: The deal is good only if a critical mass of people purchase the discounted voucher for a product or service. The participating businesses set their own deal parameters and number of required participants, so each deal is different.
Heavily advertised on social media sites such as Facebook, Groupon has spread like wildfire. The company employs nearly 300 people and is in 50 cities, with the number of cities expected to double by year-end. Groupon doesn’t disclose revenue, but it recently sold a small equity stake to Russian venture capital firm Digital Sky Technologies, which gave Groupon a $1 billion valuation.
Rather than vendors paying to participate as they would in traditional advertising, Groupon makes its money by taking a cut of the amount customers pay when they purchase their deals. Best-selling deals have included 20,000 half-price tickets for a Chicago architectural boat tour. Mason says he now has 100-company-long waiting lists in many markets, as businesses clamor for a chance to offer one of Groupon’s daily deals.
As befits a company that owes its success to crowdsourcing, Mason notes, “Most of our customers we pick up via word-of-mouth. If you get a restaurant deal or theater tickets, you want someone to go with you.”
Business reporter Carol Tice contributes to several national and regional business publications.