When Calgary entrepreneur Michael Sikorsky pitched investors last year on his new "crowdsourcing" firm, he explained that Cambrian House Inc. was a lot like Seinfeld, the TV show about nothing: "We don't know what we're going to build, who will build it or who will buy what we make." That pitch raised $2.5 million. Since then, Cambrian House has raised another $2.6 million, and it was recently finalizing a further round of investment worth more than $5 million. Investors aren't betting on "nothing," of course. They're buying into Sikorsky's vision of creating low-cost software quickly, through the oh so Web 2.0 concept of crowdsourcing. Crowdsourcing refers to using communities of volunteers to build a project. Open-source software has long been developed by individual programmers working on shared projects. And in the past year, Cambrian has become a leader in software crowdsourcing, bravely inviting one and all to contribute their ideas and brainpower to developing mass-market Web applications. It's a typically bold move for Sikorsky, who has founded a series of tech firms. "Crowdsourcing will become an essential part of the business landscape," he says. Many firms are experimenting with new ways to develop products, from contracting out to offshoring, and crowdsourcing is just another means to do so, says Sikorsky—only cheaper and faster. In March, Cambrian plans to release its first all-peer product, a video game called Gwabs. From concept to finished product, it will have taken the volunteer team six months and cost $200,000. Producing it with in-house staff, says Sikorsky, would have taken 50% longer and cost three times as much. Here's how the process works. Entrepreneurs with no time to pursue new ideas, or anyone else with a vision for new software, submit ideas to CambrianHouse.com. An online community topping 10,000 members discusses the ideas and votes for the best in a monthly "IdeaWarz" slugfest. Cambrian staff create a brochure site to test the winner's efficacy and popularity. If the idea survives, members pitch in to bring it to life, mainly by developing code, though also by writing copy or helping with graphic design. Why bother to contribute? Typical motives are to work on a meaningful project, enhance skills and receive peer recognition. Cambrian adds a fourth incentive: cash. Each contributor (typically, about 30 in all) receives "royalty points" worth a share of the project for as long as it generates revenue (likely about five years). Cambrian takes 50% off the top for project management, sales and marketing. The biggest payout so far has been just $400 to the person who dreamed up Gwabs. Yet, Sikorsky says a developer working on a project four to six hours a day for a year could earn $50,000 to $60,000 if it succeeds. "This is a generic way of monetizing mass collaboration," he says. "Anyone can work for us, and anything can flourish." Karim Lakhani, an assistant professor at Harvard Business School who studies crowdsourcing, says that open source has more than proven itself in software, with even Microsoft admitting it yields efficient products. But Cambrian's model is unique in trying to fuse open source to a traditional company format: "They've decided that the core market research, production and development functions can be done by the community." With Cambrian's compensation scheme and respect for member participation, Lakhani suspects that it has the right concept: "I think it's the most interesting model out there now." Gwabs is a good example of Cambrian's method. The game emerged from the community forums and seemed wildly popular, so Cambrian risked $8,000 on a preliminary website to promote the game. "It sailed through the market test," says Sikorsky, selling hundreds of pre-orders at half-price ($9.95) in a single weekend. That response emboldened Cambrian to invest $100,000 for the next development stage. So far, Cambrian has only one project earning revenue: Prezzle.com, a service for sending virtual best wishes and gift certificates. Cambrian's eventual goal is to turn each project into a separate, independently funded firm, but only after it has been market-validated. "Creativity loves constraints," says Sikorsky. "I like to starve people for resources and time. I believe businesses are GUPI: guilty until proven innocent." Sikorsky forecasts modest revenue of $1 million this year, but expects that to leap to $5 million in 2008, and its community to surpass 100,000. And later this year he plans a big gamble: opening up Cambrian's platform so anyone can propose a crowdsourcing project outside the firm's formal development structure. While that could woo members away from Cambrian's own projects, Sikorsky believes it will cement its leadership: "If you want to start a business and want to crowdsource, you'll come here."
Cambrian House: The wisdom of crowdsourcing
Originally appeared on PROFITguide.com