The European Crowdfunding Network aims to improve crowdfunding opportunities for both individuals and companies, enabling European businesses and development projects to prosper and grow. Taking into account discussions in progress at the European Commission and other relevant pan-European institutions, ECN members have asserted a collective view that high and professional standards of transparency are just and equitable principals and will contribute to the development of crowdfunding in Europe. Hence, they have decided to establish a non-binding Charter of crowdfunder rights.
The aim of the ECN Charter of crowdfunder rights is to state the general principles that any European citizen using a crowdfunding platform, whether as an investor or as a donor, should be able to rely on.
2.1 Categories of crowdfunders targeted by the Charter
Virtually all types of crowdfunding platforms should comply with the principles below, including:
donation‐based crowdfunding etc.
2.2 Categories of crowdfunders targeted by the Charter
The ECN Charter of crowdfunder rights is specifically designed for the protection of European “non-professional investors” as defined in the Markets in Financial Instruments Directive (“MiFID”). However, transparency guidelines should apply for all types of crowdfunders, including “professional investors” as defined in the MiFID. Investors as well as donors should benefit from the Charter.
3. Legal effect
The ECN Charter of crowdfunder rights merely sets out principles and do not constitute Court-enforceable regulations.
National regulations are not meant to be overruled by the ECN Charter of crowdfunder rights.
4. General principles
Crowdfunders and possible crowdfunders must receive all relevant information on a crowdfunding platform in order to be reasonably able to understand the nature and risks of the placement proposed. Such information shall be provided in a comprehensible form.
4.1 Transparency on projects and project owners
Crowdfunders should be able to have at all times access to all relevant information concerning projects and project owners presented on a crowdfunding platform; such information will include the identification of the project owner (name, address, trade registry number of applicable), the due diligence performed by the platform on any project as well as possible conflicts of interest with the platform or its shareholders and all specific risks identified in the project.
4.2 Transparency on crowdfunding platforms
Crowdfunders should be able to access relevant information pertaining to the regulatory status of the platforms and its terms and conditions of use (including fees and charges, duties and responsibilities, personal data policy, money safekeeping processes etc.).
Classy, a San Diego company that provides online fundraising tools for non-profits, is itself the beneficiary of a substantial amount of cash.
The crowdfunding-for-causes startup said Tuesday that it has pulled in $18 million through a funding round led by Mithril Capital Management, which is chaired by serial entrepreneur and investor Peter Thiel. The round included participation from existing investors such as Bullpen Capital and Salesforce Ventures, the venture arm of the publicly traded online customer management company.
Launched in early 2011, Classy’s online platform has hosted more than 300,000 cause-based fundraising campaigns, raising a collective $130 million from 1.3 million people for social enterprises such as the World Food Program, Special Olympics, National Geographic and Surfaid. The company has 80 employees and plans to use some of the new cash to triple its 15-person engineering team. Classy has also appointed Michael Young, the former chief technology officer at Redfin, as its first CTO.
“Eighty million millennials will make up more than 50 percent of the workforce in less than five years and their overwhelming preference is to engage online and through mobile,” said Classy CEO Scot Chisholm. “Still, only 10 percent of the $360 billion that non-profits raised in the United States last year was raised online; but this is about to change in a big way.”
Classy co-exists in an increasingly crowded space of startups providing online fundraising tools, including San Diego-based GoFundMe. The co-founders of GoFundMe, which lets people raise money from friends for personal causes, last week sold a controlling interest in their company, valued at $600 million, to an investor group.
Collectively, crowdfunding services rounded up around $10 billion in funds for their respective causes or projects in 2014, up from $1.5 billion in 2011, according to a March 2015 report from Goldman Sachs.
Will Equity Crowdfunding Buyers Be Able to Sell Their Shares?
Now that non-accredited investors can buy shares in private companies through equity crowdfunding platforms, many people eager to get in on the ground floor of high flying startups are considering making those investments. Before they cut a check, would-be investors should consider how they will get their money back out. It won’t be nearly as easy as putting it in.
Traditionally, the business angels and venture capitalists who invest in startup companies have achieved liquidity when the companies in which they invested were acquired or went public. Unfortunately, for non-accredited equity crowdfunders, there won’t be enough initial public offerings or acquisitions to provide all of the needed liquidity. Crowdfunding isn’t likely to boost the number of acquisitions or IPOs much in the short run. While more companies will receive investment, a similar number will exit.
Moreover, many of the companies that will seek investments from non-accredited investors won’t be the types that typically go public or get acquired. For investors in companies whose business models aren’t appropriate for an IPO or an acquisition, traditional methods of achieving liquidity will remain unavailable.
In their new book, Equity Crowdfunding for Investors: A Guide to the Risks, Returns, Regulations, Funding Portals, Due Diligence, and Deal Terms, crowdfunding experts David Freedman and Matthew Nutting suggest that strategic and institutional investors might become buyers of the crowdfunders’ shares. But, as these authors rightly point out, these investors are unlikely to provide much of a market. Strategic and institutional investors finance a small minority of businesses that were previously backed by business angels and entrepreneurs’ friends and family. Because strategic and institutional investors’ decisions are driven by the characteristics of the companies seeking funding and not the characteristics of the earlier investors, equity crowdfunding is unlikely to change the number of institutional and strategic investors buying shares in private companies.
Freedman and Nutting suggest that other non-accredited investors who were previously unaware of the investment opportunities, or who were limited by capital or regulations from making investments earlier might buy the crowdfunders’ shares. However, as the authors explain, that is unlikely to happen until the startups themselves are no longer seeking investment through crowdfunding. As long the companies are still raising money, new investors might find it easier and cheaper to buy shares from the companies themselves rather than from earlier investors.
Moreover, for non-accredited investors to sell their shares to other non-accredited investors requires the development of secondary market, Freedman and Nutting point out. While a few companies, like SecondMarket and SharesPost, currently provide secondary markets for private-company shares, those markets aren’t appropriate for non-accredited investors’ equity-crowdfunding holdings. These market makers generally require the approval of the companies that issued the shares before the stock can change hands, making them a better fit for the transferring shares of employees than those of investors. The markets themselves are also labor intensive and would not be economical for the buying and selling small numbers of shares.
Even if the right types of secondary markets were to emerge, those markets would be far from efficient. No analysts yet exist to provide advice about which private companies to buy and which to sell. And government regulations require non-accredited equity crowdfunders to hold the shares they have purchased for a year before selling.
Non-accredited investors thinking of investing in private companies through equity crowdfunding should beware. While private-company shares can now be bought relatively easily, selling them will likely prove more difficult.
Woman criticized by Christian neighbours for having a ‘relentlessly gay’ garden is crowdfunding to make her house even gayer
A bisexual woman whose neighbours have complained about her having a “relentlessly gay” garden has responded by crowd funding to make it “even gayer”.
Julie Baker, 47, says she received a typed note from an anonymous resident which she believes was posted in response to the rainbow coloured fairy lights she put up in her garden.
The note read: “Dear Resident of 4900 Kenwood Ave., Your yard is becoming Relentlessly Gay! Myself and Others in the neighborhood ask that you Tone It Down. This is a Christian area and there are Children. Keep it up and I will be Forced to call the Police on You! Your kind need to have respect for GOD.”
It was signed: “A Concerned Home Owner.”
The mother of four was shocked to find the note and does not know which of her neighbours sent it.
Crowdfunding used to be the wild child of finance. Now it’s become a big business, it’s having to knuckle down and face greater scrutiny.
In 2012, Emilie Holmes needed money to kit out her 1970s Citroen H van, and she needed it fast. With grand ideas for the old truck – she wanted to transform it into a travelling tea shop – she signed up as one of Kickstarter’s first UK projects and raised £14,500 in five days, which was 45 per cent more than her target.
“At the time, it felt serendipitous,” she remembers, midway through another round of funding, this time with Crowdcube. “It felt good to bring people together, and ever since, this community has been a really lovely source of support.” She will soon open a bricks-and-mortar version, with another not far behind.
When the concept of crowdfunding emerged in the UK around six years ago (Kickstarter launched its UK site in early 2013), it was seen as more of a philanthropic affair rather than an investment opportunity, often supporting creative projects where there was no expected financial return. Musician Amanda Palmer raised $1.2m (£770,600) in 2012 for an album and tour (controversially, given her existing success). A project on Indiegogo, “Fly Edward Snowden Fly”, asked for $200,000 (£128,500) to help the NSA whistleblower when he was trapped in a Moscow airport in 2013. It raised a few hundred dollars.
These types of projects still exist, and they still thrive with money raised from a wide network of investors, but crowdfunding itself has grown up. It attracts pitches for funds not only from small, existing companies, but also from very large and successful organisations, such as Adzuna, a search engine for jobs which is currently asking for £1.5m on Crowdcube, and is already overfunded with a week to go. JustPark, a website that matches drivers with the owners of spare parking spaces, raised £3.7m in 34 days earlier this year, also with Crowdcube.
Crowdfunding is often described as a “disruptive” force in financing. Bank loans and venture capital-backed funding are typically closed to start-ups or more unusual business ideas, and amateur investors don’t have access to a great number of potential cash cows, so crowdfunding fills this gap.
FTC files first ever complaint against a Kickstarter crowdfunding project
Crowdfunding platforms like Kickstarter have exploded in popularity over the past few years. As the number of funded projects has grown so have the number of projects that never deliver on their stated goals. The Federal Trade Commission (FTC) recently filed its first ever complaint with a Kickstarter project that did not provide its stated rewards to backers.
Launched in 2009, Kickstarter offers artists and entrepreneurs a platform to solicit funding from a wide audience for anything from potato salad to multifunction drink coolers. Project creators pitch their ideas to prospective backers and set fundraising goals. If a project meets its goal, its backers receive a reward based on the amount of money they pledged. If a project fails to meets its fundraising goals, then the backers receive a refund from Kickstarter. Likewise, if a project is funded but cannot deliver its promised rewards, the creator typically refunds their backers. The website earns money by taking a percentage of the money raised from projects that reach their fundraising goals.
Soliciting donations from backers online allows an entrepreneur to bypass traditional financing, which benefits small projects that would not otherwise qualify for a loan or venture capital investment. Additionally, crowdfunding benefits projects in research and development intensive industries such as virtual reality that will not turn a profit for some time to come. Unlike traditional financing methods, crowdfund backers receive neither an equity stake nor a monetary return on their investment. The most that backers will ever see is the reward promised to them on a crowdfunding website, even if that company is later sold to Facebook for $2 billion.
Since Kickstarter does not guarantee the receipt of rewards, there are no real protections for Kickstarter pledgers. The FTC complaint hinges on failed entrepreneur Erik Chevalier’s misrepresentation of how he intended to use the funds. While he promised to hire artists to design the board game, the money was instead used “on unrelated personal expenses such as rent, moving himself to Oregon, personal equipment, and licenses for a different project.” The fine that Chevalier agreed to in the settlement is less than the total raised on Kickstarter, and the projects backers will not receive a refund. Fortunately, another company called Cryptozoic Entertainment stepped in to publishThe Doom That Came to Atlantic City, so backers did not leave empty handed.
Crowdfunding is still relatively new, and the FTC complaint could be seen as growing pains. In combining elements of finance and fundraising, crowdfunding offers very little transparency to backers. It relies upon backers trusting creators, which has worked well so far based on the growth of Kickstarter. However, if too many projects abuse the trust of their backers, crowdfunding will quickly lose its appeal. The FTC complaint made an example out of one bad project, but enforcement will become more complicated as more money changes hands. In cases of malfeasance, consumers should get their money back from offenders. Websites like Kickstarter must take additional measures to weed out scammers so that project backers do not lose their faith in crowdfunding.
Judge: You Can’t Patent a Kickstarter-Style Funding System
A judge in New York has ruled that a 2011 patent for an invention that lets fans crowdfund creators’ work through a website is invalid, because it’s basically just the age-old system of patronage.
“Even the addition of an element of computer use is insufficient to render it valid,” the judge wrote.
The ruling came down in a case that was brought by Kickstarter, the Brooklyn-based crowdfunding startup. But the patent wasn’t Kickstarter’s: instead, it belonged to a 2000-era startup called ArtistShare, which operates on a similar model that lets fans fund their favorite artists in exchange for perks.
ArtistShare had been trying to get Kickstarter to license its patent, which describes what we now know as “rewards-based crowdfunding.” It’s basically a website that lets fans donate money to an artist in exchange for an “entitlement” (also known as a perk, or reward).
The present invention is directed to a system and method for raising financing and/or revenue by artist for a project, where the project may be a creative work of the artist. The method including registering, by at least one artist, with a centralized database, at least one or more projects, offering, by the at least one artist, an entitlement related to the artist in exchange for capital for the project of the artist. The method and system may also include searching, by an interested party, the centralized database, for the least one artist, registering, by the interested party, with the centralized database and accepting the offer by the interested party for the entitlement related to the project. The capital may then be forwarded to the artist and the entitlement provided to the interested party.
And an illustration from the 78-page patent application:
This is the type of patent that some in the technology world would criticize for being frivolous or overbroad, and ArtistShare’s actions are what some might consider patent trolling. ArtistShare’s application shows little originality, as confirmed by the ruling today, not to mention the fact that Kickstarter was in business before the patent was filed.
Rather than license ArtistShare’s patent, Kickstarter sued the company and asked a judge to invalidate the patent for being, in layman’s terms, not a real invention. (Kickstarter has not filed for any patents related to its funding model.)
“We’re pleased the court agreed that this patent is invalid, and we’re happy to see this case reach its conclusion,” Kickstarter deputy general counsel Michal Rosenn said in a statement. “This is a win for artists, ideas, and creative freedom.”
ArtistShare did not immediately respond to a request for comment.
Update, 6/30: ArtistShare CEO Brian Camelio posted a comment on his blog. “Regarding the Kickstarter case, we are currently reviewing the judge’s opinion and our options moving forward,” he wrote. “We are still very proud to have provided the blueprint for the crowdfunding industry by conceiving and launching the Internet’s first ‘crowdfunding’ website in 2003 and we look forward to continuing to innovate and help even more creative artists achieve their artistic dreams through both ArtistShare and latest endeavor FanFunded.com.”
BAKER, Calif., May 28, 2015 — The first UFO Hotel in America is no longer just a fantasy. The $30 million project in Baker, Calif., which is being spearheaded by a charismatic visionary, Luis Ramallo, will feature 31 rooms on two floors designed within a full-scale alien spacecraft where guests can spend the night in alien-themed rooms and dine in an alien-themed restaurant.
“We are tremendously excited about developing the first authentic UFO Hotel in the world, not just in America,” Ramallo says. “There are tens of millions of Sci-Fi and UFO fans in the world who have been dreaming of a venue just like this. They will finally have it.”
The UFO Hotel, which is in pre-construction development, will have an alien-themed lobby, spa, nightclub and other attractions, such as Sci-Fi fanatics and guests getting married in alien costumes — on their favorite planet.
“It will be out of this world,” Ramallo says with a laugh. “When you enter the hotel, you will feel as if you’ve been transported to an actual spaceship.”
Having already invested major funding into the project, Ramallo is seeking additional fundraising through investors and Kickstarter. He believes Sci-Fi fanatics globally will each kick in contributions to help fund what will be one the world’s most unique hotels and may rank among the biggest Kickstarter campaigns in history. The crowdfunding campaign provides backers with a wide choice of UFO Hotel exclusive contribution rewards from $1 to $10,000.
Room rates at the UFO Hotel will be competitively priced, beginning at around $300 a night – “an incredible bargain for a one-of-a-kind experience,” Ramallo says.
Alien-uniformed employees will use modern touch-screen technology to check guests in. Monitors will show scenes of activity from all around the spaceship.
As guests walk to their rooms, they will be able to twist various dials and hatch handles. If they turn the wrong one, a warning light and siren will flash, just like on an actual spaceship. There will also be unique photo-ops throughout the spacecraft with alien crew members re-charging themselves in pods.
Ramallo came to America 27 years ago from Argentina with $100 in his pocket. He soon created Alien Fresh Jerky near the infamous Area 51 in Nevada, where the intense secrecy of the U.S. Air Force base made the area a frequent subject of UFO folklore.
Ramallo later moved his business to Baker, Calif., where he kept the alien theme for the jerky business and soon came up with the idea for the UFO Hotel.
More than 750,000 people annually visit the Alien Fresh Jerky store, traveling along the Las Vegas-Los Angeles Interstate. Frequent visitors to the landmark store say they can’t wait to stay at the new UFO Hotel.
“It’s going to be one of the most unforgettable experiences ever,” says Carlo DiGregorio, who made his traditional stop at Alien Fresh Jerky on his return to Los Angeles from Las Vegas. His girlfriend, Jeanne Rodriguez, nodded her head in agreement. “I can’t wait,” she says.
Neither can the folks in Baker. The UFO Hotel will not only create as many as 100 new jobs in this withering desert town of approximately 650, but Ramallo expects the UFO Hotel to bring the city back to life.
“It’s going to breathe new life into this town,” says Jacob Overson, General Manager of the Baker Community Services. “It’s going to put Baker back on the map again. It will be a true tourist destination.”
The BidOkee team is thrilled that out project has been selected among five finalists for the Viatec Technology Awards in the category of Technology Strategy of the Year. Our developer-partners, Caorda Solutions, entered our project for consideration and we are stoked to be chosen as a finalist.
The awards celebrate the achievements of technology companies responsible for making Greater Victoria the fastest growing technology region in B.C., as well as the educators, creators and innovators that support this sector.
The Strategy of the Year award recognizes the best strategy implemented by or for a Greater Victoria organization. The judges will consider impact and results achieved from the underlying strategy.
BidOkee’s DIY crowdfunding platform was submitted as a MVP project – minimal viable product – as we develop a SaaS model – “software as a service” (try to keep up with the acronyms) – to disrupt the rewards-based crowdfunding industry.
BidOkee was selected from approximately 100 submissions. The awards will be announced on June 26, 2015 in Victoria B.C.
We are up against stiff completion, but simply to be shortlisted as a finalist makes us proud.
The California-based group behind the project says its computer is “built for work, play and everything in between.”
“It works just like any other computer,” Richard Reininger, one of the device’s creators, told CTV News Channel. “You hook up a monitor and a keyboard, then you can get online, surf the web, check your email, play games.”
The group behind the world’s cheapest computer first set out to create a piece of cost-effective hardware for a camera they were building, and hoped that other inventors could also put it to use.
“Once we hit the specification point and the price point, we realized that this has larger ramifications that just the maker community,” Reininger said.
C.H.I.P. blew past its $50,000 fundraising goal, amassing more than a million dollars in a week when it launched in early May. The campaign will stay open until June 6.
Unlike a laptop, C.H.I.P. can’t function as a standalone computer — but for a total of $49, the group will also include a handheld screen and keyboard device with a five-hour battery life.
For a bit less money, you can get an adapter shipped with the computer that will let you hook it up to any television screen or computer monitor you already own.
C.H.I.P has built-in Wi-Fi and Bluetooth along with four gigabytes of storage. It’ll run word processors, video games and thousands of other open source applications, according to its creators.
With its practically non-existent price tag, Reininger sees the device as something that could have an impact in parts of the world where people don’t have easy, cheap access to computers.
“A nine-dollar computer that does computer things, it turns out, is a pretty big deal.”
The recently released Regulation A+ is the first section of the JOBS Act that allows a company to raise capital from the general public. By opening up private company investments to the “crowd,” Regulation A+ promises to be a game changer for how emerging companies are funded. It’s the first nationally available form of equity crowdfunding to non-accredited investors.
This will not be as easy as a Kickstarter campaign, however. Raising capital with Regulation A+ will involve more than going online, creating a crowdfunding campaign and watching the money flow in. Regulation A+ involves the sale of equity or debt in your company and is governed by securities laws. This means (cue maniacal laughter) attorneys’ fees, accountants’ fees and compliance costs. Raising $50 million under Regulation A+ is going to require your company to invest money in the process.
The question is: Can Regulation A+ be affordably used by startups and small businesses?
The first thing to understand is that there are two “tiers” of Regulation A+. Tier 1 allows a company to raise between $1 million and $20 million, and there are no limits on the amount that an individual non-accredited investor can invest. Tier 2 allows a company to raise between $1 million and $50 million, but non-accredited investors can only invest 10 percent of their income or net worth in each tier 2 offering.
There are different rules and costs associated with each tier. Both tiers will have sizeable costs for SEC compliance and legal fees (damn those lawyers). Tier 1 will have costs for compliance with state securities laws or “blue sky laws.” While tier 2 doesn’t require you to comply with the blue sky laws for each state, it will have more onerous accounting, auditing and ongoing SEC reporting requirements.
Both tiers have legal fees and SEC compliance costs, so let’s tackle that ugly subject first. When the law becomes effective on June 19, expect most of the big securities law firms and lawyers to quote ridiculously large bills of more than $100,000 in legal fees and compliance costs.
The reality is, there are competent entrepreneurial-minded lawyers who will charge far less, so shop around, but be sure to check credentials and hire someone who knows the JOBS Act and the Regulation A+ process. Also, as time goes on, expect to see legal fees and compliance costs come down, particularly as innovative companies find ways to automate the compliance process, and as lawyers become more comfortable with the new law.
The two remaining factors are the cost of complying with state blue sky laws (in tier 1) and the cost of two years of audited financial statements (in tier 2).
The tier 1 cost of complying with blue sky laws in all 50 states could run in the tens of thousands of dollars. Some big law firms may even quote six-figure fees. Worse than the cost, the time wasted by having to deal with 50 different state securities regulators could make this process akin to having all of your teeth pulled, one at a time, without Novocain. Because of blue sky compliance, tier 1 only makes sense for a business that is raising money in a contained geographic area and does not need to comply with more than one or two state blue sky laws. Other than that, I believe most companies will use tier 2.
The major expense of tier 2, two years of audited financials records, seems like a deal killer for many small businesses. CPA audit costs of more than $25,000 per year are not uncommon for a revenue producing, young business. One CPA I discussed this with says innovators in the accounting industry will find ways to make these audits work.
“If a startup is new, and does not have significant financial history, there is no reason an audit should be so expensive,” says Craig Denlinger, who left a big six firm to start an accounting business geared towards the JOBS Act market.
Denlinger is right. I have seen quotes from entrepreneurial-minded CPA firms willing to do startup audits for as little as $2,500.
So what will the ultimate cost of Regulation A+ be? As a crowdfunding and JOBS Act attorney who has been fielding Regultaion A+ calls non stop for the past month, I suspect that the minimum a company will need to spend at the onset, with the right lawyer, the right accountant and the right compliance company, will be at least $50,000.
While that seems like a lot for a startup to swallow, how often can a company invest $50,000 into something that will allow them to raise $50 million from the general public? The best news is Regulation A+ allows a company to “test the waters” before spending a ton of money. This means you can approach potential investors and gauge their interest before you spend thousands on putting together all of your filings with the SEC.
Kendall Almerico is a business and crowdfunding attorney with law firm of DiMuroGinsberg in the Washington, D.C. area. He is CEO of FundHub.Biz, which provides an equity crowdfunding and private equity compliance and due diligence website.
What If Crowdfunding Becomes The Leading Source Of Finance For Entrepreneurs Or Growing Companies?
Can crowdfunding offer a viable source of funding to growth orientated businesses around the world? 2015 promises to be a big year for crowdfunding in terms of the role it may play in getting entrepreneurial ventures off the ground. What might that world look like if it became the leading source of finance for companies starting out? To that end, one has to better understand the phenomenon and its rapid expansion to date.
Why now? In 2014, the total global capital raised through crowdfunding platforms stood at $16.2 billion, according to a study by crowdfunding research firm Massolution, which was cited by the Economist. The number of crowdfunding platforms has experienced dramatic growth over the past decade. In Europe alone, I’ve observed the number of platforms growing from less than a dozen in 2009 to more than 10 times that in four years. Policymakers, to a large extent, have catapulted crowdfunding into global awareness.
The Jumpstart Our Business Startups ACT in the U.S., and similar legislation across the world, opened the “regulatory door” to this innovative funding approach. Before the act was passed in spring 2012, crowdfunding sites could reward investors with just products or discounts. But the act has given them the freedom to offer backers a stake in the business.
By analogy, the origin of the venture capital industry is often credited to another regulatory change, the Prudent Man Rule of 1979, which allowed U.S. pension funds to allocate a fraction of their assets under management towards risky investments. A supportive regulatory environment will be instrumental to the continued growth of crowdfunding as a credible and persistent alternative. It follows that crowdfunding will proliferate in those countries where regulators can balance the potential – and challenges – associated with the funding source.
Of the different types of crowdfunding models, there are four in particular experiencing high levels of traction:
Donation‐based (where contributors are motivated by social or intrinsic goals)
Rewards‐based (where contributors are effectively pre‐purchasing a product or service)
Debt crowdfunding (where contributors receive a debenture)
Equity crowdfunding (where contributors receive an equity stake in the funded company)
Success and failure can look very different for venture capitalists and crowdfunding investors. Oculus Rift, the virtual reality headset developer, is a case in point. In 2012, the company secured $2.5 million from more than 10,000 individuals on the reward‐based platform Kickstarter. Yet, the $2 billion Facebook acquisition two years later did not generate the anticipated jubilation among the crowd who’d supported the deal from the start.
Rather, the media reflected contributors’ disappointment and anger, such as “I backed Oculus Rift on Kickstarter and all I got was this lousy T‐shirt.”
The discussion charts the nature and scope of crowdfunding’s ultimate success. New pools of capital will become available alongside traditional investors (i.e., angels, VCs or banks) as well as in previously underfunded domains (e.g., deployment of renewable energy solution or social housing).
The key to realising such potential is threefold. First, it calls for informed entrepreneurs and contributors. Of course, financial reward is a marker of success. But it’s also important for entrepreneurs to recognise the value of fostering strong relations with their contributors, keeping their own ambitions and their contributors’ reasons for supporting them aligned. Second, the funding landscape will need to adapt to specific demands.
Different crowdfunding solutions will suit different start‐up phases, for example working capital needs may be financed through pre‐order sales on reward‐platforms, while specific objectives such as meeting upfront fixed costs might be done via contributions on donation‐platforms. Third, it will need a robust regulatory framework to support its development and growth. The right regulatory oversight will reflect the realigned landscape and offer a prudent environment that ensures transparency and safeguards to the crowd of investors.
Dr. Gary Dushnitsky is an Associate Professor of Strategy and Entrepreneurship at the London Business School. His work focuses on the economics of entrepreneurship and innovation.
It’s that time of the year again where I look into my dusty crystal ball and (attempt to) offer wisdom and intelligence. Lucky you. Forecasts are a difficult enough practice in normal circumstances, let alone an election year, but that said it’s highly likely that SMEs and crowdfunding will escape the ravages of any electoral earthquake. Politicians thankfully don’t mess with the little guys. Those dirty banks though, easy pickings. So here you are, the six epic trends, which will transform crowdfunding in 2015.
Reasons to be cheerful – part 1
Crowdfunding is gearing UP to kick ass
As investors and businesses awareness of crowdfunding grows in 2015 the already heightened interest in crowdfunding will turn into a flood. Crowdfunding has been a novelty, with the media interest partly due to the fact that finance is actually incredibly boring to report on. Stocks, shares and banks miss the human touch. Crowdfunding is an exception to the rule. It’s about the people, stupid! As crowdfunding goes mainstream, 2015 will bring normalisation to how the crowdfunding process is perceived.
Reasons to be cheerful – part 2
UK government support for crowdfunding will endure and grow
Next year is election year, and as you know it’s hard to say in election years what measures the new incumbent party will choose to support. There has been little on the political landscape to support any argument that political support for the alternative finance sector will change. In fact, with the UK discovering a world-leading niche with the fintech sector, support for tech and finance is likely to grow, even potentially through direct government investment. Further tax incentives, changes in the way banks treat failed loan application and greater awareness at the very top, will ensure continued strength in the already rapidly growing industry.
Reasons to be cheerful – part 3
The entrance of mainstream companies and banks into the crowdfunding scene
There are smatterings of rumours within the industry that many of the old digital guard (Paypal, Ebay, Amazon) are looking at the sector as a way to build fresh new revenue models. In 2015 we will start to see an indication of how they will look to mobilise their large networks within crowdfunding. Likewise banks, which have viewed the sector with utter ambivalence, are starting to take notice. Whilst banks are utterly constrained by regulation, and therefore struggle to compete with new innovative business models, it is safe to expect to see banks investing and partnering up with crowdfunding sites. The effect of their entrance could transform the sector (I’ll leave it to you to decide whether that’s a good/bad thing).
Reasons to be cheerful – part 4
The FCA is about to turn the heat UP
In a growing young industry there are always going to be catch up between good practice, as defined by the regulators, and the crowdfunding sites themselves. Expect the FCA to make examples of bad practice. Lots of them. This will help crowdfunding in the long run in become the strong trusted industry everyone is forecasting.
Reasons to be cheerful – part 5
Crowd-lending ISAs are a BIG deal
2015 will bring a third ISA to the market, which will be based on loan-based crowdfunding. Can’t really understate the massiveness of this one. Many have as a consequence forecast that this will open UP access to £50bn a year of retail money. By all accounts this will be a huge transformation within the crowdfunding world, as well as signalling that crowdfunding is going mainstream. Also public awareness of crowdfunding will be transformed this time next year due to this change. Exciting stuff.
Reasons to be cheerful – part 6
Worldwide crowdfunding will continue to grow massively
Whilst the UK is the most advanced western crowdfunding marketplace, worldwide crowdfunding is catching up. A recent report suggesting crowdfunding was growing at 10x the rate of Moore’s Law. WOW. Alternative lending will continue to grow at around 200% a year globally. The 2013 Massolution report suggested that global crowdfunding had reached circa $5bn. With Nesta in Nov suggesting the 2015 alternative finance market in the UK alone would reach £4.4bn, it’s clear that global figures are going to be much higher. #theonlywayisUP
Reasons to be cheerful – part 7 (I lied when I said there were only 6 reasons – this one is HUGE)
P2P lenders tax relief
‘The government will introduce a new relief to allow individuals lending through P2P platforms to offset any losses from loans which go bad against other P2P income,’ said the Autumn Statement document. I think that sums it up nicely. Expect more investors viewing P2P as a viable lending option, in a similar vein to SEIS and EIS on the equity side.
There you have it. It’s safe to say that 2015 will be exciting for everyone involved in crowdfunding. It’s not just massive growth within the sector that is so intoxicating, but the way more and more businesses, investor and ordinary people are looking at crowdfunding as a weapon of empowerment. Now that can’t be a bad thing. As a site which works with every part of the UK’s crowdfunding world, we at UP are pretty excited to be launching with this backdrop. Bring on 2015.
Selequity Is A Crowdfunding Platform For Investing In Commercial Real Estate
For those who are looking to invest in real estate, finding good opportunities can be difficult. In commercial real estate, unless you know a property owner or developer, it’s nearly impossible to get your foot in the door. But today onstage at Disrupt NY, a company called Selequity has launched a platform that will make crowdfunding real estate investments much easier.
The platform was founded in part to help people who are seeking capital to fund real estate projects get funded more quickly. By lowering the barrier to entry for investors, and providing them with information about investment opportunities they might not have known about, Selequity can dramatically speed up the amount of time it takes to get projects started.
Selequity — and other platforms like it — have popped up recently in part due to the JOBS Act, which relaxed some rules around general solicitation of private fundraising processes. As a result, sponsors can now publicly list projects they’re seeking money for instead of being limited to private conversations that take place only with people in their networks.
By providing a platform for those listings, Selequity increases the chances that accredited investors not currently connected to specific sponsors can find out about new opportunities and invest. More than that, though, the platform can be used to help manage all the messy details that come along with real estate investing.
The technology platform was built to give owners a way to make all the information around their properties available to investors. It was also designed to help them manage all the documentation and communications necessary with investors. In that way, sponsors are expected to use the platform not just to find new investors, but also to manage investments from people within their existing networks.
The founding team of Selequity consists of professionals who have spent the past two decades in the commercial real estate world. That includes two founders — Mark Burkhart and Bill Florent — who helped build Cassidy Turley into the third-largest real estate brokerage in the U.S., as well as AJ Chivetta and Maria Desloge, who served as their legal counsel at Armstrong Teasdale.
With that experience, the founders are uniquely positioned to source deals and connect sponsors with investors to fund their projects. They’re also building the tools they would have liked to have to help manage their business.
For now, Selequity is focused solely on deals for commercial real estate projects instead of working with sponsors on single-family or multi-tenant residential properties. It also isn’t working on new real estate developments, preferring existing properties over those that are still in the development phase.
According to founder and CEO Chivetta, doing so simplifies the process and also makes understanding the risk profile of investments much easier. Over time, however, the company could increase the breadth of its investment opportunities.
Of course, Selequity isn’t alone in the real estate crowdfunding space. Platforms like RealtyShares and Fundrise have been in operation for the last couple of years. But the experience of Selequity’s founding team could help give it a leg up in what is sure to be a fast-growing segment of the investment market.
Question and Answer session
Q: How many investors for each project?
A: It depends on the capital raise, but we think it will be in the tens, not the thousands.
Q: Can you talk about the competitive space and where you fit. Also, technically can you talk about equity versus debt?
A: We believe that this will emerge around quality projects and valuable tools. Will fit either a debt or equity side of the technical stack.
Q: What do you have on the site or in the pipeline?
A: We just launched today, so don’t have projects. We’ll have projects in the coming months.
Q: What kind of investors do you see — new, unsophisticated investors or those who already have a network?
A: Even for sophisticated owners, moving the technical stack, we see them moving their investors onto this platform.
Q: What’s the pitch?
A: The pitch is, we’ll save you time, we’ll save you money.
Q: What’s the value add?
A: The value-add is services, it’s a services business.
Q: Is there technology you have that others don’t have?
A: The difference is the models we have around the template, highlighting and educating investors about what is important for each type of property.
Crowdfunding was meant to democratize finance and help the best ideas for changing the world have a chance to succeed. But as usual, humanity is trying to sabotage that mission.
We were joking in the office the other day that the way you know something has truly reached the mainstream when people start using it in ignorant ways. Sure, we were being cynical — we are journalists after all, right?
In a way, we’ve found that’s the case with crowdfunding. As more and more people discover its powers, they’re using it for a wider variety of reasons — and not all are for the advancement of society.
I’m a firm believer in crowdfunding (disclaimer: My co-author, Jason Hiner, and I crowdfunded our book project in early 2015 on Indiegogo). Crowdfunding is democratizing finance and allowing a more diverse population to have more opportunities to realize their ideas and find a community that supports them.
The downside is that not everyone knows how to grow a sustainable business. Not everyone wants to use crowdfunding to make sure the best ideas rise to the top. And lately, those types of crowdfunding campaigns — great click bait and traffic spikes as they are — have overshadowed all the campaigns for social good.
Here are five ways humanity is sabotaging crowdfunding.
1. Crowdfunding things that don’t deserve money
I’m talking about campaigns for things like the pizza restaurant owners that backed the discriminatory “religious freedom” bill in Indiana earlier this year and decided not to cater gay weddings. The GoFundMe campaign to support their business up raised more than $800,000. According to the page, it was “To relieve the financial loss endured by the proprietors’ stand for faith.”
Or, take the white South Carolina police officer charged with fatally shooting an unarmed black man on video. Someone tried to start a GoFundMe campaign to raise money for the man, but the company said it violated terms and conditions so it took it down. They turned to Indiegogo, who took it down soon after as well.
A similar thing happened last year, when a GoFundMe page opened for Darren Wilson, the officer identified in the shooting of Michael Brown in Ferguson, Missouri. That campaign raised about $235,000 before it was shut down because of terms and conditions violations.
The internet allows for anyone to say anything, defend anyone. That is its greatest asset and its biggest downfall. However, for people trying to make a difference with crowdfunding, campaigns like these are giving crowdfunding somewhat of a bad name, and capitalizing on the misfortune of others.
2. Financing college degrees
According to the Federal Reserve Bank, outstanding student loan debt in the US is anywhere between $902 billion and $1 trillion. So yes, affording college tuition is difficult for most people in this country.
To avoid that debt, some students are turning to crowdfunding. In 2013, a girl started a GoFundMe account to raise money for her Harvard tuition. However, she already had more than $50,000 in loans and outright admitted she was desperate. Another girl tried something similar on another platform and didn’t receive much of a response beyond close family and friends.
It’s resourceful, I’ll give them that. And, if someone can get the word out enough to fund their entire college tuition, props to their social media skills.
3. Crowdfunding food
First there was the Kickstarter for potato salad, which started out as a joke and turned into a viral sensation that taught a lot of people about crowdfunding. The guy threw a party with the $55,000 he raised, and he’s also trying to land a television gig from his 15 minutes of fame.
There are quite a few other food campaigns on the platforms, including some about making a loaf of bread or a cake, and others like expensive speciality Kombucha.
But, there are some interesting ideas on Kickstarter and Indiegogo for food trucks, organic food businesses, and family businesses. One woman started a company called Kuli Kuli, which is an energy bar made with a superfood called moringa and is being made by women’s cooperatives in West Africa.
Or there’s the Flow Hive, which is the highest funded Indiegogo project of all time. It raised $12 million for an innovative beekeeping system that allows honey harvesting without disturbing the bees. The goal was originally $70,000. Apparently, an efficient beehive was a pressing need.
4. Empty promises
If a campaign gains enough popularity — especially if it’s covered by the media — it has a high chance of being fully funded. The rush of pre-orders, the excitement and buzz — all that can become the foundation for a great business.
But, all that hype with little preparation can lead to delayed timelines, and sometimes, the product never comes to market. In the case of the Kreyos smartwatch, the product turned out to be an utter failure. That campaign raised $1.5 million, but then failed to ship until more than a year later, and had multiple issues.
And of course, it’s the internet, so ideas are stolen. For example, this woman made a little product called the Pluck N’ File, then found out her Indiegogo campaign was also running on Kickstarter by someone who ripped off her campaign. And there’s really not much legal protection for intellectual property yet for these types of situations.
5. Crowdfunding generally selfish things
Here’s a perfect example: Some young man decided he was worried his girlfriend would cheat on him when she and her friends went on a spring break trip to Miami, so he asked the internet for $300 to accompany her, writing: “If you know anything about Miami, you know that she shouldn’t go without a chaperone.” He was funded.
Besides crowdfunding the perpetuation of misogyny, people are also raising money for less alarming things, like honeymoons, weddings, even babies. Crowdfunding to find and pay for a surrogate is a growing trend, which has been raising some ethical questions about having a mass of complete strangers responsible for the birth of your child — though the fact that people will donate money to potato salad is perhaps more questionable than donating to fund a family.
Another example is the young woman who wasn’t too happy with her Uber tab after a night out and said she couldn’t pay her rent, so she took to the internet to raise money to cover the $362 tab. She raised more than enough money, and it did draw attention to the ridiculous surges in Uber prices on holidays.
On the bright side, there are plenty of inspiring, altruistic campaigns out there, so we’ll end on a good note: This year, there have been a variety of campaigns funding rescue efforts for people affected by the Nepal earthquakes. Some reports estimate that with GoFundMe, Crowdrise, and Indiegogo, more than $4 million has been raised. And that’s what crowdfunding was meant for — to have people come together to solve a real problem.
About Lyndsey Gilpin
Lyndsey Gilpin is a Staff Writer for TechRepublic. She covers sustainability, tech leadership, 3D printing, and social entrepreneurship. She’s co-author of the upcoming book, Follow the Geeks.
Crowdfunding for businesses is a new opportunity, but is it a safe place to put your investment dollars?
In 2012, director Steve Taylor embarked on a Kickstarter project just short of impossible: His goal was to raise $125,000 in 30 days after financial backers pulled funding for his movie “Blue Like Jazz,” an adaptation of Donald Miller’s best-selling memoir.
With the help of two fans, Taylor’s campaign blitz succeeded big – as in history-making big. It netted $346,000, a record fundraise for any film project on a crowdfunding platform. And as a promised perk, Taylor made thank-you phone calls to every person who pledged. All 3,500 of them.
Now, with the advent of investor-based crowdfunding, there’s a better way to thank those who pony up dough: by offering them a piece of the financial action. Would Taylor consider it for a future project? “I’d do it in a heartbeat if it could retain the elegance and integrity of Kickstarter,” he says. “But it needs an ingredient the movie business doesn’t understand: transparent accounting.”
Taylor has a point. Since President Barack Obama signed Jumpstart Our Business Startups (the JOBS Act) in 2012, it paved the way for small businesses and startups to raise capital from just about anyone, through the Internet and social networking sites. Yet some experts have urged caution as equity-based crowdfunding gathers steam.
“Like all private investments, these are high-risk,” adds Rory Eakin, co-founder and chief operating officer of CircleUp, a leading equity crowdfunding marketplace that teams up investors with consumer and retail companies. For as little as $1,000, an investor can get a piece of the pie – or scoop of the ice cream, as one of the companies on CircleUp is Alchemy Creamery, a business that makes dairy-free frozen desserts.
An early equity-based investment could result in a big return. But as Eakin acknowledges of crowdfunded hopefuls, “Many of the companies are very early stage and could end up not being successful.” To improve the odds for investors, CircleUp is picky about which companies can raise capital through its site. It has accepted only around 100 of the more than 5,000 that have applied since 2012.
Until now, equity and debt crowdfunding was available only to accredited investors – those the Securities and Exchange Commission defines as having at least $1 million in assets (excluding a main residence) or annual income greater than $200,000 in each of the past two years. But in late March, the SEC adopted what it calls Regulation A+, meaning non-accredited investors can now join the fray.
“The potential upside for investors is that they will be able to review a large number of alternative investments through crowdfunding portals,” says Jacqueline M. Benson, partner at Moye White LLP, a law firm in Denver. “The major concern about crowdfunding is that unsophisticated, unaccredited investors may not understand the true risk of investing in early-stage companies. Not to be all Debbie Downer about early-stage investments, but most early-stage companies do not achieve the level of success that they anticipate on the timeline they estimate.”
Nor will the companies hoping to attract money necessarily have it easy. “The SEC must have graded itself on a very generous curve, because once the cost and time involved are considered, Regulation A+ is more like a B-,” says Jeffrey A. Kelley, senior vice president of Equity Institutional, based in Westlake, Ohio. “The cost of completing the necessary documents has been estimated to be about $100,000.” By the way, that doesn’t include accounting fees to meet reporting requirements, state regulatory fees or costs to promote the crowdfunding opportunity.
Will entrepreneurs want to give crowdfunding a second thought, then? “As someone who has founded a startup, it has become clear to me that all money is not created equal,” says Taylor McPartland, co-founder of CrowdfundX, a Los Angeles-based crowdfunding agency that works with top brands and celebrities. “I would rather give more equity to one or two investors who were very strategic and provided me with insights and introductions than several hundred investors who want their money back if the company doesn’t turn into the next Snapchat.”
“Entrepreneurs funded by lots of smaller investors receive less oversight, and receive less valuable guidance, than those backed by a few larger investors,” adds Clifford Holekamp, senior lecturer in entrepreneurship and director of the entrepreneurship platform at Washington University in St. Louis’ Olin Business School. “Founders might operate their businesses with less discipline when their funders are less engaged and more distant.”
That established, companies that jump trough all the hoops – and attract smart investors – will stick out from the crowdfunding crowd as much as any clever Kickstarter campaign. (Taylor gave his effort urgency when he dubbed it “Save ‘Blue Like Jazz.’”)
“Poorly managed firms and downright charlatans will come and go, but that doesn’t mean crowdfunding is a bad idea,” says Kim Kaselionis, founder and managing partner at Breakaway Funding LLC in Sausalito, California. “A good rule of thumb is to learn the rules of engagement and build an understanding of the pros and cons as well as the pitfalls of the marketplace – and not to fall for the hype some firms will subject you to.”
In other words, “Don’t invest your life savings,” Chris Tsai, CEO of Celery, a key player in the rewards-based crowdfunding realm. “Start small, and get to know the space. Choose projects that are transparent, ideally with a good track record of delivering on previous promises.”
Whether investors strike it rich or strike out, at least the crowdfunding sector itself appears headed for success. McPartland points to a March report by Massolution that shows that more than 1,200 active crowdfunding platforms raised a total of $16.2 billion in 2014. That’s a 167 percent jump from the $6.1 billion raised in 2013.
Yet the monetary possibilities only tell part of the story. “The real reward for crowdfunding investors isn’t financial,” Holekamp says. “It’s the opportunity to participate. Helping an entrepreneur achieve their dreams, and being a part of a company that changes its industry – or maybe even the world – is exciting and personally rewarding. Everyone should have the freedom to make a difference with their dollars.”
Raising startup money on the Internet has been a relatively easy ride for Sohaib and Ali Zahid, co-founders of a Toronto-based high-tech bicycle-manufacturing firm.
But the company, Vanhawks, may face bumps later when it files a tax return with the Canada Revenue Agency.
The bikes, which Vanhawks plans to ship this summer, will combine carbon fibre frames with software. The company’s app will connect the bike to the rider’s smartphone, calling out routes turn by turn, detecting blind spots and warning when thieves are nosing around.
“If someone’s touching your bike, you’ll get a notification,” says Ali Zahid, who is Vanhawks’s co-founder and chief operating officer.
The way Vanhawks has raised money is also cutting edge – it pulled in $820,000 last year through the crowdfunding site Kickstarter, when its goal was a mere $100,000.
A Canadian-built bicycle by Vanhawks. (Alex Choi)
What does the CRA have to say about raising money through crowdfunding sites such as Kickstarter or Indiegogo? “We’ve talked to our advisers. For safety we have put some money aside” for taxes, Sohaib Zahid says.
Tax experts say this is wise. Crowdfunding has been around since the past decade, but the revenue agency’s approach to it is a work in progress.
“The tax treatment of crowdfunding is evolving,” says Aurèle Courcelles, director of tax and estate planning at Investors Group in Winnipeg.
At first, the CRA’s general view was that any money raised by crowdfunding would be taxable. But it’s more complicated than that.
“The position has changed because crowdfunding can be used for a number of purposes. It could be a charitable effort, it could be a company trying to find investors, it could be a loan or gifts. Now it depends on the circumstances,” Mr. Courcelles says.
Sohaib Zahid, co-founder of Vanhawks, a Toronto-based high-tech bicycle-manufacturing firm. (Kim White for The Globe and Mail)
“We see ours as deferred revenue,” Ali Zahid says. In return for sending money last year, donors to his company on Kickstarter will receive a Vanhawks’ bike, when they start shipping in July, at a slight discount. (The company’s models will be sold online and retail for between $1,249 and $1,449.)
“We see it as you’re buying a product and Kickstarter is the distribution channel,” Ali Zahib says.
“It’s a new area,” says Robert Kepes, a partner at the Toronto law firm Morris Kepes Winters LLP. “You have to distinguish the different kinds of situations, such as where you’re not raising money for a product.”
He notes the case of 32-year-old Toni Morgan, a Toronto high-school dropout who later worked so hard that she was accepted to Harvard University, and has raised more than $50,000 for tuition through crowdfunding.
“She would be okay,” because nobody is making a profit from the donations, Mr. Kepes says. “It’s more along the lines of a philanthropic endeavour.”
The CRA noted in April that it “understands that crowdfunding is a way of raising funds for a broad range of purposes, using the Internet, where conventional forms of raising funds might not be possible.”
The agency’s approach “is to evaluate each situation on a case-by-case basis.”
Ali Zahib says Vanhawks just completed its year-end bookkeeping. “It’s a tricky area,” he says because in addition to the crowdfunded money, the company has additional backers. “We have funders from all around the world. Essentially we have to make sure that for the Canadian funders we pay taxes,” he says.
“The tax treatment of crowdfunding is evolving.”
Aurèle Courcelles, director of tax and estate planning at Investors Group in Winnipeg.
Some of this will be offset by the cost of the bikes they ship and by other expenses, such as the GST or HST they spent on company-related purchases. The CRA’s April note says that “any reasonable costs incurred by the taxpayer that are related to such a crowdfunding arrangement would likely be deductible in computing that income.”
Dealing with crowdfunding is even more complicated for Canada’s provincial and territorial securities regulators, Mr. Kepes says. The CRA says crowdfunding is not taxable if it’s clear that the money is “a loan, capital contribution or other form of equity,” but this can trigger filing requirements so investors know what is happening to their money.
The trickiest situations can arise when a crowdfunder isn’t sure whether what he or she is doing will actually become a business. Some people might start raising money for something they consider a hobby or a pastime and then find once the crowdfunding begins that they can make a living.
Mr. Courcelles muses about how the tax department might treat the efforts to use crowdfunding to buy the infamous Rob Ford videos allegedly showing Toronto’s then-mayor smoking crack.
“How would you treat that?” he asks. “In the end they never did get the video, so is the money that was raised taxable?”
When Medigram, a Silicon Valley startup that makes a messaging app for medical professionals, wanted to raise money earlier this year, it enlisted the help of Microventures. The online marketplace, also based in the Valley, quickly lined up “hundreds of thousands” of dollars from about 20 individuals, says Medigram’s co-founder and chief executive officer, Michael Chiu. He credits the website, which connects investors to entrepreneurs, with making the fundraising process “a lot more streamlined” than having endless meetings with venture capitalists.
Microventures says it’s the first U.S. marketplace to use a crowdfunding model to sell equity stakes in private companies to wealthy investors. To do that, it had to register as a broker-dealer. Since closing its first deal in 2011, Microventures has handled more than $8 million in equity sales through 25 completed private placements and has six more in motion, according to CEO Tim Sullivan. Other, far bigger sites such as Kickstarter and Indiegogo, which have raised hundreds of millions of dollars for creative projects and business ventures, don’t offer ownership positions or financial returns, though backers sometimes receive gifts.
Microventures is going to get some competition, thanks to the Jumpstart Our Business Startups Act President Obama signed in April. The new law may permit almost anyone to buy shares in private companies advertised on crowdfunding sites. The Securities and Exchange Commission is drafting rules for the fledgling industry. Indiegogo co-founder and CEO Slava Rubin thinks the equity model could “complement” his “perks-based” model.
“When I started Microventures, I said, ‘Why isn’t anyone doing this?’ ” recalls founder and President Bill Clark. His answer? Beyond the “hard work” involved in complying with securities laws, “if you’re doing a deal for $250,000, which is our average deal, there’s not a lot of meat left on the bone for a broker-dealer who is used to making $500,000” in fees per deal.
Another equity stakes crowdfunding site, CircleUp, launched in April in San Francisco and is partnered with broker-dealer WR Hambrecht. It’s done six deals averaging “around $1 million” and charges companies a commission “in line” with investment banks, says co-founder and CEO Ryan Caldbeck.
The SEC has been studying crowdfunding companies. The agency “has come in and asked us a lot of questions,” says Microventures’ Sullivan. Among other things, regulators are interested in the firm’s due diligence process, which screens out “fly-by-night operations.”
The securities industry regulator’s rules are due by yearend, though many across the industry expect the agency to miss its deadline. “We did say at the time that the deadline in the statute would be challenging,” Meredith Cross, director of the SEC’s Division of Corporation Finance, said at a Nov. 15 forum for small businesses, “and it is.”
Stephen Graham, a managing partner at law firm Fenwick & West, thinks it will be the crowdfunding sites themselves and fast-growing startups that will reap the biggest benefits from the new provisions. Once the regulations are in place, “you’re going to have a compliance regimen and a need for securities law expertise,” says Graham. The additional financial burden will “shut out” Main Street businesses, “whether it’s a beauty parlor or a gas station,” he adds.
The potential for fraud remains the biggest concern for regulators. “You’re going to have people investing in companies that weren’t able to get the VCs’ attention, that weren’t of the quality a VC was looking for,” says Lynn Turner, a former chief accountant at the SEC who opposed the legislation. “Then you’re going to let the leftovers go try to raise a lot of money via crowdfunding, and they can do it without putting up the necessary warnings and disclosures to investors. That’s really stupid.”
MINNEAPOLIS – The crowded field of crowdfunding is filled with many voices asking and begging for the most you can give online.
“How many people will roll down their window and give a dollar to the guy at the street corner and the next person will say go get a job! So I think that same kind of psychology is at work in this kind of giving,” Kevin Sauter, an expert on social behavior, at the University of St. Thomas said.
The launch of crowdfunding happened about seven years ago.
Indiegogo broke the mold but Kickstarter came shortly after and took the lead.
To date Kickstarter owns the largest market share of crowdfunding.
“Their original founding principal was they wanted to help artists that didn’t have money to get going so they wanted to create a platform to find people to support them,” Gordon Burtch, a crowdfunding expert at the Carlson School of Management said.
Kickstarter exploded, funding every single art or business venture you can imagine.
The chefs of the restaurant Travail in Robbinsdale used it and raised $255,000 in one month to help offset the costs of building a bigger newer restaurant space.
But not everyone is that fortunate.
Kickstarter has a rule.
It’s all of nothing funding meaning the goal amount you set for your fund be met in full over a specific amount of time.
Laura Bonicelli knows the rules as well as anyone, she has a Kickstarter account active now to raise $60,000 before her May 8 deadline.
“We are cooking for people who need food,” Bonicelli said explaining what her vision is for Bonicelli’s Kitchen in Northeast Minneapolis.
She says her kitchen will in really be three concepts in one.
First it will be where she prepares fresh meals to deliver to people, as she has already been doing, on a daily basis.
Second, it will be a restaurant with a bar.
And third, it will be a bit of a corner store.
“We really do need this money to complete this project. We have our base funding but to get everything we need, we need this money,” Bonicelli said.
Working so hard to make that goal does beg the question.
Why does she have to work so hard for $60,000 when others seemingly don’t have to work as hard to make ten times as much?
Straight up why does one campaign for cash out-do the other?
A few reasons but one big one sticks out; popularity rules the day.
“People look for social proof. If they see other people giving you money they start to think oh maybe this person is legit. Maybe this is a good thing for me to do too,” Burtch said.
That means if you live on social networks and have 10,000 friends that’s broad reach.
So if you, as the popular person, give to a cause and share it, well, that’s an ad targeted to all of your online peeps.
Basically, if your cause becomes the cause du jour, you win.
“I’m not exaggerating when I say this but I nearly passed out,” Taylor Callais said when he recalled the moment he was told his dog had cancer a few weeks ago.
Duke the dog didn’t do anything to get cancer. It’s just bad luck.
So when Taylor and his wife wondered how they could afford the surgery they worried, and then someone suggested a modest ask on GoFundMe.com
“We started the page the day after we found out about it and by the end of the day Saturday we had already raised $1,000,” Callais said.
The couple was asking for $3,500 on GoFundMe to pay for the surgery and they got pretty close to it.
That’s not a total loss, like it would be on Kickstarter.
Taylor does get whatever money is raised on GoFundMe, that site doesn’t require you hit your target but the company does take a percentage from every donation for their overhead costs.
But what is interesting about all crowdfunds, and was true for Duke’s too, was that the money comes from two distinct camps.
Half of the money for Duke came from friends and extended family and the rest came from dog loving strangers.
“From here on out if anybody does come to us, whether it be financial or any sort of awareness we are going to be there for them,” Taylor said referring to what people gave them he will give back over the years to any causes he sees come forward that are similar.
Some needs however are beyond a couple thousand dollars.
“To be perfectly honest that’s where we are at now. This has been a five-year struggle and financially you try to maintain what you had, and you can’t because it’s too much,” Heather Gladbach said candidly talking about the huge financial strain of cancer.
Heather is a young mother of two who beat breast cancer in 2010 only to now face brain cancer.
She needs the help to continue her battle so her friends created her GoFundMe site.
“I’m scared to death. This is the first time anyone said if you don’t do this you could go and I’m not ready to go. I’ve got too much to do with my children and they need some more good years out of me,” Gladbach said.
Heather doesn’t have a social campaign fueled by thousands but she has the need.
So far her fund has climbed to more than $19,000.
But Heather has to compete with campaigns that range from a cute kitten who got caught in a drain to a team of kids wanting to raise money for a class project.
All things aren’t equal but they are competing for the same dollars.
“In those more charitable cases I think the reward has to be intrinsic. Is this something that will make me feel better about myself,” Sauter said referring to how a person can be talked into giving to one need over another.
Giving to the fight of a mom who just wants to keep a hold of that job will fill that intrinsic need for most.
Going in on the ground floor of the hot new passion project in your zip code is also a good one for your street cred.
So the donation game is yours to play. The crowded field of funds isn’t going to thin out anytime soon.
Crowdfunding campaign for home espresso machine brews backlash
TORONTO — Backers of a failed effort on the crowdfunding website Kickstarter are considering their options after founders of a coffee maker missed a mid-April deadline to get the project back on track.
ZPM Espresso claimed its Nocturne coffee maker was the world’s first smart espresso machine for the home because of a programmable control chip, more common in commercial machines, that would allow consumers to create the perfect shot of concentrated java by precisely controlling water pressure and temperature.
Yet the company’s plans never materialized, and now supporters who spent as much as $1,000 US on the machine — and assorted bonuses including T-shirts and coffee paraphernalia — are looking for answers.
Christopher Browne, a Toronto-based computer scientist, said he contributed $350 during ZPM Espresso’s original Kickstarter campaign from December 2011 to January 2012, which was supposed to cover the cost of the machine as well as a few extra gifts. The campaign raised $369,569 US, well above the original $20,000 US goal.
The creators posted frequent updates in the beginning, Browne said. As the months passed, he remained positive even as the company ran into problems. There were issues with the quality of the manufacturing, and ZPM Espresso hired outside consultants to adapt the design.
Browne said he knew the project was destined for failure last fall as updates became less frequent and problems seemed to multiply.
In January, ZPM Espresso announced it was shutting down and that only a small amount of the initial money remained to return as refunds. The news prompted other backers to complain on Kickstarter and social media, Browne said, with some comments from those who felt “betrayed” by the company turning vitriolic.
In an interview, one of the founders of ZPM Espresso shed light on some of the problems.
“The way you make something at volumes of 50 is completely different than the way you make things at volumes of a thousand,” said Gleb Polyakov.
Consumers need to understand that crowdfunding is a different consumer experience than buying an existing product from an online retailer like Amazon, he added.
“That feeling of involvement and early access and participation is probably the main reason people go towards crowdfunding as a platform and find it exciting,” he said.
“But when a company is only three people instead of IBM or Apple, the manufacturing process and the customer service process looks much different.”
On its website, Kickstarter says the responsibility for completing the project lies with the creator and that any refunds must be processed between the creator and the backers.
Browne said he and other backers have discussed going to court to pursue a refund or some other remedy.
“The agreements that Kickstarter set up are worded such that this isn’t formally a product, where you can have a direct expectation of delivery,” he said. “Anyone that’s looked at Kickstarter with any care ought to be aware of that, but people like to imagine otherwise.”
Despite that, Browne hasn’t soured on the idea of crowdfunding. On April 24, he posted on Twitter that he was proud to be the 1,119th backer of a specialized 3.8-litre insulated flask for storing beer that claims to be the world’s largest personal keg.
Last month, the PR company that Sondors hired, Agency 2.0, sued Sondors for unpaid fees. Agency 2.0 believes its former client owes it $524,000.
In between all the accusations, the case also reveals what it really takes to get a crowdsourcing campaign to go viral and raise millions of dollars. According to the court documents viewed by Business Insider:
Agency 2.0 says it expected to receive a 10% cut of all the funds raised. That’s high, according to one source we talked to who was just about launch her own crowdsourcing campaign.
When this person was looking into hiring a PR firm, she found, “Almost all of them will ask for either a retainer fee (usually a couple grand upfront) OR anywhere from 2-5% of total funds raised if they believe your project will reach its funding goal.”
In exchange for a cut of the money raised, Agency 2.0 worked on its own dime up front, it says.
The costs of marketing the crowdsourcing campaign are usually calculated into the goal of the campaign.
With some crowdsourcing campaigns, like Indiegogo, the pledges are collected right away, and the marketing company might be owed a cut of those pledges, if that’s how the contract was written.
Agency 2.0 says it spent over $116,000 on ads and marketing.
The documents didn’t list all the things the agency spent on, but did say it included ad campaigns placed on Google and Facebook.
The crowdfunding campaign site takes its cut, too.
For instance, Indiegogo charges 9% up front, it says, and will reimburse 5% if the campaign makes it goal (taking a total of 4%). Kickstarter takes 5% plus transaction fees for processing each pledge, but only if the campaign is successful.
As more people look to crowdsourcing as a way to fund their products, many of these campaigns are getting really sophisticated, with photos, videos, PR outreach to reporters.
One thing is becoming clear: this isn’t just a way to raise capital when the VCs won’t help, it’s also becoming a big business in its own right.
Crowdfunding has caught on, making it possible for countless entrepreneurs to turn their dreams into reality without having to go through an arduous process of raising capital. The trend has caught the interest of large corporations too, however, and the prospect of multibillion-dollar concerns possibly kicking the proverbial little guy off Kickstarter has some people squirming.
A notification that UC Berkeley this October will host the first executive program dedicated to teaching major corporations how to tap into the US$80 billion crowdfunding marketplace recently kicked off an email exchange between ECT editor Mick Brady and me about issues raised by the program.
Me: Hey, Mick… Coke Dodge and other F500 companies are apparently crowdfunding… and UC Berkeley is running a course on this for them… think this is worth a news piece or a feature? Let me know… this is amazing.
Mick: Thanks — yeah, this is interesting — let’s whip up a feature on this. This pitch kind of makes it sound like corporations are moving in on the little guy’s turf, but why should the crowd’s options be limited to cash-poor startups? If the crowd becomes excited by a corporate initiative and wants in on a “reward,” how could that hurt anyone else? Could it be that corporate types are using their resources to manipulate and take over the process in some way?
Me: I agree — we shouldn’t limit crowdfunding only to cash-poor startups… if this lets ordinary people buy shares of large companies that would be a good thing, though [I’m] not sure that’s the case … OTOH large companies could be sucking up funds that might otherwise have gone to the cash-strapped… I’ll look into this later.
The Good, the Bad and the Pragmatic
“We are seeing established companies turn to Indiegogoto build new communities, engage with customers, test ideas, demonstrate value, and mitigate risk in a way previously not possible,” Shannon Swallow, vice president of marketing for Indiegogo, told the E-Commerce Times.
For example, $6.5 billion semiconductor company Marvell launched its Kinoma Create construction kit for consumer electronics on Indiegogo, Swallow said.
Should a company of that size turn to crowdfunding to raise money? By doing so, are large companies like Marvell drying up a source of funding that otherwise would be available to startups? Is that morally reprehensible?
“Ethics is a personal set of standards and beliefs, and what may be considered an unethical act by some will often be considered as totally acceptable by others,” Larry Chiagouris, a professor of marketing at Pace University, told the E-Commerce Times.
“It is distinctly different when companies are using crowdfunding to test the market before releasing a product as opposed to receiving investment capital from the public,” Sang H. Lee, CEO and founder of Return on Change, pointed out.
There are two popular types of crowdfunding. Donation- or reward-based funding is basically a feel-good exercise for the investors and is typified by sites such as Kickstarter. Investment-based crowdfunding, offered by companies such as Crowdfunder and CircleUp, aims to give participants a return on their investments.
Many corporations use reward-based crowdfunding as a way to test markets and “pretail” products before proceeding to mass production, Lee told the E-Commerce Times.
Investment-based crowdfunding, on the other hand, originally was intended to “democratize finance and provide small businesses new capital formation opportunities as well as allow the everyday investor to participate in high-growth opportunities which were previously strictly controlled and regulated,” he explained.
A New Approach to Marketing
Sales can be driven through crowdfunding campaigns, which indirectly increase brand awareness or shift consumers’ perceptions, Richard Swart, director of research on crowdfinance at UC Berkeley and one of the faculty involved in the executive program, told the E-Commerce Times.
“Nothing beats people engaging with a brand through a contribution or purchase,” he explained. “Corporations realized that crowdfunding is wildly popular, relatively cheap, and effective at mobilizing communities of people around causes or ideas.”
For example, Dodge ran a Dodge Dart registry that let community organizations raise money to purchase a car for a needy person or for a cause, which “significantly increased” sales of that brand following the campaign, Swart said.
Sharing the Wealth
Equity crowdfunding is just another avenue for corporations to raise money, Swart said.
“Whether it’s a public company trying to raise awareness and gauge feedback through a campaign or your neighbor who needs funds to start a bakery, anyone can launch a campaign on Indiegogo, and it’s ultimately up to the crowd to decide whether or not to fund it,” Indiegogo’s Swallow explained.
Google, Philips, Honda, Domino’s and Warner Bros. all have turned to Indiegogo to raise funds.
Crowdfunding by large corporations “could definitely represent a way for small investors to get in on the ground floor of new and exciting marketing opportunities without the investment bankers taking a piece of the action,” suggested Pace University’s Chiagouris.
It also might improve trust in the process.
Further, while large corporations may have “much better access to resources” to launch a popular campaign, many small companies “have had great success … even with limited resources,” Return on Change’s Lee noted.
A Question of Trust
Trust has been battered in the reward-based crowdfunding sector.
For example, 9,500 people who donated $2.4 million to Oculus VR through Kickstarter got nothing except the chance to vent online when the company’s founders sold it to Facebook for $2 billion.
Nearly 14,000 people who coughed up almost $600,000 for the Yogventuresgame project on Kickstarter did not see a penny of their money when the developers canceled it. They were, however, offered early access Steam keysfor the game TUG.
“The Internet has changed the way people connect with one another — yet the act of investing remains the same,” Lee said. “To spur entrepreneurial growth and advance innovation around the world, we believe in the importance of utilizing technology and equity crowdfunding.”
Richard Adhikari has written about high-tech for leading industry publications since the 1990s and wonders where it’s all leading to. Will implanted RFID chips in humans be the Mark of the Beast? Will nanotech solve our coming food crisis? Does Sturgeon’s Law still hold true? You can connect with Richard on Google+.
Just some years ago the term “crowdfunding” was a foreign concept to many people who didn’t understand this new and alternative way to access capital. However, today the word has now become a part of the everyday business vernacular. In fact, businesses last year raised more than 5.1 billion dollars worldwide using this practice.
The crowdfunding frenzy doesn’t appear to be slowing down anytime soon, especially since more legislation has been enacted, further solidifying the status of equity crowdfunding (ECF). This will motivate even more entrepreneurs to take fundraising into their own hands instead of reaching out to venture capitalists and lending institutions. Last September, we saw Title II of the US JOBS Act enacted into law, giving entrepreneurs the opportunity to publicly advertise their need for funding. This law has provided entrepreneurs with a much larger pool of investors to reach out to and will ultimately increase their odds of reaching their funding goals. In addition, Title III of the JOBS Act is currently under review by the SEC. However, when it becomes ratified this year, it will allow non-accredited investors to become active in ECF, thereby increasing the investor pool that much further.
Even though we are still waiting for the JOBS Act to be enacted in its entirety, we can still expect the ECF industry to experience substantial growth. Major occurrences are anticipated to emerge throughout this year, and the top five 2014 predictions are listed below.
1) Up to $1 billion in equity transactions will occur worldwide in 2014 based on industry trends from the past two years.
The 2013 crowdfunding report by Massolution stated that around $5.1 billion in transactions occurred globally in 2013. That’s around a 100 percent increase from 2012 when $2.6 billion was raised. The report also stated that $204 million was from ECF. Assuming that the global crowdfunding market will again experience a 100 percent growth rate next year and regulations will allow for more people to participate in ECF, ECF could produce between $500 million to $1 billion transactions in 2014. This is especially true as more investors realize the potential ROI in ECF.
2) Equity crowdfunding will become a global phenomenon as countries seek to implement it to maintain their economic competitiveness.
In some countries such as the United Kingdom, Finland, Australia, and Italy, ECF is already legal. The United States is also well on its way to legalizing ECF by adopting Title III of the JOBS Act. This law will allow almost any investor to participate in ECF sometime next year. Global participation in ECF is imminent as more countries develop laws to deal with the legal matters revolving around ECF.
A new report produced by Richard Schwartz for the World Bank states that the annual total market potential of the entire crowdfunding industry could reach $300 billion by 2025. China’s potential could reach $47.6 billion, while Europe and central Asia could reach $13.8 billion.
3) Large financial institutions will make their foray into ECF for the first time as the industry becomes more established.
As ECF continues to scale, financial institutions such as large broker/dealers, online brokerage firms, and private equity groups will expand their services into the crowdfunding industry. As stated in our first point, the global crowdfunding market has the potential to double in size by the end of this year, and ECF could account for $1 billion in transactions. Large financial institutions will likely begin to offer ECF services to capitalize on the enormous growth rate of the crowdfunding industry as a whole. Their appearance in the ECF industry could also bolster the number of transactions due to brand recognition and consumer loyalty.
4) In North America, more than half of companies using equity crowdfunding platforms will use the new Title II rule to advertise their need for funding.
Title II of the JOBS Act was introduced earlier this year on September 23, 2013. It lifted the 80-year-old ban on general solicitation, allowing business owners to publicly advertise their need for funding. According to EquityNet’s data, about half of the new companies listed on the site are utilizing Title II to reach a broader audience of investors. More entrepreneurs will likely begin to adopt this rule in 2014.
5) The implementation of Title III will not cause the calamity its skeptics say it will.
The United Kingdom and Australia have both allowed non-accredited investors to participate in ECF for quite some time now. The successes of the members of those countries’ ECF communities should be indicative of what we can expect in the US. At worst, entrepreneurs who utilize Title III will have to comply with additional federal regulations and a limit as to how much they can raise. If the SEC can establish rules that mitigate the cost of compliance, then Equity Crowdfunding could soon become the most popular form of crowdfunding by the end of this year.
In April 2013, Dustin Driver looked like a poster boy for Kickstarter success. His tech-savvy backpack venture, Packswell, exceeded its funding goal by 33 percent. He had done his homework in advance, lined up materials and local manufacturing, and produced a great prototype. With more than $13,000 raised in his 30-day Kickstarter campaign, he was ready to hit the ground running. Then reality set in.
Manufacturing delays and mistakes at the factory halted his progress. By late September, after several daunting and time-consuming rounds of quality-control efforts with the factory, only 35 bags out of 57 orders have made their way into customers’ hands, and Driver’s confidence in his new venture has taken a serious beating.
“It’s been difficult and stressful, and I feel like I’ve let my backers down to a certain extent,” says Driver. “I’m grateful for their support and I want to do everything I can to meet their expectations. As for Packswell, it’s still too early to tell whether the company will take off.”
The first backers to receive their packs waited two months past the initial delivery estimate, while 39 percent are still waiting. But given the standard set by other crowdfunded ventures, Packswell is doing pretty well.
The wisdom of crowdfunding
When someone needs cash for a new venture, there are lots of ways to get it. Traditionally, most people either dip into their personal savings account or borrow funds from friends and family. If their idea is more ambitious and they need more money than they can raise from their personal network, they can pitch their idea to venture capitalists. But VCs are a tough crowd, because they’re keen to get their money back and turn a little profit. Crowdfunding offers an alternative that skips the traditional gatekeepers.
In principle, crowdfunding doesn’t work like traditional financing. You’re not borrowing the money, and there’s generally no expectation that you’ll pay it back or give up a slice of potential profits at any point. Instead, people are simply donating the cash—typically via online platforms like Kickstarter and Indiegogo—sometimes in return for the promise of a reward once the venture successfully launches. For instance, backers of the Pebble smartwatch received watches once the product was ready for market.
An emerging variant of crowdfunding making its way through legislative hurdles right now would offer more-traditional equity transactions, bringing crowdfunding more in line with traditional financing options by giving backers a share of the venture in exchange for their cash. Equity crowdfunding still faces substantial legal obstacles before it comes to the United States, because it opens up significant potential for fraud.
Crowdfunding successes like Pebble and Double Fine get a lot of press. But for the majority of crowdfunded ventures, would-be entrepreneurs never get the chance to experience the joys of manufacturing and the woes of shipping delays. According to Kickstarter’s own stats, only 44 percent of projects meet their funding goal. Of roughly 60,000 unsuccessful projects, nearly 40,000 failed to reach even 20 percent of their goal. Indiegogo, meanwhile, is less forthcoming about its projects’ performance, though efforts to calculate its success rate from scraped Web data peg it near 34 percent.
For entrepreneurs considering how to fund a new venture, those failure rates are worth a sober look. According to Professor Gordon Burtch at the University of Minnesota’s Carson School of Business, a public failure on Kickstarter or Indiegogo can be like a death sentence in the eyes of venture capitalists.
“Crowdfunding can be a useful validation of whether you have a viable business,” says Burtch. As an example, Burtch cites Pebble, which wound up receiving post-crowdfunding venture capital in response to its wild success on Kickstarter. But if your crowdfunding campaign comes up short, your prospects for convincing VCs to invest will be very, very low.
Funding isn’t everything
Even if you defy the odds and meet or exceed your campaign goal, you will likely face serious challenges. Most successfully funded reward campaigns run into serious hurdles in manufacturing and shipping a successful product. That’s at least partly due to the prevalence of novice entrepreneurs—people with great ideas but little or no business, supply chain, and manufacturing experience—in the crowdfunding world.
“Getting funded is just the beginning,” says serial Kickstarter entrepreneur Zeke Kamm, whose Aviator Travel Jib venture raised a whopping $223,192 against its initial fundraising goal of $20,000 in July 2012. “People make it seem like winning the lottery, but it could not be further from that.”
With three successful Kickstarter campaigns under his belt, Kamm is a shining example of the magic of crowdfunding. With support from a network of colleagues and friends acquired over a 20-year filmmaking career, the Hollywood veteran blew the doors off of three successive fundraising campaigns, raking in more than $317,000 in all. But getting those projects from funding to shipping—let alone to profit—wasn’t easy.
As with most crowdfunded capitalists, business and manufacturing were not among Zeke Kamm’s primary skills when he set out to start his first venture. The learning curve was steep.
“I read thousands of pages of business books,” says Kamm, “and I studied hundreds of successful Kickstarter campaigns to learn what worked and what didn’t.” Kamm attributes much of his projects’ success to that diligence and research.
But, like the overwhelming majority of crowdfunded ventures, Kamm experienced severe delays in manufacturing his products. His first product, a small plastic clip for securely storing camera-lens caps, shipped to backers more than three months after the originally promised date. Same with his second, the Aviator Travel Jib. The third project, known as the Rocket Travel Slider, raised just shy of $88,000 in May. It’s currently more than a month behind schedule, and Kamm reports that the product will begin shipping to backers once one he resolves one last manufacturing problem.
“Manufacturing is hard,” says Kamm. He looks to bigger companies to illustrate his point: “Even Apple has shipping delays.”
Kamm’s point holds true for most crowdfunded entrepreneurs. If major technology manufacturers with global reach and billions in resources struggle to get products out the door on time, what chance does a first-time entrepreneur have, flying solo with a crowd-funded war chest of a few thousand bucks? About a 25 percent chance. According to a June 2013 study by researcher Ethan Mollick, of the University of Pennsylvania’s Wharton School, more than 75 percent of crowdfunded ventures deliver the goods much later than promised, with many delivering more than eight months behind schedule, if at all.
Fortunately, says Burtch, nearly all crowdfunded ventures—more than 95 percent—do deliver promised goods to their backers eventually.
Why bother with crowdfunding?
So what, apart from the money itself, does crowdfunding offer a fledgling venture? In an April 2013 paper coauthored by Burtch, Anindya Ghose of NYU’s Stern School of Business, and Sunil Wattal of Temple University’s Fox School of Business, one clear benefit stood out: Crowdfunding gives new ventures an opportunity to generate valuable publicity.
“Crowdfunding helps to create a lot of buzz, word-of-mouth, and awareness of a project, which then eventually helps in the final demand or consumption of that project,” says Ghose.
But there’s a catch: Getting this boost typically takes time, so projects with short funding durations often miss out. “Projects that take twice as long to meet their funding target, on average, experience a 22 percent increase in demand after the project is completed,” Ghose says. “This appears to validate a widely held belief that a key benefit of the crowdfunding model is the potential it offers for awareness and attention-building around causes and ventures.”
Ultimately, crowdfunding offers entrepreneurs a new way to skip the traditional gatekeepers of the finance world and get their ventures funded when VCs won’t kick in. But it’s not necessarily the best option for every business. Many would-be entrepreneurs would do well to try raising funds from venture capitalists, or even friends and family, before turning to Kickstarter or Indiegogo—particularly if the venture is more modest.
“Don’t bother Kickstarting something that’s very inexpensive,” says Kamm. “Borrow from your family or find another way, because if you don’t have a huge reach, it’s not worth it.”
5 tips for crowdfunding success
Considering taking a stab at crowdfunding your bright idea? Here are five key ways to increase your venture’s chances:
1. Consider other funding options first. It’s worth taking a stab at funding your project via friends or family before risking a public flop on a crowdfunding site. You can always turn to crowdfunding as a last resort, but a failure on Kickstarter or Indiegogo can ruin your chances of raising money from friends or VCs.
2. Go for a longer fundraising period. One of the main benefits of crowdfunding is its ability to generate buzz, but that buzz takes time to build.
3. Tap your social network. Hard. People you don’t know are unlikely to fund your project if it has no backers at all. The more Facebook friends you can share your idea with, the better your odds of gaining early backers for your campaign.
4. Budget for waste. Mistakes happen, and mistakes cost money. If you don’t factor manufacturing errors, supply-chain problems, and other additional costs into your budget, they’ll end up eating your profits (or your personal savings). Pad your budget by at least 10 percent.
5. Pad your timelines. If everyone on Kickstarter padded their delivery estimates by three months, hardly anyone would deliver late. No matter how long you really think it will take to ship your product, add a few months to that.
Robert Strohmeyer is a veteran business technology journalist and the founder of Startzilla, a social toolset for entrepreneurs.
This article is a guest submission by Dana Ostomel, founder and Chief Giving Officer of Deposit a Gift.
5 Crowdfunding Tips
Engaged, invested, involved. When you run a crowdfunding campaign, your goal is to turn your supporters into advocates, so they not only give, but help you spread the word. It’s no easy task to accomplish, but can be the difference between a campaign that just does ok, versus one that knocks it out of the park. Here are a few tips for a highly engaged campaign:
Visualize Before, During, and After
Having a marketing plan, that details intricately the steps you will take, to launch, and promote your campaign is incredibly important. This is crucial to have, before you even officially launch. It provides guidance on how, when, and where, you will communicate with supporters, to incite them to open their wallets. Many organizations just put up a campaign, without thinking about the steps needed to make it successful; They end up setting themselves up for failure. Depending on the relationship that you have with your community, it’s possible that a week’s prep is enough, while for others, it may take months to prime the audience. Having an action plan of exactly what your campaign promotion will look like, before it even begins, is one step that will put you on the road to success.
Tools For Engagement
Sterile campaigns go nowhere. You want your campaign to not only engage new contributors immediately, but be compelling to share, which is the key to leveraging the power of the crowd. When you personalize your campaign through unique hashtags, compelling images and announcements, you give your audience the tools to connect with your campaign so that they feel invested enough to share it with their friends. Unique Hashtags also give your campaign it’s own special way for people to find and share you on social media . It allows your appeal to stand out from the crowd, and is a great way brand your campaign.
The Power of Appreciation
You can only ask people to give so many times before it becomes annoying, and they tune you out on social media or delete your emails. That doesn’t meant that you should let communication fall by the wayside. On the contrary, you need to be emailing and posting daily, but, do it strategically. Send out announcements when you reach certain goals. Thank people for their support by tagging them on FB and Twitter so that others see who is getting involved; it reduces the bystander effect and it makes them want to get involved too. Everyone likes feeling acknowledged, and important. This brings us to our next point.
Turn Supporters Into Ambassadors
To get people to help, they need to feel like they are a part of your campaign, not just another wallet. So devise tools to enlist their support. Ask them to join your ‘online street team’ and then give them ways to participate, such as being part of an ‘email tree’, or sending out scripted emails. As people donate, part of your follow-up strategy should be to ask friends, family, and new supporters to share. Have them share on all of their social media channels and to send out emails, to family, friends, and anyone they think might contribute. Make it easy for them to do this by writing the posts and emails for them to simply copy/paste. Get your donors to do the work for you. Let them know that the success of your campaign depends on them.
Maximize the Newsletter
In order to keep your community interested and engaged, they need to know what’s going on. A newsletter is a terrific way to keep people informed and make them feel a part of the journey, which is what ultimately leads to them feeling invested in your success. People want to know how their money is being spent, what is going on with your campaign and what your plans are for the future. A weekly newsletter, allows you to do all that and more. Make it informative, include pictures, personalize it. Use the newsletter as a tool, to keep people interested. Think of it as a way to create a community of people, who are supportive and invested, in your campaign, and organization.
These are just a few of the tips and tricks that we’ve learned after helping many campaigns get off the ground to a successful start. We are always available to help you get a campaign up and running. Interested in starting your own crowdfunding campaign? Click here to check us out!
Dana Ostomel is the founder and Chief Gifting Officer of Deposit a Gift, the crowdfunding platform for personal and organizational fundraising that allows anyone to easily create an online fundraising campaign for any organizational, school or personal need. Whether you’re a nonprofit or school looking to get into crowdsourced fundraising, or an individual looking to raise money for a personal project, business, disaster relief, memorial fund or help with medical bills, Deposit a Gift makes it easy.
A lot of crowdfunding campaigns offer backers swag like T-shirts or virtual rewards. BidOkee’s model takes things a serious step forward.
BidOkee’s loyalty program lets you reward your backers with valuable points they can use in BidOkee’s auction hub and ecommerce store. That gives real value to the reward points you offer. It also drives supporters to your site and encourages them to increase their pledge levels.
There is nothing in the crowdfunding world quite like BidOkee’s loyalty rewards program. It is a powerful tool for recruitment, retention and social sharing.
The quality of loyalty rewards programs broadly depends on: the ease and rate of point collection; breadth of collection opportunities; ease of redemption; extent of redemption opportunities; and holistic, experiential merit (how it feels to participate).
Compared to other loyalty programs, BidOkee offers ease of acquisition, with slightly more involved redemption schemes. BidOkee excels at the rate of collection, and overall fun of engagement.
The DIY culture means consumers expect to have equity, fair play, transparency and control over their circumstances. They want to know that the information collected on them will benefit them, not just the company. They want to know that the social currency they provide a company will benefit them also – via rewards. BidOkee honors these beliefs.
BidOkee’s crowdfunding experience allows backers to amass Net Worth, in the form of soft currencies – in this case BidOkee points. These currencies can be used in the BidOkee MarketPlace to participate in auctions and contests – providing tangible value to users and a return on investment to campaigners. The MarketPlace, where backers can utilize their Net Worth points by participate in fun, exciting and competitive auctions and contest giveaways, also has a “Buy Now” option where users can utilize their loyalty rewards for immediate purchases.
Loyalty rewards are earned based on BidOkee’s ‘give or get’ approach. Either earn loyalty rewards by financially supporting a campaign or earn loyalty rewards by referring others to a campaign. Either way, the user earns points and becomes a backer of a campaign. Campaigns win by increasing their user base, which earns them revenue through actions taken on the BidOkee MarketPlace or by obtaining more donations because backers earn great loyalty rewards.
But campaigns also win by placing their innovative inventions and products on the BidOkee marketplace. This is where millions of users from thousands of campaigns can utilize their loyalty rewards to purchase these products, driving revenue and new backers for startups from unanticipated prospects.
Beyond an outstanding return ratio to campaigns, loyalty rewards via gamification and on-trend design differentiate BidOkee from other crowdfunding campaigns.
Reciprocal loyalty is also the foundation upon which BidOkee is constructed. Reciprocal loyalty is two-way loyalty, where backers support BidOkee through social@thecore activity, being remunerated with high-value intangible and tangible rewards.
Loyalty rewards are just one of the unprecedented features that make BidOkee a revolution in crowdfunding.
We are building the world’s first cooperative do-it-yourself crowdfunding platform, which will allow anyone to build and run their own successful crowdfunding campaign. Loyalty rewards are a powerful tool to drive support to your crowdfunding campaign.
We have built the platform and now we are raising the capital to turn it into a do-it-yourself tool that can help everyone reach their crowdfunding objectives. And we need your help.
We are crowdfunding for crowdfunding. With your support, we will soon launch BidOkee as the world’s first gamified do-it-yourself crowdfunding platform with features not offered by the crowdfunding mega-sites.
Once upon a time, sourcing funds for projects required deep pockets or a strong personal network which the Chinese termed ‘Guan Xi‘. Today, however, the word on the street is ‘crowdfunding’.
So what is it that makes crowdfunding such a buzz word?
One of the topmost reasons is its severe reduction of risk. With the pie sliced up to bite-sized portions, investors don’t feel as if they are biting off more than they can chew. Investors can also hedge their bets on a wide range of ventures, as they no longer need to put all their eggs in one basket. With less initial start-up required, this also means entrepreneurs with less capital are able to get a piece of the action. It is no longer about the rich becoming richer, as those with keen foresight and street smarts now have a chance to improve their lives or to make a difference to society.
Crowdfunding is also a great way to get unique ideas funded. Ideas that are not run-of-the-mill may not appeal to traditional investors, but might be attractive to communities of random strangers out there who are only too happy to push creative boundaries and try out something fresh and innovative.
A crowdfunding campaign is great not just as a form of accumulating funds, but also as a marketing and feedback tool. It creates curiosity & publicity about the product, idea or cause both locally and internationally. Additionally, the ability to beta test, gather honest feedback and engage in audience interaction can also be used to tweak the products and construct a more accurate picture as to what appeals to buyers. This reach once eluded smaller startups.
Angel investors from all over the world are seeking fresh ventures and ideas to adopt and co-fund. You might have an innovative product, an indie film, a real estate venture or a social cause to promote. There are no boundaries as to what can be crowdfunded. And with several hundred crowdfunding sites such as Indiegogo, Kickstarter and Crowdfunder to tap into, many have fulfilled otherwise impossible dreams.
This article is written by the CoAssets Editorial Team. CoAssets.com is South East Asia’s first real estate crowdfunding website. CoAssets also operates Crowdfunders.Asia, a magazine dedicated to the Asian crowdfunding scene.
NEW REPORT: Crowdfunding A Roadmap for Global Solution Networks
Crowdfunding asks innumerable individuals to contribute small amounts of money in support of a goal, project or new organization—even if the ”funding applicants” are unincorporated, experimental or short-term.
Crowdfunding decreases the time required to identify and vet solutions, helps mobilize donors and project backers outside the network of the initiating organization, generates richer sources of data from stakeholders, and allows for incremental program building while funds are being collected. Crowdfunding augments the annual donor campaign model and facilitates deeper engagement between financial backers, the network, and the targets of the program. While the concept of crowdfunding may give securities and tax regulators pause, it presents a considerable opportunity for global solution networks to overcome the limitations and challenges of obtaining funding through traditional channels.
In 2012, more than one million individual crowdfunding campaigns were established globally.
As the industry grows, so does the number of campaigns – and less than 50,000 of new start-ups receive venture capital funding annually, because most funding goes to established companies. That leaves the other 99.5% to seek funding from friends, family, crowdfunding or angel investors.
When you launch a campaign on a conventional crowdfunding mega-site, you are instantly in competition with every other campaign on the site – and all of the additional campaigns that will get listed in future. The more the industry grows, the less relevant your campaign becomes.
Not only that, but Fortune 500 firms are actively experimenting with crowdfunding as a product launch and testing platform, further pushing out the small players. UC Berkeley is actually looking into providing courses for corporate executives wanting to launch crowdfunding campaigns. As a result, traditional crowdfunding platforms, and the industry as a whole, are becoming very crowded, with more and more competition. The bar for getting attention for your campaign is rising for small new start-ups. The cost and effort to successfully execute large campaigns is becoming prohibitive for entrepreneurs. The bigger the crowdfunding site, the less a small start-up can compete. This is counter to the whole notion of crowdfunding, which was supposed to assist start-ups penetrate the vast expanse of the marketplace.
Crowdfunding was imagined as a place where great ideas that lack funding can find people with funding who like great ideas. It can still work that way. But every time a campaign uses crowdfunding essentially as a cheap tool for publicity or for product launches, it buries a genuine upstart crowdfunding campaign lower in the rankings.
And it’s not even a level playing field. The mega-sites have their own way of doing things and that often puts the little guy at a disadvantage. Campaigns that catch the eye of the mega-sites, or that succeed quickly, move up the ladder, featured on the most heavily trafficked part of the site. A genuinely struggling crowdfunding campaign can get buried beneath this avalanche.
This is one of the things that make BidOkee revolutionary. You are not competing with anyone else on the site — because you own your own site. You have your own URL. It’s your own brand. You make the rules. No one who comes to your site will get drawn away by shiny objects in the right-hand column.
BidOkee offers something else that is revolutionary. When you participate in our loyalty rewards program, which features an auction hub and ecommerce platform, your backers can use reward points to bid on, win or buy very cool products. This also presents an opportunity for you to showcase your product in front of the backers from all BidOkee campaigns, without compromising your networks. You can feature your products on the BidOkee ecommerce site and benefit in big ways.
First, it puts your product in the sightlines of thousands of eager consumers looking for the latest cool thing.
Second, this generates QUILs – qualified unique Internet leads. QUILs are generated when people bid on your product but do not win it. These hundreds or thousands of potential customers who have demonstrated intent to purchase may be the most lucrative leads you could ever get. You can contact them with incentivized offers that almost guarantee sales.
This kind of cooperation is just another way that makes BidOkee revolutionary in crowdfunding.
To make the revolution happen, we need your help.
We are crowdfunding for crowdfunding. We have built the prototype and are now raising the capital to turn it into the do-it-yourself platform that will make it possible for anyone to easily build and run their own successful crowdfunding campaign.
There is no greater asset to a crowdfunding campaign than the network of people supporters you build.
Yet this invaluable asset is something crowdfunding mega-sites like to keep to themselves or share with you only if your campaign succeeds.
Through our own research, we estimate that the average campaign garners 302 subscribers.
As you build your crowdfunding campaign, you are building a community, a network of backers and friends. Yet, when your campaign ends, you may lose them if your campaign is unsuccessful. And we know a majority of campaigns fail to meet their goals. Therefore, despite the fact you did the work and expended the resources to attract users to your campaign, the crowdfunding mega-site retains the information for their own benefit – not yours. It’s a great deal for the crowdfunding platform, which gets to monetize the users you attracted to their site. These are backers who have shown some interest in your product and your campaign. You should be able to communicate with them.
BidOkee has a better way.
When you build your crowdfunding site on BidOkee, your network will remain your network. Your friends will remain your friends. Your community is your community.
When your campaign ends, you can launch another one. You can initiate stretch goals. Or you can send your network over to support another great campaign that you love. It’s your choice.
The only way crowdfunding works is through building networks of people. Shouldn’t you be able to keep those networks yourself? BidOkee thinks so.