When a first time founder starts a company, it’s expected that the founder will self-finance the early stages of a project and/or receive financial help from “friends and family.” With the development of a solid business plan and more often a working prototype, it may be possible to secure angel investors, or in some circumstances venture capital, bank loans and or government funds.
With the growth of the Internet over the past two decades, there has been ongoing development of crowdfunding platforms . which can help an entrepreneur develop a product and take it to market.
What is Crowdfunding?
“Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet. Crowdfunding is a form of crowdsourcing and alternative finance. In 2015, over US$34 billion was raised worldwide by crowdfunding.Wikipedia
The modern crowdfunding model is generally based on three types of participants: the project initiator who proposes the idea or project to be funded, individuals or groups who support the idea, and a moderating organization (the “platform”) that brings the parties together.
Crowdfunding is the use of small amounts of money “capital” from a large number of individuals to finance a new project, product or business. With the development of internet crowdfunding platforms and social media, it has become easier to secure funding in usually small amounts from many possible customers, supporters and/or investors.
Generally when people consider crowdfunding, they think of Kickstarter or GoFundMe. Kickstarter is the leading benefit-based funding platform in the USA and GoFundMe is a leading donation based platform. However there are 4 primary types of crowdfunding platforms:
|Rewards||Supporters make contributions at different levels to secure some sort of benefit or product reward.||Kickstarter, Indiegogo, Verkami, Lánzanos, Throw us, PledgeMusic|
|Donations||Supporters make donations with no expectation of receiving products or equity||GoFundMe, Goteo|
|Loans||People make loans to the recipient with specific terms for interest and principal payback||Ulule, Lending Club, Prosper, Ecrowd, NextSeed|
|Equity||Investors provide funds in return for equity shares.||Wefunder, StartEngine, Anglelist, SeedInvest, FundersClub|
What is the Crowdfunding Process for Entrepreneurs?
While each type of crowdfunding and specific platforms differ in the specifics, the general process is:
- The founding entrepreneur or project owner sets up an account on the appropriate platforms with specific identity and company information.
- The entrepreneur presents the project on the platform with detailed product and company information as well as the amount of financing requested, hope it will be used and the timeframe. This may include photos and/or video of the product or working prototype. For Benefit Financing, the entrepreneur will specify specific benefits or products that contributor will receive for contributions at various levels.
- The platform might then evaluate the project and if specific criteria are met, the project is then published on the platform for a specified time period.
- During this time, the entrepreneur must promote the project listing through emails, social media and meetups to generate interest. The launch of the campaign is very important as substantial early response will raise the profile of the project on the platform. If the project receives outside press and/or goes viral, it is possible the project will secure financing beyond the original ask. Depending on the platform, the beneficiary may receive the funding as it is contributed or as set milestones are achieved or when the campaign is completed.
- After the set time period, the campaign is closed, monies are distributed and founders are provided essential information regarding the performance of the project campaign.
Equity-based crowdfunding in the USA is still small but growing as it allows startup companies to raise money without giving up control to venture capital investors. It also offers smaller investors the opportunity to obtain an equity position in the venture. With the implementation of the JOBSAct, new platforms were launched in the USA to provide a full online equity crowdfunding facility to this wider market.
Reg CF and Reg A+ “These two securities exemptions represent two of the three rules that enable crowdfunding in the US and the two rules that allow non-accredited investors to participate in an investment offer. Reg CF, created by Title III of the JOBSAct allows for issuers to raise up to $1.07 million in a highly prescriptive offering environment. Reg A+, created by Title IV of the JOBSAct, is akin to a mini IPO that must be qualified by the Securities and Exchange Commisssion (SEC). Under Reg A+, issuers may sell securities of up to $50 million.”-CrowdFundInsider
Coming up Next: The Keys to Kickstarter…