Crowdfunding: is it right for your startup business? Part two.
Is Crowdfunding a viable option for financing your small business startup? Part two.
In the first post on crowdfunding, we discussed what it is, and provided some general information on this peer-to-peer lending practice. Here we’ll take a closer look at the types of crowdfunding, dig a little deeper into specific crowdfunding platforms, check out some pertinent government regulations, plus offer up some other contemplations on crowdfunding you may want to consider if you’re in the market for an alternative means of financing.
What are the general categories of crowdfunding?
Even though each funding request is unique, there are five distinct types of crowdfunding, differentiated by what the investor receives from the entrepreneur in exchange for his capital.
Donation Model. As the name implies, with this model, investors don’t receive anything for their contribution. The sites under this model are mainly for charities. None of the leading crowdfunding sites available to business entrepreneurs uses the pure donation model. GlobalGiving is an example of a pure donation site.
Reward and Pre-Purchase Models. The reward and pre-purchase crowdfunding models are common and often appear together on the same sites. Neither model offers investors a financial return or interest, but both models offer rewards. The reward in the rewards model can be something small, like a keychain or t-shirt, while the reward from the pre-purchase model, the most common type of crowdfunding model, is the product the entrepreneur is making. Kickstarter and IndieGoGo are the top reward/pre-purchase sites.
Lending Model. Quite popular, the lending model involves lending entrepreneurs money with the expectation that the loan will be repaid, sometimes with interest. Kiva is a top lending model site.
Equity Model. This model gives investors an interest in the profits or return of the business they are helping to fund. Initially this model was only available to accredited investors, but recently the SEC passed rules as part of the JOBS Act that bring non-credited investors into the fold for equity crowdfunding, essentially opening the opportunity up to everyone.
If you’re taking a look at crowdfunding, consider:
- Added pressure. Accountability to many small investors can add pressure that does not exist with traditional funding options. Small investors can have big expectations with regard to access and communication…varying anywhere from once a year to once a week. They can also have unrealistic expectations relating to the business development process, and their role in it.
You can likely do yourself a favor by being very clear about the timeline, by giving regular updates and by adjusting for hiccups along the way. And, it will be helpful if you are a good communicator, as well as being proficient online. Keep in mind that your investors are a front-line for marketing that can be helpful through networking and word of mouth.
- Field of Dreams? Maybe not. Just because you build it, doesn’t mean they will come. At least not without a lot of prep work on your part building interest before the project launches, determining rewards you might offer, and figuring out how much interaction you want to have with investors. Your message must be designed to create interest among potential investors and should include exciting marketing.
While you might immediately think of interaction with investors as an annoyance, consider that if your investors have diverse skills you can leverage, that interaction may in fact be an asset.
- Getting ripped off. If you haven’t protected your business idea with a patent or copyright, and since you will need to disclose some of your ideas to the crowd well in advance, someone may steal your concept. Something to think about…what information will make the project look good, and excite investors enough to get them to contribute, without giving too much away.
Choosing a crowdfunding site that best suits your startup.
Each crowdfunding site operates on a slightly different model, though all aim to connect individual and institutional investors with previously unavailable investment opportunities. Investors generally have to register, often simply with a social media account, and verify their identity, income, and assets.
Some equity crowdfunding platforms, particularly real estate platforms like PeerRealty, act as intermediaries between investors and companies. They typically hold investors’ funds in escrow until the round ends successfully, then transfer equity to the company.
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Others, such as Crowdfunder, allow companies to advertise fundraising efforts to the general public. In this case, investors either make a nonbinding pledge (basically an indication of interest) or a binding, signed commitment to invest within a specified period of the funding round’s closing. Companies then contact individual investors outside the platform, accept funds via check or electronic transfer, and deliver share certificates.
Still others, like AngelList, operate investment funds that own shares in multiple companies or asset classes…commercial real estate, for example…offering exposure to an entire asset portfolio with a single investment.
Here are 10 top crowdfunding sites…reward and equity models…specializing in seed stage or startup funding.
Following are a very few of the sites generally recognized to be at or near the top of the crowdfunding food chain for startup businesses, listed alphabetically. Remember though, as we noted in part one of this post, by the end of 2012 there were more than 450 crowdfunding platforms from which to choose.
AngelList, equity model. AngelList features a network of investors called syndicates that covers all setup costs and carried interest so startups pay nothing to raise funds. Separately, AngelList operates a high-end job board that connects developers, engineers, marketers, medical professionals, and other talented job-seekers with early-stage companies looking for help. The site claims $141 million invested in startups during the last 12 months.
EquityNet, equity model. EquityNet bills itself as the “original equity crowdfunding site” and claims to hold the only patent for the concept. The site allows entrepreneurs to share their profiles and business plans with a network of more than 20,000 angel investors, venture capitalists and business supporters.
Fundable, both reward and equity models. Fundable allows entrepreneurs to raise money from investors, customers and friends. For companies interested in equity crowdfunding, Fundable provides hands-on help with onsite profile building, pitch construction, and even business plan development. It’s also known to have a relatively low minimum fundraising target (companies can raise as little as $10k at a time), and so attracts many smaller businesses.
Indiegogo, reward model. Originally launched in 2009 with a focus on film, Indiegogo now allows people to solicit funds for an idea, charity, or startup business and is becoming known for financing personal and cause-related campaigns such as that for the bullied bus monitor, which raised over $700,000.
Kickstarter, reward model. Kickstarter is on this list not because of a focus on startups, but rather because it’s the most well-known of the crowdfunding sites, focusing on creative projects, including design, film, publishing, music, gaming and technology. The website states that since its launch in 2009, 10 million people have pledged $2.1, and 98,543 projects have been successfully funded.
Onevest, equity model. Onevest came into being when RockThePost merged with CoFoundersLab, an online and in-person matchmaking network that scientifically builds startup teams, creating a platform with 35,000 startup founders and 15,000 accredited investors where entrepreneurs have raised over more than $65 million.
Peerbackers, rewards model. Consistently recognized as one of the top crowdfunding websites, Peerbackers focuses on funding entrepreneurs and innovators. The company offers startups campaign consulting services as well as marketing and media production.
SeedInvest, equity model. SeedInvest has nearly 12,300 accredited investors in its network, making it easy for startups to raise the funds they need. Entrepreneurs promote their companies using the site’s fully integrated social media and advertising tools, and its Virtual Boardroom.
StartUpValley, equity model. StartUpValley allows tech startups…including mobile apps, Facebook apps, social apps, websites, social networking, social media, healthcare and medical technology, high tech sciences, and energy and solar technology…to raise early-stage capital in exchange for equity ownership in their company.
Wefunder, equity model. Wefunder‘s co-founders were heavily involved in the debate over the JOBS Act and claim some credit for the crowdfunding-friendly measures that made it into the final legislation. While most competitors require investors to put up at least $1,000 per company or fund, Wefunder accepts investments in increments of $100.
Make sure that using crowdfunding doesn’t turn you an outlaw.
On October 30, 2015, the SEC voted to enact final rules governing crowdfunding under Title III of the JOBS Act. The long list of rules would, among other things, enable individuals to purchase securities in crowdfunding offerings subject to certain limits, require companies to disclose certain information about their business and securities offering, and create a regulatory framework for the intermediaries facilitating crowdfunding transactions. Following are just a very few highlights from the bill which goes into effect in early 2016:
- A company will be able to crowdfund up to $1 million over a 12-month period.
- Securities purchased in a crowdfunding transaction generally could not be resold for one year.
- Companies that seek to crowdfund a securities-based round must have background checks done on all principles with 10% or greater ownership in the company and provide full and adequate disclosures with a business plan and a full description of their ownership and capital structure.
- Crowdfunding portals must, alongside the legally required background checks, must do a full review of the company, disclosures and the raise in order to approve a company prior to fundraising.
- A crowdfunding round does not prevent a company from raising capital through other legal channels.
The law adds a new level of complexity in the way companies market themselves to investors using crowdfunding in that it requires websites that offer crowdfunding services to register with the SEC as a broker or funding portal. Additionally, those promoting a company must reveal their relationship to the website and also file with the SEC, provide investors annual reports of financial conditions and operating results. What’s more, the SEC likely isn’t done and is expected to make further stipulations in the next few months.
So there you go. With a crowdfunding strategy that has a clear message, a reasonable goal and some initial backers, it’s conceivable you could be the next crowdfunding success story.
Share your own experiences and your thoughts on crowdfunding as an alternative funding source for small business startups by commenting below. And if you’re looking for ways to improve your cash flow management and get the funds you need for business improvements and growth, check into our factoring services.