Overview: Crowd funding is the mechanism by which startups can gain financing by asking multiple individuals to each give a small investment. The company can set an investment target and once this has been reached they are free to use the capital.
Most notably there are 4 main types of Crowd Funding:
1. Equity Based: Investors receive a stake in the company. Money given is seen as an investment in shares of the venture
2. Donation Based: Contributions go towards a charitable cause
3. Lending Based: Investors are repaid for their investment over a period of time, at an agreed interest rate
4. Reward Based: Investors receive a tangible item or service in return for their funds.
There are more than 600 crowd funding platforms around the world, with fundraising reaching billions of dollars annually, and this number is growing by the day! Popular platforms include: Crowd Cube, Indiegogo, Kickstarter, Angelist, and Crowdfunder to name a few. Now, there are even lists and search engines that filter through over 800 funding platforms and p2p financing sites!
More recently in September 2013 the U.S Securities and Exchange Commission lifted a general solicitation ban which means that businesses are now allowed to advertise fundraising efforts to approved investors. Further to this it is believed that the U.S SEC will allow non-accredited investors to be similarly involved in crowd funding later this year. The SEC are right to take concern over this issue looking at the historical precedent of the 1930’s Depression of which we can draw some parallels. The stock market bubble/crash in the 1920’s was caused by the unregulated selling of equity products to the to the masses. Consequently the ‘Glass-Steagall Act’ was founded to regulate who could sell investment products to the public. With the introduction of crowd funding and a possible lax regulation, uneducated investors may not fully grasp the risks involved particularly with investing in early stage projects and startups. Certainly there must be more education and supervision to clearly map out the downside risks of such investments and to prevent misuse of this type of financing platform.
By contrast in the UK the FCA are looking to regulate crowd funding in a crackdown to eliminate some of the risks associated with the financing mechanism. Some sites including Crowd Cube and Seedrs have already paid the FCA in an effort to seek approval. It will be fascinating to see how this plays out and certainly the funding space is undergoing massive changes.
Angelist has most recently launched their very own syndicate platform whereby Angels can club together and invest in ventures. Kevin Rose’s syndicate has already raised over $2 million. It is likely that these developments will be disruptive within the funding markets particularly for small VC’s and Angels that don’t have the pulling power of these large funds.
Success on such platforms is elusive for entrepreneurs however below are some hints and tips on how to implement a strategic crowd funding campaign:
- Build a small network of friends and family willing to help raise the profile of your campaign by giving and encouraging others to give
- If you are offering incentives in return for the money, ensure that the gifts are desirable and related to the venture for example; on Crowd Cube a Film Maker looking to raise capital for a Shark documentary, offered major investors the opportunity to swim with sharks. Equally smaller investors were offered shark tooth necklaces!
- Present a serious business plan and explain why and how the money will be use to develop the business
- Demonstrate the passion you have for the business and
- A short video pitch will allow potential investors see the ‘whites of your eyes’ and should help engage with the investors. 1-2 minutes is more than sufficient
- Continually interact with the online world, staying active on social media, posting updates and interesting news for investors, before during and even after the campaign.
For investors, caveat emptor! Remember that you are accessing the startup community and your returns cannot be guaranteed. Other tips are:
- Use a reliable platform, recognised crowd funding platforms have a brand to protect and are likely to conduct thorough due diligence before accepting campaigns
- Take time to make personal contact with the entrepreneurs where possible. Find out about the team and understand whether they really do have the skills but also the passion to grow the business post funding
- Be certain of what crowd funding model the company are using, with ‘All or Nothing (AoN)’ or ‘Keep it All (KiA)’, being the 2 most popular methods. This is crucial to understand what happens to you investment if the funding target is not met
- Like any investment- “Do your own, extensive research”, develop an in-depth understanding of the product/service, the market, the management team and finally the financials behind the investment opportunity. These investment criteria have been used in industry for years and are of equal relevance to crowd funding investments.