Entrepreneurship University
College of Entrepreneurial Studies (CES)

Crowdfunding

Crowdfunding is defined by Investopedia (http://www.investopedia.com/terms/c/crowdfunding.asp) as the use of small amounts of capital from a large number of individuals to finance a new business venture.

Crowdfunding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new business and attract investors. Crowdfunding has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.

This form of raising funds was made possible by the JOBS Act (2012) which removed an earlier prohibition on general solicitation or general advertising for securities offerings. There are limitations on how much can be raised through such solicitations. For a summary of these limitations, see http://www.goodwinprocter.com/Publications/Newsletters/Client-Alert/2012/0424_JOBS-Act-The-Emerging-Possibilities-for-Crowdfunding.aspx?article=1.  

A blog on the UPS Store site (http://smallbiz.theupsstore.com/blog/small-business-blog/2013/09/19/crowdfunding-101) discusses the crowdfunding approach:

Crowdfunding is an excellent way for start-ups to obtain the financing and exposure they need so they can verify, execute, and enhance growth.

The approach is simple enough: You decide on a suitable website according to your campaign theme and purpose. Once a platform is determined, you contact the public by sharing your venture’s powerful message, usually in a video that passionately explains the essentials of your project, and establish attractive rewards for potential financiers. You set a target amount you wish to reach at the end of a specific time (normally about 40 days) and backers can select how much they want to commit. Generally, it’s free to sign up for a campaign.

Some platforms allow you to collect money only when your target is reached, so you can only access the funds if you reach 100 percent or more of your funding objective. You collect nothing if the crowd does not donate the figure you seek. There is no penalty for not attaining your target; the funds are simply returned to individual contributors. Other platforms provide you with the funds whether the crowd reached the target or not. Only the campaign period matters. For successful projects, the platforms take an average commission of five percent of the funds raised. They take nothing when the target is not attained.

Two of the earliest crowdfunding sites (http://www.entrepreneur.com/article/228534) are:

Kickstarter. The most well-known of the crowdfunding websites, Kickstarter focuses on creative endeavors including design, the arts (film, publishing, music), gaming and technology. While Kickstarter can’t be used to fund businesses per se, it does accept products and has had some remarkably successful campaigns, including about 50 that have generated over a million dollars in funding. Kickstarter “curates” its projects, meaning it has a rigorous submission process, and if you aren’t approved to post, it can be quite disappointing.

Indiegogo. Originally launched with a focus on film, Indiegogo pivoted to include funding for literally anything and is becoming known for financing personal and cause-related campaigns such as that for the bullied bus monitor, which raised over $700,000. It accepts all projects without review. As Indiegogo says on its website, “Our platform is available to anyone, anywhere, to raise money for anything.” While its success fee at 4 percent is 1 percent lower than most websites (which charge 5 percent), it does charge one of the highest fees in the industry — 9 percent — if you don’t meet your goal.

These sites are among many from which you have to choose based on your unique requirements. Inc magazine has published an interactive guide to 22 crowdfunding sites (http://www.inc.com/magazine/201306/eric-markowitz/how-to-choose-a-crowdfunder.phpl).

The benefits of crowdfunding include:

1. Access to capital. In many instances, you may not even have to give up equity. Some funding may simply be donations. Other investors may just require early access to the product you are developing.

2. Risk reduction. There are no loans to repay, no collateral to pledge.

3. Marketing advantages.  The public is made aware of your product early in the process. Even those who do not invest become potential customers.

There is another category of crowdfunding, often referred to as equity crowdfunding. This form of funding allows accredited investors to share in the expected financial return of the business. To be accredited, an investor must meet standards set by the US Securities and Exchange Commission (SEC) as to income and net worth. These standards are outlined in http://www.sec.gov/answers/accred.php.

Wishing you success,

John B. Vinturella, Ph.D.

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