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Crowdfunding: The Evolution of Startup Investing

posted Dec 29, 2014, 10:57 PM by J Shaw   [ updated Dec 30, 2014, 12:07 AM ]
The Internet has created a global bazaar that has become a part of our lives. We shop online, stay connected with the brands we love, and have access to innovative products from all over the world. We’re also more connected than ever before and the digital age we live in is giving us the opportunity to be part of something bigger than us.

This need to be part of something bigger is further fueled by the advent ofCrowdfunding. Crowdfunding extends fundraising beyond venture capitalists and angel investors to the average Joe (or Jane), allowing him to financially back projects he feels an affinity towards or entrepreneurs he wants to see succeed.

Crowdfunding to Raise Seed Capital

To date, crowdfunding has raised billions of dollars to help bring new ideas, businesses, and just about everything to life.

“Crowdfunding is something every Entrepreneur should look into, no matter what type of business they’re starting. It is the new frontier of financing.” - Barbara Corcoran

There are two types of crowdfunding that early stage startups should strongly consider exploring - Rewards-Based Crowdfunding and Equity Crowdfunding:

  1. Rewards-Based Crowdfunding - Rewards-Based Crowdfunding offers contributors a gift or an opportunity to pre-order a product before its launched. Rewards-Based Crowdfunding is particularly effective with creative types and consumer products. A great example of this is The Coolest Cooler, a product that raised over US$13 million in crowdfunding donations, making it the most-funded project ever on Kickstarter.
  2. Equity Crowdfunding – Equity Crowdfunding offers contributors (i.e., accredited investors) partial ownership in a company (typically in the form of shares) in exchange for seed capital.
A key difference between the above types of Crowdfunding is that for the most part, in Rewards-Based Crowdfunding, people contribute because they think an idea is cool or they want to support the entrepreneur, not because they expect anything out of it. This makes it very attractive for entrepreneurs that are looking for an outlet to test their ideas and get feedback.

Equity Crowdfunding, is a more advanced means of raising seed capital, reserved for entrepreneurs that have already demonstrated some traction with their idea or have a validated product to pitch to investors.

Crowdfunding and the Jumpstart Our Business Startups Act

Crowdfunding reached a new dimension when the Jumpstart Our Business Startups (JOBS) Act was signed into law in 2012 and required the U.S. Securities and Exchange Commission (SEC) to set forth a proposed set of rules to extend the opportunity to the crowd (including non-accredited investors) to invest in early-stage startups, once the long-awaited Title III of the JOBS Act gets released.

Alex Blumberg in his witty Podcast UpStart - a must hear for anyone who is in the throes of starting something new - shares real time recordings about the tales and struggles of starting a business. In a recent episode, “How Listeners Become Owners”, Alex talks about the undeniable appeal of Equity Crowdfunding and how it would enable his Podcast listeners to actually invest in his startup Gimlet Media. However, until the SEC releases the mentioned Title III of the JOBS Act allowing the crowd (i.e., the average Joes or Janes) to invest alongside Venture Capital and Angel investors, this risky privilege to invest in Alex’s startup or any promising startup for that matter is only reserved to a small group of wealthy individuals.

The Buzz

Crowdfunding sites (i.e., portals) are useful for more than just raising money and they quickly have become a valuable tool for entrepreneurs. Not only is it an inexpensive or free testing ground for your ideas but also accelerates the connection with investors by helping to spread stories.

However, the harsh reality is that most crowdfunding campaigns fail. Each startup is unique, whether or not (rewards-based or equity) crowdfunding is the optimal route depends on your unique facts and circumstances and where your business stands (i.e., idea, testing or growth stage). If done right, a crowdfunding campaign can not only get your business off the ground but can create momentum and organic buzz for your business.

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