Crowdfunding

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What is crowdfunding?

– So, what is crowdfunding? Crowdfunding, as its name states, is a way to raise capital for your company through a large number of investors. That’s very different from the traditional way of raising money, which is done through a small number of wealthy investors, or a venture capital firm. Individually, each investor, called in this case a “backer,” will invest a relatively small amount of money, but collectively, it can represent tens of thousands of dollars, or evenhundreds of thousands of dollars.

In this case, investors are called “backers,” because they’re actually not investors. In the case of crowdfunding, at the moment of this recording, people that want to put money on your project cannot do it as investors for legal reasons, and have to make donations instead, which are usually rewarded by a gift, or a limited-edition product. Entrepreneurs and backers meet on funding platforms, which are websites dedicated to putting in contact potential backers with entrepreneurs.

Some of the most widely-used websites are Kickstarter.com and Indiegogo.com. On those websites, you can create a project profile, which you will use to market your company and product with the objective of attracting backers and motivating them into giving you the capital to make your project a reality. There have been some huge successes in the field of crowdfunding, and one of the most well-known is the Pebble e-paper watch.

This is the story of an entrepreneur who needed to raise 100 thousand dollars and ended up getting 10 million dollars from backers on Kickstarter. Of course, that’s an extreme example of what can happen when you raise capital using crowdfunding, but it’s also an example that it can be very successful and get you the capital you need. And as we will see, crowdfunding is best serving very young companies that have a limitedconnection to the investment world.

 

Understanding the entrepreneur-backer relationship

– For the past few years, the only way you could raise capital through crowdfunding was by accepting donations from backers and send them a gift or a limited-edition product in return. This is called non-equity crowdfunding. In the example we previously mentioned of the Pebble E-Paper Watch, you could buy limited-edition products and the price you would pay would of course partly be for the product itselfand the rest would go towards raising capital for the project.

Making a donation or buying a limited-edition product for a much higher price than you would usually pay for it is very different from investing in a company. When you’re a regular investor, you put your money in because you expect to get a share of the success and therefore, have a possible unlimited potential for success. Many investors harbor the hope of investing in the next Microsoft or Google, but when you’re speaking donations, it’s a completely different state of mind.

You have no claim over the future success of the company and can only have the pleasure of knowingyou are part of its beginnings. Raising money through a non-equity crowdfunding is all about marketing and communications, getting the crowd excited about your project and finding the early adapters who will want to be part of your story. Now, things are starting to change and normally, we should all be very soon able to use crowdfunding to raise capital in a more traditional way in exchange for shares of your company.

In 2012, the JOBS Act, standing for Jumpstart Our Business Startups Act has been signed into law. This act covers many topics, and its third title or chapter, if you will, is focused on crowdfunding and specifically on defining the rules to enable equity crowdfunding. It was signed into law in 2012, but the third title is still waiting to be implemented and requires the Securities and Exchange Commission, the S.E.C., to finalize the rules, and so until this is done it is illegal to sell company shares through crowdfunding.

Up to now, there are many rules limiting the possibility of doing so, such as for example the General Solicitation Ban, which prevents companiesfrom communicating widely about their need for capital. This ban has been put in place with the objective of protecting ill-informed potential investors.With the JOBS Act, this ban should be lifted for crowdfunding purposes.

Another big change is that now, anyone will be able to invest capital. Up to now, only accredited investors could do so, and to be an accredited investor, you have to be very wealthy. There will be limitations to the amounts that you can invest based on your income or net worth, but in general, it should be relevant to how much money you make or alternatively, to the funds, properties, and so on, you already own, minus that you have, also called your net worth or wealth.

Finally, from a more technical standpoint, it created the status of funding portal as an intermediarybetween investors and entrepreneurs with a set of responsibilities, and it also increased the number of people that could invest in a single company before having to register with the Securities and Exchange Commission, which usually happens when a companygets on the stock market. Up to now before crowdfunding existed, you would always have a very small number of investors until the company opens its capital to the public through the stock market.

Now with crowdfunding, this has changed.

Understanding the entrepreneur-backer relationship

– For the past few years, the only way you could raise capital through crowdfunding was by accepting donations from backers and send them a gift or a limited-edition product in return. This is called non-equity crowdfunding. In the example we previously mentioned of the Pebble E-Paper Watch, you could buy limited-edition products and the price you would pay would of course partly be for the product itselfand the rest would go towards raising capital for the project.

Making a donation or buying a limited-edition product for a much higher price than you would usually pay for it is very different from investing in a company. When you’re a regular investor, you put your money in because you expect to get a share of the success and therefore, have a possible unlimited potential for success. Many investors harbor the hope of investing in the next Microsoft or Google, but when you’re speaking donations, it’s a completely different state of mind.

You have no claim over the future success of the company and can only have the pleasure of knowingyou are part of its beginnings. Raising money through a non-equity crowdfunding is all about marketing and communications, getting the crowd excited about your project and finding the early adapters who will want to be part of your story. Now, things are starting to change and normally, we should all be very soon able to use crowdfunding to raise capital in a more traditional way in exchange for shares of your company.

In 2012, the JOBS Act, standing for Jumpstart Our Business Startups Act has been signed into law. This act covers many topics, and its third title or chapter, if you will, is focused on crowdfunding and specifically on defining the rules to enable equity crowdfunding. It was signed into law in 2012, but the third title is still waiting to be implemented and requires the Securities and Exchange Commission, the S.E.C., to finalize the rules, and so until this is done it is illegal to sell company shares through crowdfunding.

Up to now, there are many rules limiting the possibility of doing so, such as for example the General Solicitation Ban, which prevents companiesfrom communicating widely about their need for capital. This ban has been put in place with the objective of protecting ill-informed potential investors.With the JOBS Act, this ban should be lifted for crowdfunding purposes.

Another big change is that now, anyone will be able to invest capital. Up to now, only accredited investors could do so, and to be an accredited investor, you have to be very wealthy. There will be limitations to the amounts that you can invest based on your income or net worth, but in general, it should be relevant to how much money you make or alternatively, to the funds, properties, and so on, you already own, minus that you have, also called your net worth or wealth.

Finally, from a more technical standpoint, it created the status of funding portal as an intermediarybetween investors and entrepreneurs with a set of responsibilities, and it also increased the number of people that could invest in a single company before having to register with the Securities and Exchange Commission, which usually happens when a companygets on the stock market. Up to now before crowdfunding existed, you would always have a very small number of investors until the company opens its capital to the public through the stock market.

Now with crowdfunding, this has changed.

 

Where to go from here: Using crowdfunding

– At this point in time, if you believe crowd funding is what you need, the best thing to do is to educateyourself on the proven techniques to a successful crowd funding campaign. Because crowd funding is by nature done through a large number of people, you won’t be able to convince them one by one to invest in your company, and given the amount that they will be investing, you shouldn’t want to. You can then rely on the traditional means of marketing and communications targeted at large crowds. If you are not familiar with those techniques, that’s probably a good place to start.

Educate yourself on ways to communicate with your audience, understand who they are, where they buysimilar products to yours, and how effectively to speak to them. You can start, for example, with educating yourself on marketing techniques in general and start with marketing fundamentals with Drew Boyd on lynda.com. You can also read books on running crowd funding campaigns, which will have a lot of the same marketing concepts, and in particular, online marketing ones.

Those books will enable you as well to learn where others have failed or succeeded doing exactly what you want to do. The natural next step, then, is to define your strategy, get your content ready and start your campaign. Many campaigns actually start way before they get on funding portals, such as KickStarter. The objective being to create an event around your product, an upcoming campaign, and to get the traffic flowing even before you officially started raising capital.

 

 

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