By Ramona Barrett
December 2016
When a startup is newly formed, there is a laundry list of activities to be accomplished.
Among other things, they often need to purchase equipment, rent office space, and hire employees.
But where will these imaginary funds come from?
Beyond the initial capital raised to get the company off the ground – commonly referred to as “seed capital” – startups often require additional capital to grow.
For many startups, financing poses a significant and continuous challenge.
Usually, they would resort to some combination of the traditional options: self-‐funding (dipping into their personal savings or getting a traditional business loan) and venture financing (offering equity or convertible debt to angel investors or venture capitalists).
However, a new financing alternative has been all the rave in the startup world: crowdfunding.
Crowdfunding, raising funds from the general public, is a popular trend that has been the new go-‐to financing solution.
Its revenue went from $530 million in 2009 to a whopping $1.5 billion in 2011 – in just two years, it tripled.
With the help of online tools and platforms such as Fundable, Kickstarter, Gofundme, and Indiegogo, startups are now raising capital through the collective efforts of friends, customers, and individual investors.
The startups receive capital with the added bonuses of greater exposure and a sense of demand for the company.
In return, investors either receive nothing (“donation-‐based”), a product or service offered by the company (“rewards-‐based”), or part ownership / a stake in the company (“equity-‐based”) return).
This funding source in its equity-‐based form gained legislative support in 2012 when President Barack Obama signed the Jumpstart Our Business Startups (JOBS) Act (commonly referred to as the “crowdfunding bill”) into law.
Under the Securities Act of 1933, the offer and sale of securities must be registered with the Securities and Exchange Commission (SEC) unless an exemption is available.
The registration process is costly, which can be particularly burdensome on startups looking to raise capital through the sale of equity in the company.
Title III of the JOBS Act, in conjunction with the SEC’s adoption of Regulation Crowdfunding, is an attempt to support the fundraising efforts of startups through a crowdfunding exemption from the costly registration process.
Of course, the exemption is subject to certain requirements.
Limitations are placed on each of the three primary parties involved, i.e., the startup, the investor, and the intermediary.
Startups, for example, are not permitted to raise more than $1 million in a 12-‐month period. They must also meet some eligibility requirements.
Investors are limited in the amount they can give in a 12-‐month period.
Intermediaries are limited to one online platform and must be a broker-‐dealer or funding portal registered with the SEC and Financial Industry Regulatory Authority (FINRA).
As one would expect, since the passage of the JOBS Act, crowdfunding has grown tremendously.
The number of platforms offering crowdfunding jumped from 308 in 2013 to 1,250 in 2014, when they raised $16.2 billion globally.
Forbes reported that it is expected to surpass venture capital financing in 2016.
By 2025, the global crowdfunding market potential is projected to be between $90-‐96 billion.
Notably, though it is beneficial for startups within any industry, it has been particularly beneficial for nonprofit organizations and charities.
To startups considering jumping on the crowdfunding bandwagon, we’ve offered 10 useful tips below to get you started:
(1) Choose your platform wisely: Not all crowdfunding platforms are created equal. Be sure to read the fine print to understand the pros and cons of each platform. Do a cost-‐benefit comparison and make your final choice wisely.
(2) Develop and execute a robust marketing plan: Develop an organized and robust marketing campaign. Your crowdfunding campaign will not be successful if people do not know about it. Make use of social media platforms such as FaceBook, Twitter, Instagram, and SnapChat.
(3) Determine your target audience, and engage your friends, family, and supporters first: Research to determine your target audience. And don’t forget your likely upfront supporters, such as friends and family.
(4) Determine your target monetary goal: Research to determine how much you need to like to raise and develop your campaign accordingly.
(5) Develop your pitch / story (and make it personal): Come up with a compelling, genuine story.
(6) Lower the minimum investment amount to lower risk exposure per investor: Instead of depending on a large investment from a few investors, lower the minimum investment amount per investor. This may up your chances.
(7) Communicate developments often: Communicate to your current and potential supporters often about accomplishments and upcoming plans.
(8) Adequately flesh out your product/service idea beforehand: Consider planning six months ahead before putting your campaign out there. Prepare!
(9) Do research similar campaigns (many are not taken down afterward): Many platforms keep both their successful and unsuccessful campaigns up and do not take them down. Research similar campaigns to know what you should (or should not) do.
(10) Stay strong and stay in the game – this financing alternative is here to stay.
Sources:
https://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf
https://www.sec.gov/spotlight/jobs-act.shtml
https://www.sec.gov/info/smallbus/secg/rccomplianceguide-051316.htm
http://www.themacro.com/articles/2016/01/how-to-raise‐a‐seed‐round/
https://www.fundable.com/learn/resources/guides/crowdfunding-guide
https://www.fundable.com/crowdfunding101/history-of-crowdfunding
https://www.entrepreneur.com/article/248122
http://www.businessnewsdaily.com/7506-crowdfunding-trends-tips.html
http://ignitiondeck.com/id/10-crowdfunding-secrets/