We occasionally check in on the latest advances in crowdfunding to see if it provides some good funding opportunities.  It does seem to have turned a corner, but there are still many perils.  We are now watching what is happening with one of our regional cluster companies to see how things turn out and what lessons can be learned.  Is it time to push this higher up on the options available?

First of all, the massive amount of money being successfully raised through crowdfunding of all types cannot be ignored.  Here are some recent statistics from Fundera and the CrowdData Center which track the industry, and consider all types of crowdfunding—donations, sales of equity, pre-sales of products, reward-based campaigns, and lending:

1. $17.2 billion is generated yearly through crowdfunding in North America.  The cumulative total since 2014 is $55 billion.
2. Funds raised through crowdfunding grew 33.7% last year.
3. There were 6,455,080 worldwide crowdfunding campaigns last year.
4. Since 2014, the average raise just for fully-funded successful campaigns is $214,000.
5. The average amount raised by all crowdfunding campaigns last year was $824.
6. The average success rate of crowdfunding campaigns is about 22%.
7. Overall crowdfunding projects have an average of (depending on the source) 47 backers (Fundera), or 341 backers (The CrowdData Center).

From the data we have reviewed, the typical successful equity raise for a business is a few hundred thousand dollars.  Raising over a million dollars is rare. 

Second, the SEC amended its rules to make crowdfunding more compatible with raising money in a subsequent, more traditional round.  One of the original concerns with crowdfunding was that it would result in a company having to manage hundreds of unsophisticated investors which not only could be time-consuming but a big hassle when it came time to bring in more traditional investors and existing investors would need to agree to the new investment.  The gaggle of rookies might not understand being presented with detailed terms and conditions that a more sophisticated investor would see as pretty standard.  The new rules provided for putting all the rookies in a separate entity with an established leader, and with clear rules on how decisions would be made by the group.  That would mean the main company would have only one investor to deal with.  To the extent that new money was coming into the company the leader of the special entity would arrange for a vote and have a decision rule like a supermajority (e.g., 75%) could approve a transaction, and the rest would be bound to go along.  This change made an earlier crowdfunding round much more palatable to future investors.  

Crowdfunding is appealing for several reasons.  It can provide critical early money to underwrite demo projects to provide evidence of customer traction.  It provides early exposure to some investors that would otherwise be hard to reach.  You don’t need to surrender much ownership of your company to raise early money.  Valuations tend to be very generous.

On the other hand, there are perils.  You have to expose your idea to the world, and potentially invite copycats.  Conducting a campaign requires a lot of preparation—financials, due diligence material, a slide presentation, a live Q&A session, and legal documentation.  Success is a function of the work you put into a campaign.  Close to 80% of all campaigns fail.  

You can choose a platform with very unfavorable terms, such as high fees and a requirement to refund investors’ money if the target goal is not reached.  Your platform may expect you to bring potential investors to the table.  They do not have a bench of eager investors.  You have to research the platforms very carefully.  There are scams out there. 

Platforms like Kickstarter and GoFundMe are not for equity crowdfunding.   They are more for donation-type and pre-sale campaigns.  You have to look very carefully for one that is appropriate.  There are hundreds of platforms out there now.  Research their track records carefully.  One we have identified that so far looks pretty good is netcapital.com.  It looks like they have a ready-made set of investors that visit the site often looking for deals.  And they tend to support their clients well.  There are probably others, but at least that is a place to start if you want to explore this opportunity.  But always be careful and be skeptical of anything that sounds too good to be true. Unfortunately, there are scammers out there.