Crowdfunding. An alternative financing concept. A primer on the potential applications for funding growing small businesses

Transcription

1 Crowdfunding An alternative financing concept A primer on the potential applications for funding growing small businesses Peter G. Mintz Fleetwood Associates Inc., / SCORE Counselor

2 What is Crowdfunding Crowdfunding The use of small amounts of capital from a large number of individuals to finance a new business venture. Investopedia The basic concept is to expand the pool of potential investors/funders beyond the traditional circle of owners, relatives, banks, angels and venture capitalists. 2

3 The Inception of Crowdfunding First Crowdfunding campaign When money for the Statue of Liberty's pedestal ran short, publisher Joseph Pulitzer launched a call for donations in his New York newspaper. Through the paper, more than $100,000 was raised in six months. About 125,000 people contributed $1 or less. 3

4 The Inception of Modern Crowdfunding Modern roots are in funding projects in the Arts. Many trace the inception to 1997 when British Rock Band Marillion raised $60,000 for a U.S. tour utilizing their fan list. ( nu). 4

5 The Inception of Modern Crowdfunding. Largest donation from any Marillion fan pounds. Any fan who donated 10 pounds or more got a free CD. Not only was this the first modern Crowdfunding campaign, they also created the concept of a Rewards based campaign (the CD). It also introduced the concept that the crowdfunders need to be people who have a passion for the concept that they are funding. 5

6 Who uses Crowdfunding Crowdfunding has a wide variety of uses and users from individual artists to small businesses. Crowdfunding is not limited to any particular type of art, entertainment platform, industry or project. Crowdfunding campaigns have ranged from just a few thousand dollars to more than $40 million for a single campaign. 6

7 Who uses Crowdfunding Largest campaign to date: Star Citizen (Video Game) a space trading and combat simulator video game for Microsoft Windows, OS X and GNU/Linux. $43.2 million has been raised since October Through Kickstarter - 34,397 backers raised $2.1 million of the funds in October and November of

8 Crowdfunding Models Four Core Models: Donation return. Supporters give and get nothing in Reward Supporters get some type of reward for their donation. Usually the underlying product or service free or at a discount and marketing type merchandise. Equity The JOBS ACT A stake in the venture. Lending Backer/investor gets a loan. 8

9 Crowdfunding Models Donation: Funds are collected from a community for a publicly disclosed initiative but there is no financial return to the people putting in the money. For instance - the Crowdfunding done for the 2008 Obama Presidential election campaign generated over $137 million dollars. 9

10 Crowdfunding Models Donation: The donation model is a means for charities, to gather a community online and to enable them to donate to a project. Crowdfunding platforms can be useful for smaller organizations and people raising money for personal or specific charitable causes. 10

11 Crowdfunding Models Donation: Funding Platform examples: GoFundMe ( - #1 crowdfunding website in the world for personal causes and life-events. Most people use GoFundMe to raise money for themselves, a friend or loved one during life's important moments. This includes things like medical expenses, education costs, volunteer programs, youth sports, funerals & memorials - even animals & pets. Launched May 2010 Over $280 million raised 5% fee for each donation 11

12 Crowdfunding Models Donation: Funding Platform examples: GiveForwad ( the #1 platform to start a medical fundraiser GiveForward specializes in and is the premier online platform for medical fundraising.we have helped thousands of people raise millions of dollars online for things like general medical expenses, cancer treatment, transplants, funeral costs and disaster-relief. Launched August 2008 Over $99 million raised for more than 100,000 people 0.5% fee for each donation 12

13 Crowdfunding Models Reward: The current most popular form of Crowdfunding. Initial focus on funding entrepreneurial projects. of a creative, social and Contributors receive non financial rewards. Campaigns usually operate with a tiered reward structure - The more you donate the better the reward. For instance: Funding the production of a new Play. $10 contribution gets a Tee Shirt. $100 gets a Tee Shirt and two tickets to the play. 13

14 Crowdfunding Models Reward: For many projects the model is similar to a presale agreement. The entrepreneurs or artists crowdfund the production cost of their record, movie, game or product and allow the donors to be the first recipients once the production is complete. 14

15 Crowdfunding Models Reward: Funding Platform examples: KickStarter ( - The largest and most well known of all Crowdfunding sites. Kickstarter is a funding platform for creative projects. Everything from films, games, and music to art, design, and technology. Launched April, 2009 Over $1.0 billion raised (6.1 million contributors, 110,000+ projects) 5% fee of funds collected 15

16 Crowdfunding Models Reward: Funding Platform examples: Indiegogo ( - Also claims to be the largest of all Crowdfunding sites. Indiegogo is a way for people all over the world to join forces to make ideas happen. Launched January, 2008 Over $150 million raised (Over 44,000 projects) 3-9% fee of funds collected 16

17 Crowdfunding Models Equity: Potential to raise equity capital outside of the traditional equity models. Driving Force - The JOBS ACT (signed April 5, 2012) Jumpstart Our Business Startups Act A law intended to encourage funding of United States small businesses by easing various securities regulations. Fastest growing sector. 17

18 Crowdfunding Models Equity: Key JOBS Act provisions: Shareholder requirements - Increase in the number of shareholders a company may have before being required to register with the SEC. Old Rules Company must become public with assets of $10 million and 500 shareholders. New Rules - 2,000 shareholders, both accredited and unaccredited. Public Soliciation Companies can advertise to the public that they are seeking funding. 18

19 Crowdfunding Models Equity: Smallest of the four key sectors about 4% of the current Crowdfunding Market. Fastest growing sector Grew 300% in 2013 vs. 91% for entire Crowdfunding Market. Currently represents about 10% of the Venture Capital (VC) Market. Many believe it will eclipse the VC market within the next few years. 19

20 Crowdfunding Models Equity: Funding Platform examples: Equitynet ( - One of the earliest Equity Crowdfunding sites...prepares entrepreneurs to access the capital markets and enables investors to research, compare, and benchmark private companies. Launched 2005 Over $230 million in raised(20,000 contributors, 18,200 companies) $69 - per month and up. Some functions are free. 20

21 Crowdfunding Models Equity: Funding Platform examples: Crowdfunder ( - One of the most active Equity Crowdfunding sites. Connecting entrepreneurs with investors around the world to help fund their business and fuel economic growth. Launched 2011 Over $66 million in deal flow(45,000 contributors, 8,800 companies) $99 - $999 per month 21

22 Crowdfunding Models Equity: Key Issues: Fraud Concern that the loosening of investment protections would expose small and inexperienced investors to fraud. Wrong Path for many - May encourage small businesses to seek equity when it might not be the most appropriate route. 22

23 Crowdfunding Models Equity: Key Issues: Follow up Unlike Donation or Reward there is an ongoing obligation to provide information. Exit Strategy Both the Issuer/Company and the investors need to have an exit strategy. Alternative methods Angel, VC and Investment Banking funding may be viable alternatives. 23

24 Crowdfunding Models Lending: Loans from the crowd. Also known as Peer to Peer (P2P) Lending. Crowd lenders take small chunks of the overall loan. Many platforms use standard credit scoring systems (i.e., FICO) so lenders can choose an appropriate interest rate to charge. Borrowers generally look for loans between $2,000 and $35,

25 Crowdfunding Models Lending: Funding Platform examples: LendingClub ( - One of the earliest Lending Crowdfunding sites... create a more efficient, transparent and customer-friendly alternative to the traditional banking system. Launched August, 2007 Over $4 billion loans funded to nearly 250,000 individuals. Loans up to $35,000. Rates dependent on Credit Score. 25

26 Crowdfunding Models Lending: Funding Platform examples: Prosper ( - America s first peer-topeer lending platform. The Prosper platform connects people who want to invest money with people who want to borrow money. Launched February, 2006 Over $1 billion loans funded to over 2 million members. Loans from $2,000 to $35,000. Interest rate dependent on Credit Score. 26

27 How big is the market World Bank Report: Crowdfunding s Potential for the Developing World (October 2013) Campaigns across the globe raised nearly US $2.7 billion in ROW ($110) $2.7 billion Market (2012) Europe ($945) North America ($1,600) 27

28 How big is the market World Bank Report: Crowdfunding s Potential for the Developing World (October 2013) Donation and Rewards based platforms represented more than half of the campaigns in 2012 Equity (4.3%) Donation and Rewards (51.5%) Lending (44.2%) 28

29 How big is the market 2012 Market: Massolution (a crowdsourcing research and advisory firm) forecasted an increase in global crowdfunding volumes in 2013, to $5.1 billion. Some estimates have that market as over $6 billion. Crowdfunding investment market expected to grow to $13 billion this year and to $93 billion by

30 Crowdfunding Statistics and Demographics Most campaigns are relatively small and short lived: Average successful crowdfunding campaign is around $7,000. Average campaign lasts around 9 weeks Source: 30

31 How can Small businesses use it Smallest businesses and startups are probably best served using a Rewards based platform, or possibly a Lending platform. Companies at the VC funding stage should consider the Equity based platform. 31

32 Crowdfunding Benefits Better understanding of market demand Particularly on Rewards based platform. Helps drive highly focused concise and high energy funding campaign. Creates Media Buzz. Can help find potential partners, distributors and investors. Becoming an alternative to VC investment (Equity Platform) less invasive for owners. 32

33 Crowdfunding disadvantages 60% of all current campaigns fail. Campaigns are usually brief. May not be enough time for some companies. Rules and expectations are still developing. Communicating with Investors and backers New concept for small companies. 33

34 Keys to success Preparation The campaign should be done before it starts. Backers/Investors already identified. Expect to work the campaign at least several hours each day. Presentation Good title, story, photos, video. Keep it simple and compelling. 34

35 Keys to success Documentation Well prepared support materials appropriate to the project: Corporate Information (Dependent on campaign) Company Description Product / Service Description Mission Statement Executive Summary Business Plan Projections 35

36 Keys to success Campaign Duration - Less than 60 days is recommended. Actually, those under 30 days are the most successful. Video - Simple, personal and informative Projects with a video attract 125% more dollars (predominantly Rewards based campaigns). 36

37 Keys to success Identify those with a passion for the project or company. Offer compelling and realistic rewards- Rewards platform. Oversubscription Have a plan. Delivery MUST deliver as promised. Reputation is key. 37

38 Keys to success Communications is key: Thank funders/supporters, make them feel good about supporting you personalize! Be prepared to continue communication. Most critical for Equity campaigns but valuable for all. Remember The supporters can be valuable to you even beyond the campaign. 38

39 Crowdfunding Platforms Summary There are over 500 different Crowdfunding sites. Crowdfunding Platforms Select Sites Donation Rewards Equity Lending Many sites do more than one platform. Catapult Crowdrise Fundly Giveforward Gofundme Qgive Quirky Artistshare Indiegogo Kickstarter Peerbackers Rockethub AngelList Crowdfunder EarlyShares Equitynet Fundersclub Microventures RockThePost Seedinvest Biz2credit Dealstruck Fundingcircle Kiva Lendingclub Prosper Somolend For instance, Lendingclub does equity and debt. 39

40 Crowdfunding Support Crowdsourcing.org the largest online repository of news, articles, videos, and site information on the topic of crowdsourcing and crowdfunding. CrowdundingAcademy.com Helps create, host and manage civic and entrepreneurial projects around the world. Fleetwood Associates ( Helps companies with corporate documentation such as Business Plans, Mission Statements, Industry Research, etc. 40

41 Crowdfunding Support LinkedIn Crowdfunding CrowdFunding USA CrowdSourcing & CrowdFunding Meetup Groups: CrowdFunding For Entrepreneurs NYC CrowdFunding CROWDFUNDx Crowdfunding Meetup: NYC Division Radio - Book Cash From The Crowd - Sally Outlaw (peerbackers.com) 41

42 Crowdfunding Takeaways Rapidly growing worldwide financing market for small companies (and others) with multiple channels/platforms. $13 billion (currently) to $93 billion in a decade. Dual benefit of funding and market awareness. Equity platform - fastest growing sector. Alternative to VC. Current use - predominantly pre-sale and focused/intense marketing campaigns. Capitalizes on and leverages the power of the Internet. 42

43 Thank You Crowdfunding An alternative financing concept A primer on the potential applications for funding growing small businesses Peter G. Mintz Fleetwood Associates Inc., / SCORE Counselor (914)