Crowdfunding is hot. According to Crowdsourcing.org, in 2012, more than US$2.7 billion was raised through crowdfunding platforms; in 2013 the amount is expected to increase to US$5.1 billion. That crowdfunding is hot was also confirmed at a recent sold out MaRS Best Practices event featuring Brian Meece, the CEO and co-founder of crowdfunding platform RocketHub.
According to Brian, crowdfunding can be defined as “an event that harnesses networks for funds, awareness and feedback.” Historically, crowdfunding can be seen as part of a long-term trend of “democratizing innovation,” as described by Eric Von Hippel in his 2005 book by the same name. In the world of funding, crowdfunding fits somewhere in between “The Long Tail” as described by Chris Anderson in 2004 and microfinance as done by Grameen Bank and Kiva.
The Pebble effect
Considering that current security regulations prevent equity from being raised through crowdfunding events in Canada and the United States, what exactly is the appeal of crowdfunding to the current class of entrepreneurs?
One word describes it all: Pebble.
When Pebble Technology was unable to raise venture capital funding to develop and market their smartwatch, they decided to run a pre-sales campaign on a crowdfunding platform in an attempt to obtain orders totalling $100,000 so that they could begin production. The campaign launched in April 2012 and reached its initial funding target within days. When the campaign wrapped up, 68,928 buyers had placed orders for a total value of $10,266,844—more than 100 times the initial funding target.
As other entrepreneurs struggle to raise risk capital from traditional sources, such as angel and venture capital investors, the Pebble campaign has shown that pre-sales through a crowdfunding platform can be a very attractive alternative to raising the capital required to get commercial operations started. After all, Pebble’s founder raised more money than he was looking for and did so without having his ownership share watered down.
Is crowdfunding for you?
In his talk, Brian presented some statistics that should cause people to think twice before launching a crowdfunding campaign.
In other words, the typical crowdfunding campaign is very different from the Pebble campaign. Lean startups that are hoping to use crowdfunding as a way to validate their solutions and business models should ask a few critical questions to determine whether crowdfunding is, in fact, the right way to go.
If your responses to these questions are positive, Brian offered further advice in the form of a project checklist to make sure that you’re truly ready for a crowdfunding campaign.
This checklist alone does not ensure success. Once a crowdfunding campaign is launched you need to have a game plan in order to engage with potential backers, to get your first “wins,” to build and maintain energy in the campaign and to communicate actively with potential backers throughout the campaign.
Crowdfunding for lean startups
While lean startups may plan to use crowdfunding as a way of validating their solution and business model, they must resist the temptation to jump in too early in the customer development process. Crowdfunding should not be considered until some fundamental pieces are in place.
Only when these two points have been resolved would we recommend that a startup consider a crowdfunding campaign.
Watch this space
Meanwhile, we are waiting for both Canadian and American regulators to move forward with new market rules that will allow crowdfunding platforms to facilitate the raising of equity and debt for startups and projects. The United States Securities and Exchange Commission was supposed to issue new rules earlier this year, but the new rules have been delayed and are not yet known. The Ontario Securities Commission has engaged in a consultation process, but has not yet issued new rules or a timeline for when such rules should be expected.
For more information about crowdfunding and the potential crowdfunding exemption being considered by the Ontario Securities Commission, see the following resources:
Check out this five-minute “Hot Tips for Startups” video:
Check out Brian Meece’s full presentation here.