Below is an article by Inc. entitled “Crowdfunding (and Crowdfinance) 101”
Crowdfunding (and Crowdfinance) 101
By: Luan Cox, Inc. Contributor
Jun 26, 2014
Crowdfunding has paved a new avenue for entrepreneurs to raise capital for their growing businesses and has generated billions of dollars for startups. Some do it well (think innovators such as "Generation Why Not: 35 Under 35"). Others, like New York City Opera, struggled with executing a winning campaign. New York City Opera used crowdfunding site Kickstarter to try to raise $1 million the opera needed to stay open through September 2013. It got $301,019 from the 22-day campaign--not even close to its target--and filed for bankruptcy soon thereafter. Although this was not the sole reason the NYCO shut its doors (it needed to raise another $6 million from private investors but only got $2 million), entrepreneurs can learn valuable lessons from the failures of their online campaigns.
First, the NYCO did not clearly define what it was producing with the funds. Kickstarter's guidelines state that the site is not to be used for direct charity or cause funding, therefore a project from a nonprofit organization must have a clear end and focus on what is being created. Second, the campaign began a mere nine days before the 2013-14 season that it was supposed to be funding. Some thought this gave off a sense of desperation and looked like poor planning on the part of the NYCO. Both of these illustrate how lack of understanding and preparation can produce poor results in an online crowdfunding campaign.
How can you do it right? Do you even want to? Before jumping into a crowdfunding campaign, here are 4 things you need to know.
1. Crowdfunding is not one size fits all--you have 4 options.
- Donation-based crowdfunding. People contribute to a cause or campaign that they believe in with no expectation of returns. This is ideal for philanthropists or those wanting to support their community. Sometimes referred to as civic crowdfunding, this type of crowdfunding works best for charitable causes, community projects, and other socially conscious campaigns.
- Rewards-based crowdfunding. A reward is given that usually corresponds with the amount contributed. Though rewards-based crowdfunding is not a new concept, it has been thrust into popularity by sites such as Kickstarter and Indiegogo. Popular with musicians, artists, movie producers, and startups producing consumer goods, contributors are often rewarded with a prototype or some other tangible reward.
- Debt-based crowdfunding. This involves the person or entity essentially getting a loan from contributors and paying them back with interest. These types of loans are growing in popularity, particularly with businesses looking to expand but not give up equity in their company.
- Equity-based crowdfunding. This is associated with the passage of Obama's 2012 JOBS Act, which eased federal regulations regarding fundraising and gave individuals the opportunity to become investors in private companies. With the implementation of Title II on September 23, 2013, private companies can publicly solicit funds from accredited investors. This usually happens online through a portal such as AngelList, EquityNet, or EarlyShares. When Title III is implemented, unaccredited investors will be able to invest in these private companies as well. This type of campaign entails the most legal and regulatory complexity, as it involves the sales of securities. Many project that soon this sort of fundraising will be a vital tool for small businesses and startups to raise capital.