CROWDFUNDING UPDATE – 2017

Update on crowdfunding trends.

 

What do these dogs have to do with Crowdfunding?  Nothing that I can think of, but I did get your attention, right?

“Reward funding,” via websites like Kickstarter and Indiegogo made the initial headlines.  These sites match people and funding with relevant ideas and inventions online. Companies receive what is essentially a contribution from an interested party who receives some free trinket or service in return.  Securities-based crowdfunding or “regulation crowdfunding” became legal in May 2016.  Regulation Crowdfunding permits private companies to secure funding from investors without registering the offering with the Securities and Exchange Commission (SEC).  Prior strict regulations involving investor qualifications have also been relaxed. 

 

 

Although the increased availability of financing is very attractive, especially to start-up companies who have difficulty finding traditional bank financing, the process to actually offer the securities is complicated and costly.  The securities must be offered through an approved crowdfunding portal.  To achieve success, the company must carefully implement an effective marketing campaign.  These companies are not just trying to induce customers to purchase a product: they are seeking considerably investment in a new venture.  The most important component to a successful raise is a video that explains the product or service.  Professional videos get a far better response than smartphone videos.  In addition, to the numerous filings required, and the details of the offering must be worked out and explained to the public in a simple, easily understandable manner.  To conduct a successful campaign, the issuer must have an extensive social media following.  According to Douglas Ellenoff, expert in crowdfunding, the data suggests that, unless an issuer has several thousand online contacts, they will have difficulty raising even $100,000.

 

 

Despite the hurdles, how is crowdfunding doing?  At the end of 2016, there were 21 FINRA-approved portals, with 186 participating entrepreneurs actively seeking financing.  Of that group, 79 were able to raise at least their minimum funding requirements. 

 

 

Looking at reward-based crowdfunding, platforms such as Kickstarter and Indiegogo have become considerably more sophisticated over the past few years.  As a result, successfully marketing these campaigns has also become more sophisticated.  Traditionally, specific product categories tend to perform better than others.  According to Entrepreneur.com, these popular products include affordable electric transportation alternatives for urban commuters (electric bikes, skateboards, etc.): active apparel with built-in chargers, extra pockets and extreme durability; and smart home devices for every need.  

 

 

Another wrinkle in the crowdfunding landscape is the proliferation of companies doing crowdfunding that don’t need financing.  Last year, Indiegogo launched “Enterprise Crowdfunding” to help large companies do market testing, launch products and support new innovations. 

 

 

Although this industry may be off to a slow start in comparison with the total amount of funding raised last year, the $17 million raised to support securities crowdfunding, in addition to the numerous companies that have been funded via the reward-based websites has helped numerous entrepreneurs start-up new and innovative businesses.