Crowdfunding is not a new concept. In its simplest sense, it is about communicating an opportunity to people and influencing them to give you money to support your project or venture. It is essentially what all forms of fundraising and capital raising/investing are. Silent auctions, bake sales, community bonds, stock exchanges, and mutual funds are all forms of getting money from the crowd.
This new wave of crowdfunding takes advantage of technology, video communication, and online distribution channels to move money to compelling projects through an internet medium. Although moving money online is not a new thing either, what are the things that we need to know about or be aware of?
1. Understand the difference between crowdfunding as online fundraising and crowdfunding as online capital raising.
I touched upon this issue in the previous post in this series to a certain extent. Crowdfunding as online capital raising, in practice, is still presently subject to the same regulatory restrictions as in offline capital raising (i.e. raising capital from investors in person). In general, the onus is on the company raising the money to comply with securities laws. However, as an investor, you too should pay close attention to what is being offered and asked of you be it online or offline capital raising.
2. Finding and reaching people.
a. Finding and reaching supporters/investors.
From the perspective of a project creator or venture founder, you want to use the features of online platforms to your advantage. They are great in terms of administrative convenience and as a central place to communicate and collect information. But more importantly, use it for its reach. Reach people outside of your immediate network and take advantage of the community of people gathering on the site that are supporting other projects or looking for projects to support. The least successful online fundraising campaigns that I’ve observed simply directed their existing network to the site to collect their donations. If you are only reaching your existing or local network, you might be better off organizing a local fundraising event and engaging in person, which is more compelling. Online platforms are attractive because you could be reaching an audience you didn’t know about or with whom you cannot normally engage in person, locally.
b. Finding the projects you want to support or in which you want to invest.
As more and more online crowdfunding platforms pop up, we’re are already starting to see variations and niches being developed – be it by geography, focus, or slight tweaks in the business or funding model. Whereas Kickstarter had the biggest audience as one of the first movers, new platforms will be vying for your attention. It will become increasingly important for you to understand what your investment mission, vision, and values are. You will then need to research to find the right places and platforms that feature the projects that you’d be most interest in supporting or to invest in.
3. Understand what information is being conveyed and how it is conveyed.
Online fundraising: What is the project? What outcomes are the project creators hoping to achieve? Does it matter to you where the project activities are taking place or whether the project creators are credible and have does this activity before? Online fundraisers may use a combination of stories, data and analysis, and video to convey the purpose, meaning, and intended outcomes of their project. What speaks most to you and how does the project align with your values and what is important to you?
Online capital raising: Is there a document, typically a prospectus, which details the risks, impact, and anticipated outcomes of the venture? Do you have the opportunity to speak directly with the venture’s founders and management team? This is your due diligence process. The Angel Capital Education Foundation (an initiative of the Kauffman Foundation in the US) published research that showed better angel investment returns resulted in situations where the investor(s) spent more than the median number of hours (20 hours) on due diligence. Remember that research and statistics are based on averages and medians, so if you need to spend more time on due diligence or you need to get more information before you can make a decision, invest the time to do so and ask the questions you need to ask.
Especially in investing, so much depends upon the relationship that is built between an investor and entrepreneur that I believe making strong connections is still important. Online platforms may appear to be more accessible and have the perception of being more democratic, at present they may still be limited to raising small amounts of money. The projects that attracted a lot of money are outliers and possessed characteristics that I wouldn’t say are typical to the average fundraising or capital raising campaigns. When it comes to raising significant amounts of capital to get a project started or growing, I believe the following principles still hold true:
- Meet people before you need to meet them. This helps investors find the opportunities they’re looking for and helps entrepreneurs find their supporters. Build relationships.
- For entrepreneurs: Communicate clearly (in words, numbers, stories, visuals…) what your project or venture offers, what the risks are, and what it needs.
- For investors: Communicate your investment requirements, expectations, and what you have to offer to a venture to help it succeed.
If you’re able to achieve this with the help of an online platform, then all the better.
Register for Let’s Talk About Crowdfunding and hear from 5 guest speakers about their perspective on sourcing money from the crowd. The event is part of a series of Conversations for Investing with our Values hosted by Pique Ventures. August’s event is co-hosted with the Canadian Global Impact Investing Group.
This series of posts:
- Getting Money from the Crowd – Part 1 [Crowd-funding]
- Getting Money from the Crowd – Part 2 [Crowd-funding vs. Crowd-sourced Equity]
- Getting Money from the Crowd – Part 3 [Crowd-sourced Online vs. Offline]