Crowdfunding is an option to raise capital, to fund your company, but for the longest time,
it has come with a reputation: if going to VCs or angel investors fails, then crowdfunding
is a plan B. And this has been mostly true since IndieGogo first popularized it in 2008.
But the landscape is changing. With some new legislation, new companies, and investors
taking a new interest in it - and the numbers confirm that it’s now more popular than ever.
So in this episode of Startups 101, I want to do a quick overview of your options,
how they work, and which might be best for you.
Crowdfunding really took in the startup world with reward-based crowdfunding.
These rely on receiving money in exchange for a reward, usually a product or service,
and again. Kickstarter and IndieGoGo are some of the bigger references.
And you probably own or at least have heard of A crowdfunded product. Some winners, and some losers
(that ended up in one of our Forensics episodes). One of my favorite examples is Peak Design (who we
love, can’t get enough of their gear, please send us free things).
Peak Designs funds the production for all their product launches with a Kickstarter campaign,
which is incredibly clever. It’s like a pre-sale,
that funds their manufacturing process without having to come up with the cash themselves.
So rewards-based crowdfunding is ideal for creating a community of early adopters.
It’s ideal for companies that have physical, consumer-oriented products and niche markets-
because you are essentially getting people to pre-pay for your product.
I funded my first startup with a Kickstarter campaign,
and it set me on the journey that I am today (I told more of that story on last week’s video).
Anyway, reward-based crowdfunding products have their issues. Firstly, copycats.
An army of Chinese companies is carefully following campaigns that get traction,
to rip off the products and beat them to market. Which yeah, it’s a douche move.
On the software side, you have the problem of the perceived value of digital rewards:
credit in the app, free downloads, free subscriptions… that are not as exciting
as a limited edition package signed by the founders- and can raise less money.
(Though with the NFT Madness these days, that’s OBVIOUSLY changing, but
that’s next week’s video). Still, the Kickstarter campaign I ran in
2011 (holy shit, 10 years ago) raised most of its money from advertising inside the app, and some
T-shirts. App pre-sales were $5 each, and getting thousands of people to back you is not easy.
In my experience (which again was a while ago) the key to crowdfunding was promotion:
just being on Kickstarter does not get you backed! You have to hustle with press,
blogs- I’ve even seen Facebook ads on Kickstarter campaigns, which must work.
The key is economics. Many failed Kickstarter projects fail
on that part- they forget about the cost of fulfilling rewards or marketing their campaign.
Yes, you are relying on community. Yes there might be an advocate, organic
aspect to it- but the truth is you have to convert traffic, just like with a good old landing page.
But more important than that, my take from these campaigns is that they are
good old MVP validation. Your MVP is a video pitch,
and you are testing whether or not the market cares. Lean Startup all the way.
Now- we managed to fund Pota-Toss because it was
little money, it was cool and sexy, but mostly because it was a mass audience product.
If you are building a B2B or enterprise software,
then there aren’t any cool rewards you can give, Which brings me to Equity Crowdfunding.
Equity crowdfunding was not a possibility in the early 2000s. We could very well argue that the
Kickstarters of the world helped pave the way for this to become a reality. The biggest detonator,
though, was the 2008 crisis, and how much small businesses struggled after it to raise capital.
So in 2012, the JOBS Act loosened a bunch of regulations for startups,
and one of them was allowing companies to be public about their round.
Before the JOBS Act, it was illegal for a company
to solicit- that is to advertise their funding online. JOBS allowed not only
to be public about the fundraising but to raise from investors outside the US.
From 2016 onwards, it was a fast track to growth. From 2016 to 2021,
crowdfunding increased by $514 million.
And, last year, 2021, the SEC implemented even more lax rules. The annual limit for
crowdfunding went from $1 million to $5 million it also increased the
limits for non-accredited investors- and it allowed investor syndicates.
But I’ll get to that in a sec.
I want to talk about that original point on crowdfunding being a last resort.
People have often doubted how far a crowdfunded company can really get.
The CEO of Pebble, for example, said crowdfunding was their last resort.
That was a common perception at the time- that the companies going
to crowdfunding were desperate- which is not necessarily wrong.
For years, I’d agree that this reality extended to equity crowdfunding:
you’d find companies that tried to close their round with Angels and VCs (the traditional way)
but failed to do so. You can find plenty of sites with small rounds,
not-so-great companies, and failed crowdfunding campaigns.
Actually, size has always been an issue. Equity crowdfunding rounds are small,
even today, with a $5 million cap in twelve months.
Before that, the $1.07 million cap made it difficult for startups
to raise money in a short period.
This meant that companies had to resort to further crowdfunding rounds or other forms of fundraising.
So, in a sense, crowdfunding can limit itself. Growth comes in small bits,
and it can frustrate founders.
Plus, an additional challenge comes in the form of looking
for venture capital in the future. Another big issue was the number
of investors in your cap table. Imagine having to send investor reports,
or answer questions for 50 investors. Imagine getting 50 signatures to approve an acquisition!
So new regulation was passed in 2021, allowing investors to
be merged into a Special Purpose Vehicle- which is essentially a company, formed
proportionally to the investor check sizes, which invests in the startup as a company.
So you get 1 investor in your cap table, instead of 30. And that company has its
own rules to govern itself and vote on the startups’ decisions, as a single entity.
Our experience here comes from working with
startups that have pursued crowdfunding via WeFunder.
Shameless plug, that’s what we do for a living: not Youtube videos- but help
startups pitch investors- by helping them write their pitch decks, run their financials,
scrape the web for investors… and also, connect them to WeFunder.
So with (ironed) technicalities aside, the new regulations have opened this new opportunity,
this new secret sauce to crowdfunding: you can turn your users into investors
Some of my favorite examples. Brewdog is this brewery and
pub chain that did a 72 million pound crowdfunding campaign back in 2011. They
are based out of the UK, so ignore all the JOBS act rules I just talked about.
They sold 8% of the company, 23 pounds per share,
and every shareholder got discounts in their bars and online purchases of their beers.
Another incredibly successful story is Zenefits,
this payroll company that raised its first round on WeFunder, $50,000 on 2013.
They then went on to raise a $500 million dollar series C round in 2015.
Last one, this company called Gamestar who closed their round just today-
are on track to close over $5 million dollars in funding.
For good or worse, we are also seeing crowdfunding in crypto,
where tokens are raising millions, sometimes hundreds of millions of dollars.
That to me is the ultimate test that there is something there. It’s happening, and it’s growing.
Now, one key difference is the short-term nature of crypto- I’d bet a fiat dollar
that most of these investors are looking to flip those tokens within weeks or months.
Startup investing takes longer. You might not see an ROI for 7 or 10 years. It’s a different kind
of investor that can make that commitment, and we are yet to see what’s going to happen with this.
So I’m genuinely curious what your perception is about this.
Remember I have office hours available, link in the description. First five comments on
any video get a free session, so make sure you are subscribed, and belled.
If you need help with your fundraising, just hit
slidebean.com. See you next week.