Crowdfunding is such a fascinating emergence.
It’s actually coming up as what’s called the new asset class. If you’re looking for funding for your project it has a lot of buzz behind it right now.
Crowdfunding, for anyone who hasn’t heard about it, is a way of having average Joe public, your friends and even family help you fund a particular part of your project or all of it and do it in small pledges. Basically small pledges, if you think back in the day with the Jerry Lewis Telethon, it’s almost like an Internet version of that, to keep it simple.
There are a couple different websites that you can look at for crowd funding. Some of the most prominent are RocketHub.com, KickStarter.com, IndieGoGo.com. Each of these sites have different criteria of project that they’re looking for and what ones they’re great with, etc. When you’re looking at it you want to read through the posting guidelines.
And just because you want to post there doesn’t mean that they’re going to approve your project to post. You’ll see a lot of different things. People are using crowdfunding for movies, screenplays and physical products. We have one client who funded their prototyping to the tune of $22k from crowdfunding.
There was a project on Kick Starter called the Glyph, which was fascinating to watch. They posted for some money to help with their prototypes and they were looking to raise like $20k and they ended up raising over $122k from small pledges, so they got much more velocity than they expected, which was super cool for them.
They did it with pre-selling their product.
If anyone wants I can talk about that in more detail, what pre-selling your product means versus debt versus equity for funding.
The upside of crow funding is this. When you take a business loan that’s debt financing your business or using your credit cards or business credit lines, that’s all debt financing. Equity financing is if you start a company or in the LLC world it would be that you sell a membership. In C Corps and S Corps it’s that you sell stock to raise money to do the things you need to do and that’s what your capital looks like.
- You have debt which is take out loans.
- You have equity which is partnership sales in an LLC
- You have stock sales in a C or S Corp
Sometimes you’ll have what’s called a convertible note. I used that at the start of my business. I had a friend who put up money as a loan and she could convert it to stock if she wanted to at a certain rate at a certain point in time if she chose to.
Those are the basic one that have existed a lot. The other, pre-sales of your product is really interesting. It gets into how you negotiate with your vendors a little too, but here’s how you use it. You basically know that you have your product available at a certain price, the cost of goods which you have dialed in somewhat. You go and create some offer that says for $10 or $50, whatever works for your product, people can buy one of these when it’s ready.
It’s clear what you’re using the funds for. You actually have to have a use of funds for people to have confidence in you and they say okay I’ll take one or I’ll take 10 of those and they are usually individual consumers. With these different crowdfunding sites what you’re able to do is go post your project and then people go on and see what the projects are and if they like something in particular then they’ll pledge the money to get something they want before any of their friends have it.
On some of the sites if you don’t hit the amount that you want, like if you want to raise $20k and you don’t hit that threshold of pledges than you don’t get any of the money that’s been pledged. Kick Starter operates that way. I think on Indie Go Go, they don’t have that but the fees and percentages that they take go up if you didn’t hit your goal. So the projects can be posted multiple places. I don’t recommend you do that though I would just post it on one and there are new crowdfunding sites launching all the time.
A lot of funding is happening this way and the relationship between crowdfunding and angel funding is very interesting. There are a lot of angel groups that are starting to watch the crowdfunding site for good projects. The challenge that’s happening for most of the people who are doing crowdfunding is that once they get the money and it comes in, they don’t always know what to do with it.
What we’re seeing is that in some cases it just sort of bleeds out the sides and then they still don’t have what they said they wanted done, finished. So my advice is this, if you’re going to do crowdfunding, like anything else have a very clear purpose for the money and clear purpose and intention for yourself so you stay focused and have the results you want.
Because of this little clause, like on Kick Starter that says you don’t get the money unless you hit your pledge threshold, you may want to break your project down into steps and have the crowdfunding initiative be to fund a particular part of it, like your prototyping or a launch campaign. Instead of saying I need a quarter of a million for my entire project and trying to raise that through crowdfunding, isn’t something I’d recommend in one big lump.
The other thing about crowdfunding that everyone should be aware of is that there are some laws on the Senate floor which will change the limits you can raise through crowdfunding. It’s becoming an extremely strong place to look for funds, particularly if you have a big social network and a lot of friends. Crowdfunding in a lot of ways can augment or replace friends and family financing. It’s fascinating how it’s playing out.
There are different crowdfunding sites as I mentioned earlier, so if you’re interested in crowd funding look at the sites and watch in the next little while for a bunch of sites to turn the switch on and launch. There are three that will be fascinating, the sites all built out and they’re simply waiting for the changes in the law to take effect. Then they’ll turn on the site and it will be big very fast.
The cool news is that there is money out there and it’s changing how people are doing business. Some of the people in crowdfunding aren’t using their credit cards like they would have in the past. Pay attention to it and we’ll keep you posted.