If you are an entrepreneur or investor, crowdfunding may pique your curiosity. But the crowdfunding craze may not be what you think.
In its original form in the early 2000s, crowdfunding was collaborative fundraising, associated with starting a website to raise money for a product or one-time event. New entrepreneurs, crafters, wannabe authors, fundraisers, and even kids seeking charitable donations could start a webpage on a site like Kickstarter.com or Indiegogo.com to solicit for new projects or heartfelt causes.
Friends, family, colleagues, and even strangers who saw the site donated money in support. Perhaps these fans got a t-shirt, music album or their name in the list of credits. Perhaps not.
Crowdfunding has advanced. It’s now a financing alternative–lucrative seed capital for thousands of new ventures.
How significant is that?
Plenty. In the last 5 years, both crowdfunding platforms and campaigns more than doubled year after year as contributions from funders increase and one-time project sites morph into new businesses.
Billions and Billions
Results from a survey by Massolution of 308 active crowdfunding platforms revealed $2.7 billion was raised, funding more than 1 million campaigns in 2012. That’s an amazing 81% increase over 2011. Similarly, the 2014 Massolution survey shows more growth–1,250 platforms raised $16.2 billion, and expectations are $34.4 billion for 2015.
By September 6 on Kickstarter–just one platform–you can see that 111,572 successfully funded projects have already pulled in $2.58 billion from 11 million backers.
Instead of sending $10 or $50 in exchange for feeling good about supporting a new project, funders may now want a return for their “investment.” It’s similar to what an investor in a start-up company or early-stage “investment” opportunity wants. Not surprisingly, this is referred to as “equity crowdfunding.”
Reacting to the potential investing risks/rewards, the U.S. Securities and Exchange Commission (SEC) got in the picture with compliance rules (via the JOBS Act). This fulfills part of SEC’s mission to protect average consumers (and seasoned investors) who may be at risk of losing money without fully understanding the “investment” to which they agreed.
Seed Money Donation or Investment?
This does not mean crowdfunding platforms are gone for the small publisher or little guy. But it does mean you should be on the lookout to know the difference between a crowdfunding donation and an investment, whether you are the solicitor or the solicited.
If you are donating, look at the project as you would any other charitable cause or event.
• Research the project and solicitor’s reputation.
• Understand where your money goes.
• Consider you are contributing for the goodwill and not getting something in return.
Investors Be Aware
If you are investing, scrutinize and treat the project as you would any other investment:
• Consider the risk. The bigger the reward, the greater the risk.
• Realize you must be an “accredited” investor, with a limit to the amount you can invest. The SEC offers this protection, since it now regulates start-up crowdfunding ventures that promise a return, just like new companies issuing stock.
• Understand you probably won’t be able to sell or liquidate this investment.
If you are the creator of a project, here are three things you should know before soliciting via crowdfunding:
1) The sites/portals (like Kickstarter and GoFundMe) take a fee, usually a percent of the amount you collect.
2) Not all projects get funded.
3) Your ideas are not protected.
Before You Send Money
If you find a crowdfunding project you like, consider these things before you contribute or invest:
• Basically funders assume the project’s risk. Many projects are often from start-up companies now. If you are considering this as an investment, you could lose all your money.
• If you are looking to be a donor, realize you are at the mercy of the project creator to fulfill their “campaign” promises. Some will not, even if they raise enough money.
• Not all crowdfunding portals or projects operate by the same rules or etiquette. Do your research on the projects (the webpages) and also research the portal (the entire site, which is hosted by a business.)
For more information, use the SEC’s investor site here.
As always….buyer beware!