Although crowdfunding has a long history of supporting books, films, art and music projects and more, the first online crowdfunding platform companies started appearing around 2001. Popular crowdfunding website Kickstarter began in 2009. In 2012, the Jumpstart Our Business Startups (JOBS) Act loosened U.S. Securities and Exchange Commission (SEC) rules to permit the sale of stock to the general public by way of crowdfunding sites and popularized this new funding mechanism in the media. Now at the beginning of 2020, I started wondering exactly what was going on in this arena and how it affects crowdfunding for small businesses.
What is Crowdfunding?
First, let me explain how that term is defined and the different categories of funding that are included under the “crowdfunding” umbrella. Crowdfunding is a subdivision of alternative finance that operates to fund a project or business venture by raising small amounts of money from a large number of individuals, typically by utilizing an online platform to facilitate the marketing and financial transactions between the parties.
Types of Crowdfunding
Crowdfunding can be subdivided into four primary categories: reward-based, peer-to-peer, donation-based and equity.
Reward-based “crowdfunders” typically pledge money to a new project or product with no expectation of anything in return beyond a small token gift. The financier essentially gifts money to the company or individual. This is the most common type of crowdfunding and Kickstarter and Indiegogo are popular examples of online platforms that facilitate these transactions.
Donation-based funding is the second most popular method. Donation-based crowdfunding is the result of the collective effort of individuals to help a charitable cause. Typically the funds raised are for social or environmental causes. There is no reward for donating and funding is based on the donor’s altruism. There have been concerns about fraudulent campaigns in this arena. GoFundMe and Crowdfunder both have charity options on their platforms.
Peer-to-peer lending sites enable borrowers to access loans directly from other individuals. Lending Club and Prosper are two examples of sites that connect individuals seeking financing with individuals willing to loan. Typically, these sites conglomerate small contributions from a large number of participants to create a loan. Thus, individual risk is minimized for the funders.
Equity crowdfunding enables non-accredited individuals to make equity investments in private companies. In other words, a company can actually launch a “mini-IPO” without all of the traditional hurdles. The JOBS Act legislation of 2012 sets out specific guidelines for company disclosures, who can invest and how much they can invest. This funding mechanism allows entrepreneurs, early-stage companies and nontraditional investment funds to raise substantial amounts of money by selling equity in the corporation. AngelList and CircleUp are two of many examples of equity crowdfunding platforms.
The State of Crowdfunding
What is happening today in the crowdfunding arena? According to statistics compiled in August 2019 by Fundera.com:
- An average of $17.2 billion is generated annually through crowdfunding in North America.
- Crowdfunding increased 33.7% last year.
- The average amount raised in completed campaigns was $28,656.
- The average success rate of a crowdfunding campaign is 22.4%.
- Overall, projects average 47 backers, but fully funded campaigns have an average of 300 backers.
- The average pledge for fully funded projects is $96.
- Crowdfunding campaigns with videos earn 105% more than those without videos.
- A successful crowdfunding campaign takes an average of 11 days to prepare and lasts an average of nine weeks.
- Kickstarter had 319,051 completed projects, the most of any platform.
- Indiegogo projects raise an average of $41,634, the highest average amount of any platform.
Crowdfunding in Wyoming
A quick search on Kickstarter for Wyoming projects yielded a total of 412 projects going back to 2010. The highest grossing projects were two different products from Give’r. Their frontier mittens raised $986,672, and their four-season gloves raised $224,370. Another company, Foot Flops, raised $179,019.
Why Choose Crowdfunding?
An upside to crowdfunding is obtaining the funding to get a business established, prior to dealing with the requirements of angel investors or bank loan officers. A successful campaign can also create an initial customer base who feel as though they have a stake in the business’ success.
Be aware that some sites, such as Kickstarter, have an “all-or-nothing” requirement where your fundraising goal must be attained or no money is released. This policy actually minimizes risk for creators. Receiving only $5,000 to fund a project that requires $50,000 may be more detrimental than helpful. And the “all-or-nothing” rule gives backers the confidence that the job will get done when they pledge to your project. The downside is that a company can easily waste a lot of time and effort chasing crowdfunding support that could have been spent on other ways to grow the business. Another risk is underestimating capitalization requirements. A business could get sued if promised perks or products are not delivered. Protecting rights to your intellectual property is another consideration.
Crowdfunding Help is Available
Crowdfunding can be an amazing opportunity for companies with a unique and marketable idea and strong leadership. However, for every huge success, there are 100 ideas that did not go anywhere.
If you are interested in crowdfunding for small businesses, the Wyoming Small Business Development Center (SBDC) Network’s alternative financing experts can help you to:
- Research crowdfunding platforms
- Plan your campaign
- Build a fan base
- Create perks
- Develop a video pitch
- And more
Contact your local Wyoming SBDC Network advisor for no-cost, confidential assistance today by clicking here.
About the Author: Cindy has been helping Wyoming entrepreneurs start or improve their businesses for the past 17 years. An entrepreneur herself, she thrives on the challenge of understanding each new business and business owner and helping them to succeed. Currently the owner of several rental properties, she has owned a number of other small businesses, including a want ad newspaper, a secretarial service, and a stained glass studio.