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A Crowdfunding Torrent in the News: A Rundown

June 20, 2012

Is it just us?  Have you noticed the torrent of Crowdfunding-related news in recent days and weeks?  It seems that the general media and blogosphere

is catching on to the exciting potential of what’s both already happening thanks to platforms like Kickstarter (fundraise without giving up equity) and what’s to come with the SEC’s JOBS Act regs next year.  It seems that every day there is an announcement for a new JOBS Act crowdfunding platform.   In a gold rush, sell the pick axes, right?

Regular readers already know that LaunchPad is excited by this space, watching it closely and thinking about ways to get invovlved.  So we wanted to share a rundown of some recent developments we think would be of interest.

1.  The Crowdfunding Bible was recently published and will tell you everything you need to know about the topic of Crowdfunding.  Hands down, it is the best, most comprehensive resource we’ve seen yet if you want to get ‘wicked-smaat’ fast.  Click here to get your free pdf.  The two quotes you’ll see on the landing page sum it up well:

  • “Every entrepreneur thinking about jumping into the wild world of crowdfunding needs to read this.”
  • “The ideal reference to help you navigate crowdfunding’s increasingly complex waters.”

What you’ll find:

  • Best Crowdfunding Websites and Services
  • Complete Guides: How to Start and Promote Any Project
  • Expert Tips: Crafting Pitches, Rewards and Marketing Programs
  • Advice from Today’s Most Successful Creators and Campaigns
  • Handbooks to Building Powerful PR and Social Media Strategies
  • Key Lessons and Takeaways from Top Hits and Failures
  • Reviews and Post-Mortems: An Inside Look at the Business
2.  We  enjoyed this thought piece, “CROWDFUNDING: THE NEXT GENERATION — FOUR CHANGES THAT WILL SHAKE UP THE MODEL” which spells out how Crowdfunding will quickly evolve.  Some highlights:
1. Vertical platforms will emerge to focus on select market segments.
2. Crowdfunding platforms will evolve into “full service” communities to better meet the needs of their members.

3. Creativity and innovation through online crowdfunding will be supported not just by individuals but by organizations as well.

4. Benefits-based crowdfunding will complement equity-based platforms.
 3.  We came across this piece arguing COMPANIES CAN CROWDFUND OR RAISE VC, BUT NOT BOTH  whose author seemed to really do his homework.  While there will be exceptions, this position is largely consistent with our conversations especially when it comes to the newly-created JOBS Act equity crowdfunded deals.  Why?  Nobody wants to deal with 100’s of unsophisticated investors.  Read more for the details.  Taking pause to consider the down-stream ramifications is always a good idea if you are considering equity crowdfunding.  On the other hand, we do not have similar VC-downside concerns for crowdfunding via ‘gift/reward’ models like Kickstarter’s.  in our opinion, if you are able to raise your seed capital without giving up equity, can prove your concept and show it’s a winner, then you will still have the potential to raise VC capital if you need it.    On the other hand, for some businesses, the Kickstarter round may get you over the cashflow-positive hump and you may never need to raise VC!
4.  Speaking of KickStarter, there was much written in recent weeks on how Kickstarter only publishes the winners— project that get funded.   Well, some enterprising screen scrapers were able to collect the overall data and show that over half of all Kickstarter projects (56%) fail to raise their stated goal.  Read about it here.  The chart below is how it breaks down:
For a handy infographic offering more detail, click here.

Note that the vast majority of projects on Kickstarter are not of the typical web-startup variety.  This is changing.  But creative projects will always find a home on Kickstarter.   Also worth noting: Kickstarter now publishes a stats page that’s updated daily.  You can get to it here.

5.  The Economist published a comprehensive expose on Crowdfunding.  It’s a deep dive titled,  “The New Thundering Herd. Wanted: small sums of money to finance young

companies. Click here to invest.” is a great one-stop shop to drink in all the all things crowdfunding.  Some excerpts:

Crowdfunding is booming. A report by Massolution, a research firm, forecasts that $2.8 billion will be raised worldwide this year, up from $1.5 billion in 2011 and only $530m in 2009 (see chart 2). There are over 450 “crowdfunding platforms”, including four in China, up from under 100 in 2007, with Kickstarter America’s largest. This month Indiegogo, its closest rival (though global and with a broader mix of projects), secured the biggest chunk of venture capital so far for crowdfunding.

Talk of crowdfunding as a short-lived fad has largely ceased, as evidence mounts that lots of people value personal engagement with projects they help to finance. “People increasingly want humanity with their technology,” says Caterina Fake, an early investor in Kickstarter. Hitherto people have opened their wallets for three main reasons: “caring about the person or company; wanting the product; or being part of a community,” says Slava Rubin, a founder of Indiegogo. Adding profit as a motive will bring fresh challenges.

Raising money from strangers requires a lot of effort to gain their trust. One indicator of credibility is “social proof”: projects that can raise 20-40% of their target amount from online “friends and family” do far better at getting strangers to contribute, says Mr Rubin. Videos also help. Campaigns with them raise over twice as much as those without.

But what if firms could raise money from anyone? Fred Wilson, a prominent venture capitalist, calculates that if Americans used just 1% of their investable assets to crowdfund business they would release a $300 billion surge of capital. But will regulators, who worry about Joe Sixpack being ripped off by unscrupulous fund-raisers, allow the crowd in? The Securities and Exchange Commission (SEC) is trying to come up with rules to implement the JOBS Act. Some fear that it will impose onerous requirements on firms raising equity from the crowd.

Fears of fraud may be overdone. Crowds may be harder to cheat than individuals. “On eBay, to sell something fraudulently, you need only fool one person. On Kickstarter, you have to fool a couple of thousand,” says Mr Strickler. Robert Litan of the Kauffman Foundation, a think-tank, believes experts will be able to add “proof of concept” to social proof. Perhaps leading venture-capital firms will return to financing baby start-ups, which they long ago abandoned. They would boost crowdfunding if, say, they lent their reputations to young firms and promised to invest later if they met certain targets. With so much promising experimentation in the works, Mr Litan says, “let’s just hope the SEC doesn’t kill it off before it gets started.”

6.  For us, perhaps the most gratifying was to learn of the recent news that Harvard B-School legend Clayton Christensen has made an equity investment into a crowdfunding platform.  In “Clayton Christensen gets into crowdfunding”, we learned famed author of The Innovator’s Dilemma and the person who taught us about disruption likes the space so much he has invested in it via CircleUp, a new equity crowdfunding platform.

Last month we noted that CircleUp, a new crowd-funding platform for small retailers and consumer brands, had launched with $1.5 million in venture capital from Maveron and individuals like David Topper. What we didn’t know at the time was that the round’s largest investor actually was Clayton Christensen, the noted Harvard Business School professor and author of books like The Innovator’s Dilemma.

Given Christensen’s area of study, I asked him to discuss whether crowdfunding is disruptive, or just a reflection of government-endorsed social media hype. His reply, via email:

“I do think it can be disruptive (depends on the business model, and the target market).  For now, as it takes root, I think that the disruptive crowdfunding opportunities are targeting non-consumptive areas – consumer being one.  The sorts of opportunities that KickStarter targeted being another example.

These are companies or projects that otherwise struggle to get funding. While I wouldn’t say that most entrepreneurs find it easy to get funding, there are certainly more people out there funding technology and healthcare companies than in other areas. So I think that crowdfunding platforms in those spaces (technology and healthcare) will find that they have a harder time (since they’re essentially taking on incumbent seed and angel investors), and face other complicated issues, like adverse selection (only go to the crowdfunders after they haven’t been able to get well-known angels or angel groups to invest).

I would say that for now the areas where it has the most opportunity to disrupt is by taking root in these underserved areas that traditional financiers have traditionally found unattractive.  This is a classic entry point for disruption – expand participation in the market by lowering cost at the low end of the market, where incumbents don’t see profit opportunities. Later, as the platforms gain scale, then they may start to add scope, or may start to add later-stage funding opportunities.  That’s likely where all of this goes next.”

7.  If you’ve made it this far, it means you are as into this stuff as we are.  So we shared the wonkiest for last.   This Washington Times piece discusses “Beyond crowdfunding: Why Regulation A reform is the most vital piece of the JOBS Act”   The article describes the historic role of Regulation A (“there has long existed an exemption from the traditional IPO process, known as Regulation A, which permits a company to issue up to $5 million of securities per year in offerings that are free from the resale and investor restrictions associated with privately placed securities. However, because of the annual dollar amount limitations, a robust market in Regulation A securities has never developed.”) and how Reg A will be modified by the JOBS Act to upon the crowdfunding floodgates and open a secondary market for corwdfunded equity securities.

The JOBS Act expands Regulation A’s annual dollar limit tenfold – from $5 million to $50 million. Here’s why this expansion will be a game changer for small business capital formation:

• Public solicitation: Offerings are issued and sold publicly, and companies are permitted in many instances to solicit interest in their offerings before filing with the Securities and Exchange Commission (SEC). Therefore, small businesses will now be able to connect with potential investors more easily.

• Freely tradable: Trading Regulation A securities is not restricted, much like traditional, publicly held securities (such as stocks and bonds). This flexibility, when combined with the increased size of Regulation A offerings, should attract more investors to small business offerings. In addition, the growth in size of these offerings should encourage the development of disciplined, sophisticated markets for real liquidity at the “Main Street” level.

Regulation A likely could become the dominant avenue for small and medium-size businesses to form capital. Moreover, as those businesses grow, funded by the capital from their Regulation A offerings, they will find appealing the IPO onramp. The onramp provides a means to increase the amount of capital they can raise without the necessity of a traditional IPO and the costly regulatory compliance burden to which publicly held companies are subject.

With what is expected to be an exponential increase in the use of Regulation A to form capital, there is every reason to believe the financial markets will develop a robust secondary market for these securities.

We’ll be watching this space intently and will pass along what we like in real time via our twitter feed and our Facebook Page.  From time to time we will also compile wrap-ups like this one in this blog.

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