I remember a few years ago I was chatting with a friend about raising capital for a real estate project he was trying to fund.
I suggested he take a look at crowdfunding and he looked at me like I had four heads.
“But Susan, isn't that just for artists and people with cancer?”
It was then that I realized people have no idea what crowdfunding really is. (And what it isn't.)
So, let's take a look at crowdfunding and why there is so much confusion about the topic.
Crowdfunding is simply raising capital online.
Typically through the collective effort of friends, family, customers, and individual investors.
This approach taps into the collective efforts of a large pool of individuals—primarily online via social media and crowdfunding platforms—and leverages their networks for massive reach and exposure for the company raising the capital.
The biggest challenge seems to be the one I had with my friend – the term “crowdfunding” is used to describe so many different concepts that everyone is confused.
Just like there are many different kinds of capital round raises for businesses in all stages of growth, there are a variety of crowdfunding types.
The 3 primary types are donation-based, rewards-based, and equity-based crowdfunding.
Generally, you can assume any crowdfunding campaign where there is no financial return to the investors or contributors is donation-based crowdfunding.
These are the types of crowdfunding offers you see on platforms such as GoFundMe and are basically a solicitation of donations for disaster relief, charities, nonprofits, and medical bills.
Heck, even Caroline Channing, the blonde on the TV show “2 Broke Girls,” went on a crowdfunding website, gofundyourself.com, to raise $1,500 for a new pair of pants.
As investors, obviously this is not our preferred method of crowdfunding since there is no financial return on our investment, but I've donated to people in need just because it feels good to be a good person and help people in need.
Rewards-based crowdfunding involves individuals contributing to a business in exchange for a “reward,” typically a product or service the company offers.
Even though this method offers backers (they are called backers, not investors) a reward, it’s still generally considered a subset of donation-based crowdfunding since there is no financial or equity return.
This approach is popular on crowdfunding platforms like Kickstarter and Indiegogo, because it lets business owners incentivize their contributor without incurring much extra expense or selling ownership stake.
I have “backed” many projects on Indiegogo for products that I want to own such as TellSpec, a hand-held scanner that offers real-time food testing.
I have a disease called Celiac Sprue which means I have a pretty brutal autoimmune reaction to gluten, so having a magic wand to wave over my food that tells me if it has gluten is something that makes my life better.
You can see that TellSpec raised $386,392 with this campaign from 1,765 backers.
Unlike the donation-based and rewards-based methods, equity-based crowdfunding allows backers to become part-owners of the company by trading capital for equity shares.
As equity owners, investors receive a financial return on their investment and ultimately receive a share of the profits in the form of a dividend or distribution.
The most recent equity investment I've made is in a startup called Keen Home which develops and markets “smart” vents for homes.
Through the mid-90s and early-00s, people were starting to become more connected online with the launch of Facebook and other social platforms, which promoted some early cause-based and charity-based crowdfunding campaigns.
Like when the British rock group Marillion promoted their “Tour Fund,” raising $60,000 to fund their U.S. tour with online donations from fans.
Following the example of Marillion and a number of other crowdfunded bands, ArtistShare launched in 2000 to become the first ever fan-funding platform for artists.
And fast-forward to 2006, when fundavlog founder Michael Sullivan coined the term “crowdfunding.”
In 2008 and 2009, IndieGoGo and Kickstarter launched with the goal of supporting creative entrepreneurs and projects. These platforms helped popularize the rewards-based method of crowdfunding, combining the original principle with an ever-growing social sharing mindset and technical infrastructure.
These platforms helped popularize the rewards-based method of crowdfunding, combining the original principle with social sharing and technical infrastructure.
(Fast forward to 2013 when 91,585 backers pledged $5,702,153 to fund the “Veronica Mars” movie. I was one of them!)
In April 2012, the Jumpstart Our Business Startups (JOBS) Act passed Congress with bipartisan support and was signed into law by President Obama.
The JOBS Act eased restrictions on entrepreneurs seeking to raise startup capital, with the goal of encouraging small business and startup funding throughout the US.
At the bill’s signing, President Obama said, “for the first time, ordinary Americans will be able to go online and invest in the entrepreneurs that they believe in.”
In May 2016, a key section of the JOBS Act, Title III, was finally implemented and removed the accredited investor requirement – allowing the general public—those who aren’t considered accredited investors—to invest in private companies.
Now the industry is expected to grow exponentially, increasing the number of available investors from 3.4 million Americans to over 233.7 million, with a combined net worth of over $50 trillion.
Finally, individuals will have more opportunity to invest (or solicit) early-stage funds, regardless of their personal net worth or network of potential investors.
We’ll start to see a shifting of capital from the venture capital market, which is estimated at $30 billion, to the ginormous crowd of non-accredited investors.
For the first time in 80 years, millions of Americans will be allowed to invest in early-stage companies, bringing collective investable capital that could 10x the investment market to as much as $300 billion.
Here's a quick summary of how much you can invest under Title III:
What's missing is banks. This is all funding from the crowd and thankfully, the bank is not part of the “in” crowd. 😉
What else is missing? YOU!
Here at the Investor Insights, we focus on building a portfolio of equity crowdfunded investments that make us money now and in the future.
So, be sure to check out the blog for great tips and tactics.
And if you want to see exactly what we're investing in join our alternative investment club, Investor Insights Elite. Click here to get all the details.