Crowdfunding: An Emerging Opportunity
By: Daryl Hatton, Founder & CEO of FundRazr
Crowdfunding is one of the hottest business topics of 2013. In 2012 all forms of crowdfunding raised $2.7b
an 80% increase from the $1.5b raised in 2011. Massolutions, a consultancy, estimates the global market will increase another 81% in 2013 to $5.1b. A big component of this growth will come from the crowdfunding activities of startup companies. It is important for exempt market dealers to understand the application of the various models of crowdfunding to the funding lifecycle of startups in order to identify and capture emerging business opportunities.
Social Media Makes Crowdfunding Work
A major component of crowdfunding is the use of social media technologies such as Facebook, Google+, Twitter, Pinterest, etc. to help find and engage a crowd of supporters for the project. This
usually involves telling the project’s ‘story’ by creating a ‘campaign’ for a project on one of the
crowdfunding sites such as Kickstarter, FundRazr, Indiegogo, RocketHub, etc. Friends of the company/project are initially asked to make contributions and, most importantly, to share the campaign page and therefore the story with their social networks. As the campaign spreads through social media, potential supporters are exposed to the story and can also make contributions. After they make their contribution, they are encouraged to share the story with their social networks distributing the campaign to an ever expanding network of potential supporters.
Rapidly Emerging Market
Crowdfunding is evolving rapidly. As of this spring, there were 813 companies identified by Massolutions in the crowdfunding market space. Many of these companies did not exist in 2012. Among these companies there are many innovative business models attacking and expanding the market. These models currently divide mainly into two major funding models and three major categories of offerings.
Major Funding Models
The two major funding models are: 1.
Keep It All (KIA)
all contributions to a project are available to the company regardless of whether or not the campaign goal (targeted amount of funding) is reached. 2.
All Or Nothing (AON)
contributions to a project are treated as pledges and are only available to the company if the goal is reached. If the campaign does not reach its goal, all pledged contributions are cancelled and no money changes hands. Projects determine which of these two models to use based on their financial requirements. If a project can benefit from even a portion of the target funds of a campaign, it is a good candidate for a KIA model. If a project requires at least a set amount of funding to proceed, it is best to use an AON model. The major benefit of the AON model is contributors will not pay anything if the project does