E-commerce Business Models
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INSIGHT ON BUSINESS
CROWDFUNDING TAKES OFF
Think you have the next big idea
but lack the resources to make it
happen? Crowdfunding sites might
be your best shot. Sites such as Kick-
starter, Indiegogo, RocketHub, and Tilt
have led the growth of crowdfunding from
$530 million in 2009 to over $34 billion in 2015.
A World Bank study predicts that capital raised
via crowdfunding will exceed $93 billion by 2025.
The Internet is the ideal medium for crowdfunding
because it allows individuals and organizations in
need of funds and potential backers to find one
another around the globe.
How do sites like Kickstarter and Indiegogo
work? The idea is simple—an inventor, artist, or
activist looking to raise money for a project uses
the site to create a page for that project. People
can pledge to support the project, but at Kick-
starter, money actually only changes hands once
the project fully reaches its funding goal (other
sites, such as Indiegogo and RocketHub, allow
project creators to keep the money they raise even
if they do not achieve their goal). The sites take
a small commission, usually about 5%, on com-
pleted projects. Backers often receive some type
of reward, often corresponding to the size of their
contribution to the project.
Crowdfunding is quickly becoming a main-
stay in the development of movies, video games,
art installations, and other types of projects. For
instance, among the most funded Kickstarter proj-
ects to date are Pebble, a customizable e-paper
watch that connects to a smartphone (over $33
million raised across several campaigns) and
Coolest Cooler, a cooler with a waterproof Blue-
tooth speaker, USB charger and other high tech
features ($13.3 million). Several of the biggest
EC13_CH02.indd 69
Kickstarter projects have been movie projects that
struggled to gain traction at Hollywood studios,
like the Veronica Mars movie project ($5.7
million) and a project to reboot the popular educa-
tional TV show Reading Rainbow, which garnered
over $5 million in financing in 2015. In 2014, a
man from Ohio solicited $10 in donations to make
a batch of potato salad as a joke, but after his
campaign went viral, he raised over $55,000,
much of which he used to support local charities.
The applications for crowdfunding are limited only
by the imagination.
Successful crowdfunding projects typically
share some common elements. One of the most
important is a clear and concise presentation of
the idea, especially through the use of video. The
crowdfunding campaign is in many ways similar
to presenting a business plan, and should touch
on the same eight elements of a business model,
such as the project’s value proposition, its target
market, and so on. A whole ecosystem of video
producers, editors, and other services has sprung
up to support crowdfunding projects.
Not every crowdfunding project gets off the
ground—Kickstarter reports that only about
35% of its approximately 308,000 projects thus
far have reached their funding goals. Sometimes
projects that do get off the ground simply flame
out, disappointing their backers. For instance,
the Coolest Cooler has been marred by price
increases, delays in production, and failure to
deliver the product to its original backers, despite
shipping it to those who pay full retail price on
Amazon. Another high profile Kickstarter, fledgling
drone manufacturer Zano, went bankrupt before
ever completing its product, despite raising $3.4
million. Kickstarter now requires fundraisers to
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disclose the risks associated with their
project, and for inventions, now requires
photos of prototype products instead of simply
drawings, simulations, or renderings. But backers
still have no real recourse with respect to proj-
ects that never get off the ground or unresponsive
founders.
A new use of crowdfunding is to provide seed
capital for startup companies in return for equity
(shares) in the company, known as equity crowd-
funding. Under the JOBS Act passed by Congress
in 2012, a company will be able to crowdfund
up to $1 million over a 12-month period, and in
2016, the rules requiring potential investors to
be accredited (having a net worth of at least $1
million dollars) were relaxed to allow smaller
investors to purchase equity stakes of $2,000 or
more. Twenty-five states have their own crowd-
funding rules that allow local businesses to raise
money in this way, and the 2016 regulations will
also fix a loophole preventing these businesses
from advertising to investors from outside their
respective states. However, equity crowdfunding
will require extensive compliance from businesses,
with steep penalties for any irregularities, and
potential investors will be subject to all the same
risks that professional investors experience, but
may put themselves in more precarious financial
positions as a result. They’ll also be forced to hold
their investments for at least one year.
Kickstarter currently has no plans to allow
creators to offer equity in Kickstarter projects,
believing that equity crowdfunding is funda-
mentally different from the projects on its site,
which focus less on profits and more on ideas and
social issues. In the meantime, many companies,
such as Indiegogo, Crowdfunder, AngelList, and
StartEngine are laying the groundwork for an
expected explosion of activity. Indiegogo in par-
ticular has been open about its support for the
JOBS act and is currently working on implement-
ing it as an option on its site in the near future.
When it does, it’s likely to immediately become
the dominant player in the industry thanks to its
15 million monthly visitors. Niche companies are
also springing up, with varying degrees of success.
For instance, SeedInvest is a company that caters
to investors who may have concerns about crowd-
funding privacy by offering better privacy con-
trols. CircleUp is focused on consumer products.
As crowdfunding becomes more widely recognized
by the general public, more specialty sites such as
these are likely to spring up. However, studies from
MIT and the College of William and Mary suggest
that equity crowdfunding isn’t as likely to lead
to positive outcomes for smaller investors. Many
of the highest quality startups won’t need to use
equity crowdfunding and will instead pursue more
traditional venture capitalists, and smaller inves-
tors may be more likely to fall prey to misleading
claims from businesses seeking funding. It’s likely
that more regulations will need to be developed to
protect smaller equity crowdfunding investors in
coming months and years.

SOURCES: “Indiegogo Could Soon Dominate Equity Crowdfunding,” by Jeremy Quittner, Fortune, July 5, 2016; “Latest Pebble Campaign Snags the
Top Slot on Kickstarter,” by Haje Jan Kamps,Techcrunch.com, June 30, 2016; “New Crowdfunding Rules Could Do More Harm Than Good for Some Startups,”
by Samantha Drake, Forbes, June 27, 2016; “Equity Crowdfunding is Here—And It Could Be Terrible for Indie Filmmakers,” by Chris O’Falt, Indiewire.com,
May 17, 2016; “New Crowdfunding Rules Let the Small Fry Swim with Sharks,” by Stacy Cowley, New York Times, May 14, 2016; “Can Equity Crowdfunding
Democratize Access to Capital and Investment Opportunities?,” by Christian Catalini, Catherine Fazio, and Fiona Murray, MIT Innovation Initiative, May 2016;
“As Equity Crowdfunding Debuts in U.S., Will More Regulations Follow?,” by Jeff Engel, Xconomy.com, March 25, 2016; “Trouble on Kickstarter as Two
Massive Projects Hit the Rocks,” by Alex Hern, The Guardian, November 19, 2015; “S.E.C. Gives Small Investors Access to Equity Crowdfunding,” by Stacy
Cowley, New York Times, October 30, 2015; “Equity Crowdfunding: A Market for Lemons?,” by Darian M. Ibrahim, College of William & Mary Law School,
2015; “Indiegogo Is Getting Ready for Equity Crowdfunding,” by Harry McCracken, Fast Company, October 2015; “Tired of Waiting for U.S. to Act, States
Pass Crowdfunding Laws and Rules,” by Stacy Cowley, New York Times, June 3, 2015;“Keeping Up With Kickstarter,” by Stephen Heyman, New York Times,
January 15, 2015; “Why Investors Are Pouring Millions into Crowdfunding,” by Katherine Noyes, Fortune, April 17, 2014; “Invest in Next Facebook…For a
Few Bucks,” by Patrick M. Sheridan, CNNMoney.com, April 14, 2014; “How You’ll Fund – And Wildly Profit From – The Next Oculus Rift,” by Ryan Tate, Wired.
com, April 4, 2014; “If You Back a Kickstarter Project That Sells for $2 Billion, Do You Deserve to Get Rich?,” by Adrianne Jeffries, Theverge.com, March 28,
2014; “Crowdfunding Tips for Turning Inspiration into Reality,” by Kate Murphy, New York Times, January 22, 2014; “World Bank: Crowdfunding Investment
Market to Hit $93 Billion by 2025,” by Richard Swart, PBS.org, December 10, 2013; “SEC Finally Moves on Equity Crowdfunding, Phase 1,” by Chance
Barnett, Forbes.com, July 19, 2013.

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