Who Needs Investors When You Have Crowdfunding??

HACKETTSTOWN, N.J. - April 12, 2013 - PRLog -- Veronica Mars raised $2 million from fans in 11 hours and raised more than $5.4 million when the campaign ended on April 12, 2013. Rob Thomas put the campaign on KickStarter after failing to get interest from traditional investors. Veronica Mars may set crowdfunding records, but more than 1000 campaigns have raised over $100,000 on KickStarter and Indiegogo, with over 200 raising over $1million.

While both KickStarter and Indiegogo provide a funding platform for people in the arts to promote their projects, technology companies have learned that they can bring their products directly to market through crowdfunding. The Pebble Watch raised over $10 million a year ago. Hundreds of other technology products such as the Nanolight – a high efficiency light bulb, and the Mycestro – a 3D mouse have raised several times their funding goal. Nanolight raised $273,000 with an original goal of $20,000 and Mycestro raised $354,000 with an initial goal of $100,000.

When companies are having such success with project crowdfunding do they need equity crowdfunding, or should they even seek investors by traditional methods? In the UK where equity based crowd funding is legal the average raise is less than a quarter of a million dollars. The JOBS Act provides for funding up to $1 million, but it is yet to be seen what the average raise will be. In theory investors are prepared to loose all their money, but there are many requirements to keep investors informed and  they can still exercise their right to sue when business does not go as planned. This adds cost for the entrepreneur and puts them at additional risk.

Traditionally business must invest money in design, tooling, inventory, and accounts receivable before they know if a product will be profitable. Investors put in risk capital before a product goes to market. Since 9 out of 10 new ventures fail to meet original expectations, risk capital is expensive. Usually, this capital is in the form of equity, so that investors can benefit on the upside with successful ventures. Pre-selling a product through crowdfunding minimizes this risk, but does not eliminate it. There will always be the risk that management can execute on their plans.

Furthermore, pre-selling a product accelerates cash flow, through the elimination of accounts receivable, and reduced inventories. Other costs are reduced through efficient production runs and direct to customer distribution. Crowdfunding has the potential to change the general business model for new ventures. Some early results are in, it is now time to learn from the successes of project crowdfunding in the US and equity crowdfunding outside the US.

Ironically, some of the biggest innovations such as the PC and the cell phone have been a success, but not for the reasons the innovators intended. Crowdfunding may well be another. The report answers these questions.:

Is project crowdfunding an alternative to equity finance for certain ventures?

Based on results to date, are ventures/startups that have used equity crowdfunding outside the US similar to ventures seeking funding from Angel Investors and Venture Capitalist?

What can be learned from websites used by accredited investors such as, Angel List, to structure equity crowdfunding platforms, that will be enabled by the JOBS Act?

What features of equity crowdfunding will support the needs of Angel Investors and Venture Capitalist. What are the perceived shortcomings of equity crowdfunding?

This project is being funded by a campaign on Indiegogo. For more information and to get a copy go to www.indiegogo.com/projects/376372   The author can be contacted at tommiez2001@yahoo.com