Reaping the Rewards of Crowdfunding

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Crowdfunding is a concept that allows businesses to raise small amounts of capital from a large number of investors, most often through websites such as Kickstarter and Indiegogo. It can be especially useful for small and startup businesses that may lack access to more conventional sources of capital needed to grow their business. To date, raising capital online has presented serious regulatory and compliance challenges for businesses, but the Jumpstart Our Business Startups (JOBS) Act passed last year amends the Securities and Exchange Act of 1933 by creating a new exemption for crowdfunding. When the SEC finishes its rulemaking process (probably early next year), companies will be able to raise up to $1 million in a crowdfunded offering conducted through an SEC-registered funding portal or broker-dealer.

Kickstarter, Indiegogo, GoFundMe, and other crowdfunding sites have been around for years, helping companies and individuals raise millions of dollars to produce movies, build prototypes, pay medical bills or tuition, and fund a host of various other activities, says Michael Harrington, a partner in the technology and venture finance practice group at Fox Rothschild LLP. That type of crowdfunding is different from the equity crowdfunding (in which equity interests in a company are sold to crowd investors via the Internet) recently enabled by the JOBS Act. But even the “old” type of crowdfunding has proven valuable to many businesses, especially startups, which often reward investors with prototype or “special edition” versions of the products they are developing. One of the biggest success stories to date has been Pebble Technologies, which last year raised more than $10 million for the development of its “smartwatch,” which connects to iPhone and Android smartphones.

“Reward-based crowdfunding really makes supporters feel like they’re part of the story,” says Brad Damphouse, cofounder and CEO of GoFundMe. Supporters are incentivized to give because there is something in it for them, and when crowdfunding is done right, businesses stand to build stronger relationships with their customers. “Additionally, when crowdfunding is used as a payment method, businesses are empowering a larger pool of customers to afford their services,” he points out.

To boost the likelihood of success with a crowdfunding project, SMBs should craft a strategy that generates a significant amount of support for the project before it gets posted to a crowdfunding site, suggests Marcia Stepanek, who teaches courses on new and social media and cause video at New York University. “There is nothing worse than launching a project, then having very few people rallying behind it online, for all to see,” she warns. “Some things don’t change: people want to back a winner or a soon-to-be winner, and the power of group endorsements is that it leads to more support.”

The advantages of a successful crowdfunding project can extend beyond the duration of the event itself, notes Candace Klein, founder and CEO of SoMoLend, a transparent portal that connects business borrowers with interested investors. “The fact that your initiative was customer-funded is a powerful message to include in all of your marketing communications. It tells your marketplace that your customers believe in your product or service, and it must be good, which will motivate others to try it,” she says.

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