From the course: Foundations of Raising Capital

The different forms of crowdfunding

From the course: Foundations of Raising Capital

The different forms of crowdfunding

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- For a very long time, the option to invest into private companies was limited to a small number of individuals who qualified as accredited investors. Accredited investors earn more than $200,000 per year or have a net worth of more than $1 million. Talk about a small group of people. But in 2012, the Jumpstart Our Business Startups Act or Jobs Act, was passed in the United States to make it easier for regular people to give money to startups. And it was around this time that crowdfunding was becoming popular. Crowdfunding is exactly what it sounds like, raising money from the public or a crowd of people. It really started around 2009 with platforms like Kickstarter and Indiegogo. They pioneered what is called product or rewards-based crowdfunding. On product crowdfunding platforms, creators solicit money from the crowd at different rewards levels or tiers. Each tier is tied to a particular reward, things like thank you letters, stickers, t-shirts or units of the product at a discount. The relationship to the crowd usually stops there. They give you money and you provide them with a reward that they purchased at a later date. There is no exchange of ownership in the company, and so anyone can back your product. Product crowdfunding is often used to fund the production or MVP of a product. It's as useful as a marketing platform as it is a funding platform. By creating a small window of opportunity to back your product, you create anticipation and gauge the public's interest in your product. But since the Jobs Act passed, it's become possible to engage in equity crowdfunding too. In equity crowdfunding, you use an online platform to trade cash for debt or equity, AKA ownership, in your company. Equity crowdfunding is typically done through platforms like AngelList, Republic, Wefunder and StartEngine. A perk of equity crowdfunding is that the entrepreneur has full control to set all the terms of the investment. There isn't negotiation with each investor, and it's not common to offer board seats to equity crowdfund investors either. But equity crowdfunding still has hoops to jump through. There are limits how much can be raised through equity crowdfunding, and there are a lot of regulations to follow. The platforms I mentioned earlier make compliance a little bit easier. If you're considering equity crowdfunding, make sure you consider what it will mean for investor communication. With a lot of new investors through crowdfunding, you'll want to think through how you plan to send updates and setting those expectations upfront and investors from crowdfunding typically have a lot less invested in you. They won't bring the same relationships or guidance that more sophisticated investors will. Crowdfunding may give you a lot more control, but you'll have to decide if the effort is more worth your time than finding a small number of more sophisticated investors.

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