Crowdfunding CentralAdvancing Crowdfunding through Research and Best Practices   The power of the crowd   The power of new...
technology companies, in particular, should consider. The implications are far reaching for firms with fans(think Apple, A...
viability. Individuals must examine the number and quality of other Crowdfunding investors. Identify if theCrowdfunding in...
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  1. 1. Crowdfunding CentralAdvancing Crowdfunding through Research and Best Practices The power of the crowd The power of new Crowdsourcing assets and the use of social networking and related Web 2.0 technologies are helping film-makers, musicians, politicians About and charities finance new projects. Football clubs like Ebbsfleet United have Crowdfunding Central funded operations through fans subscriptions; Obama has used the internet to reach a new and much broader funding audience, while redesigning the campaign financing business; and sites like allow people to buy a credit or become an executive producer based on their level of produces member driven patronage. research to highlight the opportunities, concerns and Now may be the time for other growing companies.In practice, this is a very best practices to businesses, immature method of raising capital. Substantial legal obstacles, a lack of best investors and entrepreneurs practices and formal governance techniques need to be addressed for of Crowdfunding. Crowdfunding to become feasible to a broader audience. For more information go to What is Crowdfunding? Wikipedia defines Crowdfunding as: “An approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations”. Crowdfunding in theory delivers significant opportunities for small growing companies looking for capital to finance growth. If an organization can Tell Us: motivate a network or crowd to invest in a company, in theory, it will have a dedicated and invested community to help develop the company. Many • Where to focus our verticals have differing levels of brand association and engagement. The research agenda technology market for instance is a very networked community with fans already supporting different communities (open source, technology • What best practices we languages, and brands) to achieve personal and organizational goals. need to explore and The Crowd phenomenon is allowing organizations to look at social and professional networks including family, friends, customers and suppliers as a • How to get the word out source of competitive advantage, and of funding.Organizations can tap the expertise, passion and online networks of customers, analysts, friends, and Leave a comment for us at: interest groups to finance their organizations. The crowd can already exist as a community but an open call for funding and participation can suddenly Members Comments transform a disparate group to a focused group of investors passionate about owning, growing and representing a common goal. Charities like,, and are using Crowdfunding as a successful funding technique. Web 2.0 technologies like video, blogs and twitter help illustrate project activities that drive donation giving and lend credibility and a voice to show how participation will support a project’s mission. These technologies can transform a traditional donor to an energetic ambassador as they engage their online personal networks and highlight the Crowdfunding cause with which they support. The implications of Crowdfunding do not stop there. It is proving to be a new model for raising money that – All rights reserved
  2. 2. technology companies, in particular, should consider. The implications are far reaching for firms with fans(think Apple, Amazon, eBay, and Facebook). The film and music industries are being transformed by buddingproducers filmmakers and musicians like (Artemis Eternal, A Swarm of Angels, Akamusic, and ArtistShare)looking in some cases to dis-intermediate an entire industry or just get funding to bring life to a project thatpromotes only conservative mainstream films from established directors and writers.A lack of venture capital to grow 21st Century businessesCrowdfunding provides emerging companies with a new source of finance in a period of acute VC slowdown.Over the past 18 months, venture capital firms significantly decreased the appetite for new and potentiallyrisky investments (including follow-on rounds for existing portfolio companies). The most recent PwC MoneyTree analysis of venture capital investment for all sectors in the US indicated that only “$6.9 billion wasinvested in companies during the first half of 2009 indicating a return to the lowest VC investmentFigure 1. Venture capital investments in the Noughties (2000-2009) Source PWC Money Tree ReportThere is a current lack of money supply in the marketplace to finance legitimate growing organizations. This ishighly acute for small businesses that are in early stages of development as VCs continue to nurture existinginvestor portfolio companies rather than take new bets on early stage firms. Big commercial institutions likebanks, ventures capital firms or even record labels in the music industry have significantly reduced their riskprofile for new investments.In this environment VCs have the upper hand and entrepreneurs clamour to get their attention. The need formore than family, friends, angel investors and traditional VCs to fund a company is forcing entrepreneurs tomake an “open call” for funding.Crowdfunding provides an alternative to traditional venture capital gatekeepers and presents a marketingplatform upon which to raise funds, drive interest in the product, service or issue and get input and feedbackto company direction.Like any new fad unscrupulous individuals will jump on the latest trends promising financial returns “not foundfrom conventional financial assets. The target unsophisticated investors and those individuals that are not ofsufficient wealth where they believe they can make a quick buck from just riding the wave of speculativeinvestments. It will be necessary for prospective investors to separate the “wheat from the chaff” andexamine Crowdfunding proposals thorough due diligence on the company’s short-term and strategy and – All rights reserved
  3. 3. viability. Individuals must examine the number and quality of other Crowdfunding investors. Identify if theCrowdfunding initiative is under performing or has not met milestones. Many organizations will want to timebound the exercise (3-6 months) so examine what will happen if the money is not accumulated by that date.Crowdfunding Steps To SuccessFor organizations evaluating Crowdfunding consider the following issues:Define Your Crowd. Organizations looking to leverage the Crowd for funding need to first establish a clearperspective of the value proposition they wish to propose to the Crowd and indeed define a crowd of potentialinvestors. There is a need to understand the audience in terms of motivators, behaviours and proposedmessaging. Entrepreneurs need build a crowd of sufficient size to find funding and how long will it take for thecrowd to mobilise on the funding proposal. Initially a target audience can be identified from personal andprofessional networks. A larger crowd, one that requires an open call may need to occur through identifyinginfluencers that are prevalent in the market in which you are operating such as third party advisors, financialand industry analysts, bloggers, and brokers. In many cases, companies look to exchange equity or debt forVC investment and will want to ensure that potential investors are qualified in terms of high net worthindividuals or have sufficient experience in investing in illiquid and highly risky investments. The nextchallenge is figuring out how your organization should interact with your defined Crowd to achieve yourfunding objective (email, mail, phone calls, newsletters, webinars, blogging, video).Navigate state, federal and international regulations. The chief hurdle to Crowdfunding’s ability to get offthe ground in the US will be governed by state and federal regulations. There are rules and regulations onhow organizations can solicit financial investments and more regulations will likely appear after the financialscandals of 2008 (e.g., Madoff). There is a need for Crowdfunding to be regulated, to prevent scams andprotect those involved in the programs. Organizations must create transparent practices that meet state andcountry laws and create trust in the online world.Negotiate with the Crowd. A successful Crowdfunding solution or service has to solve many problems inorder to be a feasible alternative for start-ups and investors alike. Some investors may be lacking in requisiteexpertise. Their numbers may be so numerous, or so dispersed that they become utterly dependent oncentralized management and require outside counsel and or explanation of benefits or terms. A majorobstacle is how investors are able to negotiate agreement terms. There is an obvious need for processsimplification (de-mystification) and standardization concerning documents such as Term Sheets andShareholders’ Agreements.Nurture Transparency. Organizations have to provide as much information as possible without disclosingtrade secrets. Companies have to decide at what point, if any, written contracts, non-disclosure agreementsshould be used particularly if potential investors live in different jurisdictions. Careful consideration of type ofcontent has to be explored and managed throughout the Crowdfunding arrangement. If a small contributionobtained via Crowdfunding is actually an equity investment or even a loan and is being marketed as aninvestment opportunity with an expectation of a return then Crowdfunding companies will need to work withinsecurities laws. Lack of sophisticated investment expertise, appreciation of risk/reward analysis andexplanations for appropriately marketing the opportunity for a company or idea provide barriers toCrowdfunding success.Manage the Crowd. Posting an open call for funding quickly becomes an investor relations exercise thatengages your defined target audiences (investors, regulators, customers, analysts and partners) over alengthy, sometimes undefined time period. Defining and acquiring the right participants, motivators andbehaviours for the development of a crowd is required. Tools include rewards, communications, engagementand feedback opportunities. Extensive use of web-enabled communication, reputation building andcommunity platforms allow participants to follow, communicate with, invest in as well as provide input to thedevelopment of ideas, projects or companies.Get help, research and best practices from the growing Crowdfundingcommunity… – All rights reserved