Raising capital while effectively managing your time is becoming a challenge for individuals and organizations. According to Dave Lavinsky, it takes about 500 to 1,000 work hours spread across a 6-9 month time period and entails the creation/perfection of a business plan, doing due diligence, developing targeted investor lists and negotiating the transaction. Lavinsky goes on to say that it takes about 160 pre-qualified prospective investors before a deal is likely. These timelines are considered normal costs of doing business through traditional means but there is a change in the horizon.
This change is in the form of crowdfunding, particularly equity-based crowdfunding. Traditional means of getting financing have been shaken to their cores and its time for a new way of thinking. No longer can we spend months trying to acquire financing when we have an example reported in PC Advisor of companies like Pebble smartwatch that raised $100,000 in just two hours and raised approximately $10.3M of financing in just over a month.
The advent of crowdfunding as a viable option is due to the rapid reach and scalability of the underlying technologies and new business processes that support these online crowdfunding platforms. An example of this is Kickstarter.com which is only a 9-year-old company but through its crowdfunding platform has raised money in the billions.
Currently, there are hundreds of crowdfunding platforms that can prove to be a problem if the individuals and organizations opt for being on multiple crowdfunding platforms to get maximum exposure. On top of this, the problem becomes complex when equity is involved.
Thus, this idea looks at creating a single portal where organizations can manage all of their equity-based crowdfunding activities and have a “big picture” view of their equity stakes. This idea takes the best practices of HootSuite.com and Mint.com and leverages them for equity-based crowdfunding purposes. What Hootsuite.com did for social media management and what Mint.com did for online personal financing, CrowdSuite will follow along the same lines and become your single source of the equity-crowdfunding management portal.
In today’s economic environment, it is getting increasingly difficult for new ventures (e.g., startups, project, etc.), small and medium enterprises (SME) to raise capital through traditional means. These traditional means have entailed applying for a bank loan, obtaining a government loan or grant and seeking funding from Venture Capitalists (VC) and Angel Investors. Due to the scarcity of resources, organizations are slowly moving away from traditional means of raising funds and moving towards non-traditional means such as crowdfunding.
The Oxford dictionary defines crowdfunding as “the practice of funding a project or venture by raising many small amounts of money from a larger number of people, typically via the Internet.”As we can see from this definition that crowdfunding is not a new concept but what is new is the use of the Internet to raise funds through a website aka platform. This method has opened new possibilities, new business models and disrupted the business processes involved in getting financing. This seismic shift has resulted in organizations looking at their own operations and making strategic decisions as to how to maximize benefits achieved through crowdfunding.
GoGetFunded.com has reported that the amount of money raised since 2011 has doubled every year and in 2013 was at $5.1B. But the most interesting thing about this change is not necessarily the size of the current market but according to Chance Barnet, it is going to disrupt $1.2T per year market of Regulation D and placement market. Additionally, Chance goes on to say that the $30B per year of the VC market is going to see some changes as well due to crowdfunding.
In order to understand the crowdfunding trend, we have to know that not all crowdfunding is the same. GoGetFunded.com categorizes it into the following:
- Reward-Based Crowdfunding – where financial contributions are “rewarded” by certain perks (e.g., t-shirts, hats, etc.).
- Donations-Based Crowdfunding – where financial contributions are for a certain cause (e.g., charity, church, etc.).
- Lending-Based Crowdfunding – where financial contributions can result in an agreed-upon interest rate of return.
- Equity-Based Crowdfunding – where financial contributions result in owning a stake in the growth of the organization.
The figure below depicts the various crowdfunding categorizations along with market growth and industry share.
The popularity of crowdfunding is such that according to Statistica.com, in 2012 there were almost 200 platforms in the United States alone. Interestingly, among the crowdfunding categories, GoGetFunded.com reports that equity-based crowdfunding has raised more funds per project than rewards-based and donation-based crowdfunding platforms.
In the United States, equity-based crowdfunding had been restricted for almost 80 years until the Jumpstart Our Business Startups (JOBS) Act was passed and signed into law on April 2012 by President Obama. The law requires the “Securities and Exchange Commission (SEC) to write rules and issue studies on capital formation, disclosure, and registration requirements.”What this means is that now companies can solicit financial contributions openly to the public under the various Titles of this law. Under Title II, which went into effect in 2013, companies can solicit funding from accredited investors (i.e., those who have a net worth of $1M or have made $200K for the past three years). However, perhaps the most exciting part of this law is Title III, whereby non-accredited investors (i.e., essentially everyone) can invest in the various startups.
Companies like Indiegogo.com (a rewards-based crowdfunding platform) have openly shown interest in equity-based crowdfunding and are “really excited” about when the rules of Title III were to be released by the SEC. While the other well-known crowdfunding sites (e.g., Kickstarter.com) have not been too vocal about equity-based crowdfunding but one thing is for sure that there will be a gold rush in the marketplace resulting in an increased number of equity-based crowdfunding platforms. Therein lies the issue, as the number of equity-based crowdfunding platforms increases; various organizations would look into being on more than one equity-based crowdfunding platform to get maximum exposure. This would create management issues not only in terms of logging on to various equity-based crowdfunding platforms but also making a determination of how much equity can really be given up.
Today, individuals and organizations manage their various crowdfunding platform accounts by creating separate accounts for each crowdfunding platform. These account creations entail maintaining login credentials, editing and updating information about the crowdfunding campaigns so the crowd can stay informed from whom they are seeking funding. The figure below visually shows this current state.
In addition to maintaining multiple crowdfunding accounts, if individuals and organizations want to know what is happening across their crowdfunding accounts then they have done the perform the following information capture methods:
- Manually – where crowdfunding account managers manually copy information from multiple crowdfunding accounts. In the case of equity-based crowdfunding platforms, this information can include equity remaining based on the equity given out.
- Eyeballing – where crowdfunding account managers logon to multiple crowdfunding platforms and switch back and forth between them to get a rough estimate. In the case of equity-based crowdfunding platforms, this can entail eyeballing equity stakes.
- Third-party Tools – where crowdfunding account managers export the data from multiple crowdfunding platforms to a third-party tool (e.g., Excel). In the case of equity-based crowdfunding platforms, this can include extracting information such as equity remaining and then determining how much equity can actually be given out.
Currently, the crowdfunding platforms use technology to be the intermediary between the crowd and the organizations that are seeking funding online. These crowdfunding platforms typically charge a fee for every transaction that occurs. Due to this focus, crowdfunding platforms have not paid much attention to an individual or an organization’s potential management issues. Due to this lack of foresight, current crowdfunding platforms have not created a solution to tackle this problem.
From our observations of the current state, there is no effective and efficient way for individuals and organizations to keep track of and manage all their equity-based crowdfunding platform accounts from one location. We can imagine that logging on to various crowdfunding platform accounts can waste time especially if crowdfunding initiatives are spread across multiple platforms. In addition, the likelihood of human error increases as more and more crowdfunding platforms are used. In terms of equity-based crowdfunding platforms, a simple human error can prove to be harmful for the whole organization.
Keeping the above issues in mind, a dashboard-type portal called CrowdSuite would be developed. This portal would help individuals and organizations manage multiple equity-based crowdfunding platforms by logging on to one location. Figure 4, below depicts how this portal will consolidate information from equity-based crowdfunding platforms and display this information to individuals and organizations under one portal.
CrowdSuite would focus on individuals and organizations that are managing multiple equity-based crowdfunding initiatives. CrowdSuite’s revenue generation model would be two-fold:
- Freemium Model – In this model, the basic service would be free. Advanced features such as analytics will require tiered subscriptions.
- Limited Advertising – Another source of revenue would be advertisements from early-stage funds, incubators, venture capitalists and angel investors who are interested in doing equity-deals with our client base.
The following Strengths, Weaknesses, Opportunities, and Threats (SWOT) analysis has been conducted to assess the feasibility of this idea:
- Not burdened by SEC regulations
- Holistically and preemptively assessing management issues
- Leveraging existing equity-based crowdfunding platforms
- Ability to incorporate other crowdfunding platforms into the portal
- Portal integrity dependents upon the quality of data from third parties
- First to market to set the tone
- It can be under the radar since most organizations will be focused on creating equity-based crowdfunding platforms
- The business model can be replicated by competitors
- Crowdfunding portals decide not to create, suspend or dramatically update Application Programming Interfaces (APIs)
CrowdSuite gives the freedom to manage your limited time efficiently and effectively when it comes to equity-based crowdfunding. Although there are no real examples of what CrowdSuite is attempting to accomplish, CrowdSuite takes inspiration from what Hootsuite.com has done for social media and what Mint.com has done for personal financing. Additionally, we will be utilizing technologies that are used to develop a mobile hybrid app that can be viewed across various mobile devices. This is the same technology that power’s Wikipedia’s mobile app.
- Lavinsky, Dave. “Raising Capital for Your Business -How Long Does It Take?”Raising Capital for Your Business. BusinessKnowHow.com, n.d. Web. 20 June 2014. http://www.businessknowhow.com/money/raising-capital.htm
- Casserly, Martyn. “The Top 5 Kickstarter Success Stories: Oculus Rift, Pebble Smart Watch, Ouya and More.”PC Advisor News RSS. PC Advisor, 2 Oct. 2013. Web. 20 June 2014. http://www.pcadvisor.co.uk/features/internet/3471652/top-5-kickstarter-successes/
- Sekhon, Sandip. “Crowdfunding Statistics and Trends [Infographic].”GoGetFunding Blog RSS. GoGetFunding.com, 1 May 2013. Web. 20 June 2014. http://blog.gogetfunding.com/crowdfunding-statistics-and-trends-infographic/
- Definition of Crowdfunding in English:.”Crowdfunding: Definition of Crowdfunding in Oxford Dictionary (American English) (US). OxfordDictionaries.com, n.d. Web. 20 June 2014. http://www.oxforddictionaries.com/us/definition/american_english/crowdfunding
- “Crowdfunding – Number of Platforms Worldwide by Country, 2012 | Statistic.”Statista. Statistica.com, 2013. Web. 20 June 2014. http://www.statista.com/statistics/251573/number-of-crowdfunding-platforms-worldwide-by-country/
- “Jumpstart Our Business Startups (JOBS) Act.”gov. Securities and Exchange Commission, n.d. Web. 20 June 2014. https://www.sec.gov/spotlight/jobs-act.shtml
- Barnett, Chance. “The Crowdfunder’s Guide To General Solicitation And Title II Of The JOBS Act.”Forbes. Forbes Magazine, 23 Sept. 2013. Web. 20 June 2014. http://www.forbes.com/sites/chancebarnett/2013/09/23/the-crowdfunders-guide-to-general-solicitation-title-ii-of-the-jobs-act/
- Noked, Noam. “Jobs Act Title III Crowdfunding Moves Closer To Reality.”The Harvard Law School Forum on Corporate Governance and Financial Regulation. Harvard Law School, 6 Dec. 2013. Web. 20 June 2014. http://blogs.law.harvard.edu/corpgov/2013/12/06/jobs-act-title-iii-crowdfunding-moves-closer-to-reality/
- Alois, JD. “Indiegogo CEO Slava Rubin Talks Equity Crowdfunding (Video) – Crowdfund Insider.”Crowdfund Insider Indiegogo CEO Slava Rubin Talks Equity Crowdfunding Video Comments. CrowdFundInsider.com, 4 Dec. 2013. Web. 20 June 2014. http://www.crowdfundinsider.com/2013/12/27708-indiegogo-ceo-slava-rubin-talks-equity-crowdfunding-video/
- “KICKSTARTER.”Kickstarter Stats — Kickstarter. Kickstarter.com, n.d. Web. 20 June 2014. http://www.kickstarter.com/help/statsJeffries, Adrianne. “If You Back a Kickstarter Project That Sells for $2 Billion, Do You Deserve to Get Rich?” The Verge. TheVerge.com, 28 Mar. 2014. Web. 20 June 2014. http://www.theverge.com/2014/3/28/5557120/what-if-oculus-rift-kickstarter-backers-had-gotten-equity