By Jason Graf, CFB guest contributor, The growing success and popularity of crowdfunding among start-ups and new ventures has attracted many go-getters (both young and aged) across many industries. However, people are asking a lot of good questions. In this Q&A session with Crowdit CEO Jason Graf, he shares his experiences with crowdfunding and offers advice and information on how to successfully use crowdfunding to fund your dream.
We’ve had quite a few concerns about people stealing ideas/intellectual property in crowdfunding. What are your thoughts?
That’s a great question and valid concern for anyone. Intellectual property (IP) is extremely important and potentially valuable. You want to make sure you have any trademarks, copyrights, patents or patents pending in place beforehand to protect your dream or idea if that is a concern. There are some companies in the space that specialize in helping young entrepreneurs and new startup ventures protect their intellectual properties as much as possible. Nextlabs, Leyendecker & Lemire, and Sonian are some of the companies that specialize in this practice. Conversely, there’s also a move toward abandoning the need for patent and IP protection with some very well-known and large companies moving away from this practice. These companies instead redirect resources toward improving and expanding upon ideas which incentivize innovation and make them strive to be more competitive in the marketplace. Companies like Google and Red Hat have come to adopt this “open source” ideology. They believe if you get to the market with an open source product, everyone creates a better solution and, therefore, do a better job of taking care of their customers. Regardless of how you approach the issues surrounding intellectual property, the pros and cons are something that you are going to have to consider in order to determine whether or not crowdfunding is the right fit for you.
Can crowdfunding be used to successfully fund a “brick and mortar” business?
Absolutely! For those of you who are unfamiliar with the term “brick and mortar” business, it’s a business that deals with its customers face to face in an office or store that the business rents or owns. A great example of a “brick and mortar” business that could be crowdfunded is the pizza place in a college town that’s been around for 50 years and is a staple of that community. Let’s say the owner who’s getting up in years wants to retire, but doesn’t want to sell the business just yet. They could crowdfund, for equity, a majority of the company to fund his retirement, as well as fund hiring a management team to run the operation for him. I know we have had success with a gym that was crowdfunded and they were able to raise more than $30,000 in just a few months. The key is not as much the product or the service as it is your ability to access, expand and monetize your network.
Can you please give statistics on the success of crowdfunding to date?
Industry-wide there is about a five percent success rate and the median amount raised on Kickstarter for example, is $5,000. This is for rewards-based crowdfunding, which is probably going to be a little bit different than equity crowdfunding where there is a potential for a greater return on contribution or investment. According to an industry report by Massolution, global crowdfunding raised nearly $2.7 billion for more than 1 million campaigns in 2012. That being said, it takes a lot of work and a lot of project developers need to be willing to put in the time and effort that is required for success. There is a high rate of unsuccessful crowdfunding campaigns, but if you choose the right platform, nail the pitch, build your audience, use social media and follow up with contributors, I think that you can have a really good shot at being successful.
Can people run a crowdfunding campaign on two different sites?
You can, but some portals are going to have stipulations against that. In my opinion, this question sends a signal to the crowdfunding portal that the crowdfunder is miscalculating the amount of pre-campaign work and networking that is required for funding success. I don’t recommend it because what you’re trying to do is direct a very large network to a project landing page in a very short period of time. If you are splitting that effort between two or more portals, then you are going to have a much tougher time developing a following and creating the continuity you need to have a successful project.
One participant writes in “I was recently told by an advisor that I shouldn’t even attempt crowdfunding because my business is IT consulting and I have no tangible rewards to offer my donors.” What is your thought on that? Can crowdfunding be used not only for consulting, but for other types of services?
In the example of IT, your service is a valuable commodity and you could offer it at a discounted rate that they can only get through the crowdfunding portal. It’s like offering a coupon. If you have the proper network, are passionate enough about your business or service, and can come up with unique and creative ways to incentivize your network to contribute, then absolutely you can be successful.
How can you really engage your community with crowdfunding to help make your campaign go viral?
You want to work hard to get people cognizant of your campaign before it launches to create that scenario. Obviously, you want to engage in social media, video, email, press releases and maybe even direct or cold calling to your network. Picking up the phone and calling trade publications that might have an interest in your campaign can help your project also go viral. There are lots of third party companies out there that specialize in crowdfunding marketing and PR. Rally Crowd PR, Crowd Mafia, and Leverage PR are some examples of these ancillary service providers. There are also crowdfunding news sites to connect with that cover the industry and everything that goes on within it – for example CrowdfundBeat.com and Crowdsourcing.org are great places to read about the most up-to-date news and information related to the industry.
Talking about your campaign, how much information about your business do you have to divulge to be considered valuable as a business?
For reward incentive campaigns you are not required to divulge any information. For equity incentive campaigns, however, there is going to be quite a bit of information required. The Financial Industry Regulatory Authority (FINRA), the regulating body of the Securities and Exchange Commission (SEC), will be overseeing that. You’re going to be required to have background checks on the principles of the company as well as the company itself. The third party companies that are doing the background checks will do anything they can to validate the company and its legitimacy. There is going to be quite a bit that will be involved in equity crowdfunding, and we are still trying to work through those rules to make it as easy and as viable as possible for the amount that’s able to be raised.
You mentioned some changes in the rules and regulations. Until new rules go into effect the previous rules still apply, correct?
Correct. The only new rule that is currently in effect is the ability to engage in Title II, more specifically known as 506(c). The only difference is that instead of now having to seek out accredited investors behind closed doors, you can now advertise publicly that you have placed the Private Placement Memorandum, ranked the offering and engaged in investments from accredited investors. When you decide to work under exemption 506(c), you are required to take reasonable steps to prove that all your investors are in fact accredited.
Do business owners have to pay sales tax on rewards that they give away for contributions?
That’s a great question. In my opinion it would be considered taxable revenue, but I would encourage you to seek the advice of a trustworthy and experienced accountant.
On average how much does it cost to fund a new business venture?
Based on statistics from the Small Business Administration (SBA), the average amount nationwide is $30,000. Businesses can be started for much less, but it really depends on the business model or industry that you are pursuing as a new business.
How does a small business owner offer a cash return on investment to investors in a startup company with little or no net worth?
It’s going to require your ability to show market value, proof of concepts, that you’ve done your homework on that industry and that you have a good plan in place. Investors are often betting on you and your team as much as they are the concepts or business idea. You need to be able to capitalize on your network. In a recent study for the World Bank that was done out of the Fung institute, companies or startups with a large board of advisors often get invested in more often than those companies that either do not have a board of advisors or do not have a very well-established board of advisors.
What are your thoughts on how crowdfunding will effect traditional and non-traditional financial institutions, like banks and micro lenders?
I think banks, micro lenders, angel investors and the venture capital world are already taking a look at crowdfunding and trying to find out where they fit. I think it could possibly incentivize banks, angels and VCs to be more competitive. I know personally of some angel networks that are requiring that their startups go through a rewards or incentive crowdfunding raise prior to giving an investment to a company. This is because it proves so much more than the ability to gain access to capital. It proves market concept, it proves demand, and it proves customer acceptance. I think it’s going to prove disruptive in a good way as it does democratize access to venture capital. I think you’ll see broker dealers and investment advisers using crowdfunding as an addition to their portfolio offerings and offering advice on where to diversify your personal investments
There are a number of websites out there like Kickstarter and Indiegogo which seem really good for crowdfunding. Is there a list of other sites where people can go?
There is a company called kickstartercoaching.com that provides a list of the top 200 portals in order of web traffic out of the more than 700 total portals globally. Someone had also asked “if the crowdfunding sites are not providing the contributions or the network why would you use them?” The reason is because it gives access to people who are seeing them. There are portals that are specific to certain industries, niches and communities, and it may be helpful to get in front of those people that already have an interest in your concept, design, belief, or product.
Jason T. Graf is the founder and concept-creator of CrowdIt. Graf is a visionary with 13 years of experience in business and finance. Graf’s passion for business, marketing, planning and financing has helped other business owners through his position as a business intermediary for Murphy business & Financial Corporation since 2010 and through his volunteer work with SCORE.