By Craig Allen, Noozhawk Business Columnist
Recently, I began working as interim CFO with two companies to assist them with fundraising. One of the avenues we’re pursuing is a crowdfunding round — an equity round for one company and a convertible note for the other. While there are certainly some positives to crowdfunding as a concept, unfortunately, the current capabilities of crowdfunding companies are strictly limited.
As with most startups or early stage companies, the two I’m working with need to raise capital to execute their business models. Both are technology-based businesses, which means they’re in the “sweet spot” from crowdfunding as a platform for raising capital. Even so, my direct experience with crowdfunding thus far is that it is a great way to centralize the company’s information so investors can access it. In terms of the crowdfunding companies driving investor traffic to that information, simply put it ain’t gonna happen today.
What Is Crowdfunding?
For those readers/investors who have not had any experience with crowdfunding, here is a short explanation of how it works. The recent change in Securities and Exchange Commission rules has allowed companies to use general advertising to raise capital. Although the SEC did not define exactly what it means by “general advertising,” the rule changes make it clear that companies can now access potential investors through the Internet (among other sources). As a result, Internet-savvy entrepreneurs have established crowdfunding websites through which companies can access investors using a multitude of contact mediums.
There are basically two types of crowdfunding approaches: rewards-based and direct capital raises.
Rewards-based crowdfunding approaches use a wide array of creative methods for raising capital, including donations for charitable entities, coupon purchases for future products, etc.
Direct capital raises involve the sale of equity or debt by the company using the crowdfunding website as the portal to interface with investors.
Most crowdfunding investments, whether through rewards-based or direct capital raises, are small — usually $1,000 or less, and can be as little as $10. The upside to this is that the investor is not risking a large amount of money. The downside for the company is that, if trying to raise a sizable amount, it will take lots of investors to reach the fundraising goal.