Your Business: Crowdfunding – the new gold rush

Waze traffic software Photo: Marc Israel Sellem

Waze traffic software Photo: Marc Israel Sellem

Caution and due diligence are the hallmarks of wise investing.
The same is true for taking on business partners.

“Crowdfunding” is the new gold rush that raises cash by soliciting small amounts of money from many supporters and investors. It lets small-timers in early on start-up businesses, while entrepreneurs raise cash and gain strategic management alliances from equity investors.

Crowdfunding is grammatically a noun, but it’s a verb to the entrepreneur. A company promotes its invention or cause on an Internet site (called a platform) and expects product orders or small donations to a cause, perhaps $10 or $25 each. Equity crowdfunding attracts many small investors with $10,000 or less. It pools money, something like a venture-capital fund, in exchange for part ownership of a company before it is bought out or “goes public.” Think WAZE.

Cash is not just king; cash is power to design, produce and market the product. Sources for small-business cash flow are bank loans, which require collateral of a second house mortgage and title to the family car. Angel investors are family and friends, friends of friends, and spouses and children who “invest” family savings, even college funds. Reinvesting cash from sales is common, but this is a slow trudge that hampers growth.

There were 900 self-described crowdfunding sites a few years ago and more than 9,000 in 2013, according Bob Webster of the North American Securities Administrators Association. The top-10 crowdfunding sites, according to Chance Barnett of Forbes are: Kickstarter, for creative products; Indiegogo, a platform for music, hobbies and charities; Crowdfunder, which promotes hi-tech start-ups and social enterprises; RocketHub, Crowdrise and Somolend, which specialize in debt-based investment funding; and AngelList,, appbkr and Quirky, which attract inventors and tinkerers.

MoolaHoop is a money-raising platform that targets women owners. Israel-based OurCrowd is “one of the largest (VC) crowdfunding organizations on the planet,” according to Forbes.

OurCrowd invests its own capital alongside small investors who take an active role in management. The minimum investment is $10,000 “to invest in the best early-stage companies in Israel,” the start-up nation, for a “broader base of investors than ever before.” OurCrowd raised $300,000 in six days for one company; “They make us feel like we are part of both a family and a community,” the founder said.

A “Crowdfunding Industry Report” in 2012 by several New York firms said equity-based crowdfunding raises the most money for software, films and music. Reward-based and donation- based crowdfunding campaigns that perform best “appeal to funders’ personal beliefs and passions (e.g., environment)”; 452 platforms primarily based in North America and Western Europe raised nearly $1.5 billion in 2011 for a million different campaigns.

The platforms make their money on percentage commissions.

They have to solicit and collect from a lot of small investors to generate serious returns for their platforms. Some charge management fees from 2 percent of the investment up to 7.5% on profits. Such pressure warrants extreme caution by investors about what they are being told.

Getting listed on a platform does not guarantee success. One analyst said only 44% of campaigns on Kickstarter reach their goals, and 31% on Indiegogo are fully funded.

Successful crowdfunding entrepreneurs undertake detailed planning for pre-funding, as if they were preparing for battle.

They know the numbers about the projects, industry and competition; a video helps. They commit to the projects as more than a part-time job and wow buyers and supporters with perks.

The pitch is tailored to the audience that buys or invests on the chosen platform. Have a good story that gets across your passion.

Do not try to achieve target capitalization by posting on multiple platforms; the platform suggests the message or image the business wants, so it is important to know where a start-up belongs.

Crowdfunding supporters and investors must beware. Bubble and Balm suddenly asked to be delisted, took down Facebook and Twitter pages and stopped returning calls. That reportedly caused 82 Crowdcube investors with 15% of the company equity (plus perks such as samples and discounts on orders) to lose more than $10,000 each.

I purchased a new product on Kickstarter; I liked the look and new styling. I gave them my credit card in April, with delivery promised in July. It might be November before it arrives.

The founders never anticipated the complexities moving from home-based to mass production. They say they did not coordinate all of the processes from raw materials to finished goods, misjudged the amount of extra time to mass produce elastic essential to the finished product and hand-cut each piece of elastic individually. The logo must be embroidered one at a time on the individual pieces, so the manual process delays product completion.

One seam takes much longer than any of the others to stitch. Meanwhile, backers wait for returns on investment, and customers are without the product. Can they go to mass retailing like this? There are few if any government agencies or trade associations that regulate crowdfunding. Investment money and buyers are largely unprotected if a project fails, misses payments or doesn’t deliver products. Most start-ups are high risk and do fail. Investors in equity crowdfunding may also have their shares diluted if the company issues more stock to raise additional capital.

Still enticed by crowdfunding? Keep Shel Silverstein’s apodictic ditty in mind: “If you are a dreamer, come in, If you are a dreamer, a wisher, a liar, A hope-er, a pray-er, a magic bean buyer… If you’re a pretender, come sit by my fire, For we have some flaxgolden tales to spin. Come in! Come in!” Dr. Harold Goldmeier is the managing partner of Goldmeier Investments LLC and an instructor of business and social policy at the American Jewish University, Aardvark Israel, in Tel Aviv.

Source: The Jerusalem Post – HAROLD GOLDMEIER


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