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If you are an entrepreneur, no matter what field you are in, you need to understand the concept of crowdfunding, its benefits and risks.
April 9, 2013
9 Min Read
If you are an entrepreneur, no matter whether you are in healthcare or tech, or any other industry, you need to understand th concept of crowdfunding, especially now that President Obama Jobs Act formally recognizes it.
Very simply it is the process of a project or venture being funded by a large group of people who typically give small amounts of capital via the Internet for something in return. Sites that provide this opportunity to the average Joe are Kickstarter, Indiegogo, AngelList and others.
In the world of politics, President Obama’s 2008 election was a wildly successful crowdfunded campaign with small donors giving him a massive war chest.
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But the business world is different in that the crowd of small investors is looking for something in return, and there are inherent benefits and risks if entrepreneurs pursue this route. Here are some pros and cons to think about:
Pros
Running a crowdfunding campaign provides “proof of market,” says Stephanie Rich, VP of business development at Spark Devices, which ran its first crowd funded campaign on Kickstarter. In other words, if your traditional investors want some validation that there is a market for whatever you are developing, the campaign will show whether perfect strangers are willing to part their money to support it. In other words, it answers the burning question: Will people buy my product?
Crowdfunding affords an unbelievable networking opportunity, Rich adds. Just putting yourself out there and promoting the campaign on social media and getting press can get real investors who otherwise may not have heard you, contact you and begin a conversation.
It is a way to "accelerate failure" says, Patrick Donohue, a co-founder of INVESTyR that teaches entrepreneurs digital strategies on raising capital. And knowing early that you are going to fail is a good thing. That's because if an idea is bad, crowdfunding very quickly tells entrepreneurs it is so without them spending thousands of dollars making a prototype and then ultimately going bust because no one wants it.
As with all things the benefits come wrapped in some risk. And yet they may not necessarily be things that should act as a deterrent from trying to raise money online. Rather, these are realities entrepreneurs should be aware of because it comes with the territory.
If you suddenly have a successful crowd funded campaign with several hundred, if not thousands, of shareholders who own small amounts of the company, you may not be as attractive as an acquisition target, says David Jenson, an attorney with Leonard, Street & Deinard.
All those people who have invested in your idea – whether in return for rewards or equity or some other perk – now feel they have a connection to the company and can send emails and advice regularly. Rice gave an example of the most successful campaign ever on Kickstarter that raised $10 million from 69,000 backers that ended up hiring a full-time person, a big part of whose daily responsibilities is to respond to emails from these stakeholders. In other words, crowdfunded startups need to devote a lot of time in "shareholder relations" as Jenson puts it.
There is very little room for error. If you have promised your online investors that within a certain time frame they will receive the product or reward or whatever it is you promised in exchange for the money, you better deliver. Otherwise you run the real risk of being sued by disgruntled backers.
Rice, Donohue and Jensen were all panelists at a session on crowdfunding held Tuesday at the 2013 Design of Medical Devices Conference organized by the University of Minnesota.
By Arundhati Parmar, Senior Editor, MD+DI
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