Oculus. Glowforge. Flow. Exploding Kittens. Veronica Mars. Tile. The Coolest Cooler. BauBax. Fidget Cube. What do all of these companies have in common? They are all successful and started with crowdfunding — the list of these nine case studies comes directly from the US Chamber of Commerce.
Crowdfunding has indeed exploded especially in the last few years. This article will illustrate three key principles for entrepreneurs to use crowdfunding effectively.
1) Understand The Rules — In the US very recently new regulations have come into effect to reduce the paperwork associated with it. The gist is
(i) a company can now raise up to $1M in a 12-month period without having to register its securities
(ii) how much an investor can put in depends on their annual income or net worth but basically the maximum limit is $100K in any 12-month period
These are simplifications, for a deeper view you can read a plethora of articles online including the SEC’s official press release.
The US is still fairly fragmented when it comes to platforms as the data below from 2019 shows. Different platforms do have different focuses and many do more than crowdfunding, for instance secondaries.
2) Yes To Marketing — Now that crowdfunding is well established, good marketing is almost a pre-condition for elevating your startup from all the noise. There are many great articles about the topic, here is one take from Forbes published in 2019. The data shows clearly what you would expect: video does better, most campaigns last just over 100 days, but most of the money is raised very early as in almost half in the first 3 days. Areas that are overwhelmingly dependent on consumer tastes, such as gaming, get more crowdfunding than VCs relative to other verticals.
3) Set Your Expectations — Many entrepreneurs tell me they think crowdfunding campaigns are proof of a new way of doing investing that will replace professional investors. I disagree. Crowdfunding is a fantastic way of raising capital for projects that resonate with the average consumer and that can deliver on a short timeframe. But it’s not going to fund a Tesla that takes a lot of capital or an Amazon that takes a lot of time to become profitable. If you are putting up a project on Kickstarter or backing someone, having the right expectations is critical, there are plenty of unfortunate stories like ZPM Espresso. There is also an emerging concept called crowdfunded equity, see more in this article from 2017. To set your expectations — Fundly published the following figures for 2020:
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.
