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Financing a Startup Company Series: Crowdfunding 1.0 – Reward Based

Entrepreneurs may be able to raise seed capital by attracting relatively small amounts of money from a large group of individual investors in the crowd.

Entrepreneurs may be able to raise seed capital by attracting relatively small amounts of money from a large group of individual investors in the crowd.

This post continues our Financing a Startup Company Series and focuses on rewards based crowdfunding.

Crowdfunding describes the process of getting a large number of people, or investors, to each give small amounts of capital, usually via the internet.  A relatively new source of funding for startups, Crowdfunding is rapidly evolving and becoming a source of funding to an ever-widening array of companies.  Initially a source of funding for art and creative projects, it has grown to be a forum for launching hardware and software projects, such as the OYUA video game console, social media, marketing and financial services companies.  Two of the biggest crowdfunding portals are Kickstarter and Indiegogo, however there are hundreds of other crowdfunding websites out there.  Forbes has a good list of 10 of the biggest crowdfunding sites and their specialties.

A company seeking to use crowdfunding to launch a product or service can structure the deal with investors in a number of ways.   First, in exchange for money, the company can offer an early release of the final product, named credit on the company website, and teeshirts or other rewards.  This is called donation or reward based crowdfunding (or Crowdfunding 1.0) and is the model employed by Kickstarter and Indiegogo.

Beyond the money raised, crowdfunding campaigns can provide a number of benefits, but also come with risks:

  • A successful campaign can generate huge amounts of buzz.  Because the fundraising is public, the mainstream press can easily pick up stories about companies that succeed their funding goals.   This advertising exposure can lead to more sales once the product or service goes live.
  • An unsuccessful launch can provide market feedback, and allow for a strategic pivot, before too much time is spent actually bringing the product to completion.
  • Because no money is released from the crowdfunding campaign until the goal amount is reached, an unsuccessful campaign could end up being a waste of time that produces no funds.
  • Be wary of releasing or publicly disclosing IP secrets.  After publicly releasing or displaying an invention, a US patent application must be filed within 12 months, or else patent rights will be forfeited.  In other countries, public disclosure before filing for a patent can completely bar a patent application.  Additionally, disclosing IP secrets, or “trade secrets”, makes it easier for competitors to copy your product, or improve their own products using your ideas.
  • Crowdfunding campaigns don’t give startups access to a networks of advisors and mentors like angels or VC can do.

One Response to Financing a Startup Company Series: Crowdfunding 1.0 – Reward Based

  1. Pingback: Financing a Startup Company Series: Intro | Wolverine Startup Law

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