By: Vanessa Schoenthaler and Jonathan Friedland
One in a series of articles explaining why and how Accredited Investors will likely change their investment strategies because of the JOBS Act of 2012
Installment #4- “What’s all the Noise about Crowdfunding?”
Let’s stop for a moment and consider crowdfunding, which you probably have heard of, and Kickstarter, one of the most well-known types of crowdfunding platforms and one of the least important to you as an accredited investor.
It’s not that Kickstarter doesn’t matter at all. Kickstarter has in fact been a pioneer in the nascent market for crowdfunding and the platform that it provides has been instrumental in the funding oftens of thousands of creative ventures.
platform that it provides has been instrumental in the funding oftens of thousands of creative ventures.
Nevertheless, while Kickstarter may provide a platform that allows for the pooling of resources to fund a venture—the essence of crowdfunding—it’s not a platform for making investments, at least not in the traditional sense of the term. That is to say, you cannot not earn a financial return by backing a project on Kickstarter. Your return on investment comes in the form of knowing that you have helped to bring a project to life and, oftentimes, in the form of swag. Swag are perks of varying degree, for example, if you were to make a certain minimum contribution to a movie project you might get a DVD copy of the finished film, whereas a larger contribution might get you a production credit or an invite to the premier.
To date, the most successful project to receive backing on Kickstarter is Pebble, a customizable watch that connects with a user’s smartphone to run apps. Pebble set out to raise only $100,000 on Kickstarter, but ended up raising $10,266,845 from 68,929 backers.
Another example of an extremely successful Kickstarter project isOuya, an open video game console. Ouya set out to raise $950,000 on Kickstarter, but ended up raising $8,596,474 from 63,416 backers. Ouya is the eighth Kickstarter project to raise more than one million dollars.
Even more examples of Kickstarter success stories include Amanda Palmer’s project to raise funds for the manufacture and distribution of an independent album (a $100,000 goal, with $1,192,793 raised), Rich Burlew’s project to raise funds for the reprint of the out-of-print comic The Order of the Stick (a $57,750 goal, with $1,254,120 raised) and Ministry of Supply’s project to raise funds for the manufacture and distribution of a high-tech, fashionable dress shirt (a $30,000 goal, with $429,276 raised).
It’s success stories like these that naturally led to a Time Magazinearticle: The Kickstarter Economy (subscription required), which poses the question:
“Could Kickstarter and its crowdfunding competitors and imitators end up competing with venture capitalists and angel investors and other sources of funding for startups of all sorts?”
With respect to Kickstarter, at least in its present form, the answer is no.
To begin with, there are several restrictions on the types of projects that can raise funds through Kickstarter. Its Project Guidelines require that all projects fall within one of a limited number of categories covering things like art, music, technology and theater. With the exception of technology, there aren’t many angel investors or venture capital firms that focus on the same kinds of categories as Kickstarter does.
Kickstarter’s Project Guidelines also require that projects have a clear goal that can eventually be completed. Therefore, you can’t use Kickstarter to raise funds to start a business or for general working capital to fund ongoing operations; you have to have a specific, attainable purpose in mind.
What’s more, the average Kickstarter project is modest, even miniscule, in comparison to outliers like Pebble, Ouya, and even Ministry of Supply. In the Time Magazine article, Kickstarter co-founder Yancey Strickler, tells us that a typical project only raises about $5,000 and is supported by 85 backers. Compare that to thetypical angel investment round of about $341,800.
Thus, the kinds of businesses that raise funds from angel investors and through venture capitalists and the kinds of individuals and businesses that launch projects to raise funds through Kickstarter are likely to be very different. That’s not say that a Kickstarter project can’t form the basis of an angel or venture-backed company, it’s just not likely that the two will be competing for the same investment deals any time soon.
So you see, Kickstarter actually occupies a valuable niche in the crowdfunding marketplace, it’s just that Kickstarter and similar platforms don’t really matter to you, as an accredited investor.
What is crowdfunding?
This might naturally lead you to ask, if platforms like Kickstarter’s are not relevant to accredited investing, should accredited investors be concerned with crowdfunding platforms at all? Possibly, remember the Kickstarter platform is an example of only one type of crowdfunding platform.
More generally, the Oxford dictionary defines crowdfunding(sometimes also called crowd-sourced funding, crowd financing or social funding) as “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”
When considered in this broader context, any number of a variety of platforms can come within the definition of crowdfunding. Even so, we can generally categorize existing crowdfunding platforms into one of four business models:
About the Authors:
Friedland is founder and chairman, and Schoenthaler is general counsel, of DailyDAC, LLC, which owns and operates AIMkts. Friedland practices corporate law in Chicago at the Levenfeld Pearlstein law firm; Schoenthaler maintains a private practice in New York City, where she focuses on securities law.
This article is copyright©2013 by DailyDAC, LLC.