The JOBS Act changes are heralding a new era of crowdfunding, in which supporters of a company or project can become more than just backers – they can become owners. The new capital raising opportunities under the Act are game-changers for both investors and entrepreneurs.
But while “equity crowdfunding” differs significantly from traditional rewards- and donation-based crowdfunding, one aspect is the same for both: the fundamental importance of the project owner’s existing network.
In order for any ‘crowd’ fundraising campaign – rewards and equity alike – to succeed, the head of the project must motivate his or her network and drive support and investments from friends, family, and colleagues.
Rewards-based crowdfunding has become a mainstream concept thanks to the popularity of platforms like Kickstarter and Indiegogo. But ask someone on the street about crowdfunding and he or she is likely to recall the biggest, boldest campaigns to date – the ones that garnered widespread public interest and tons of funding: the Pebble Smartwatch project that raised $10 million; the Veronica Mars film that surpassed its $2 million funding goal in a mere 10 hours and went on to raise more than $5.7 million.
The high-profile, viral nature of those and other major campaigns has led some outsiders to view crowdfunding as a means for easy money… and that couldn’t be further from the truth.
“I think that’s the misconception going into crowdfunding, that you think the crowd is going to be on your side,” says Vann Alexandra Daly, a filmmaker and consultant who’s been called the ‘crowdsorceress’ for her expertise managing crowdfunding campaigns.
Anonymous donations from strangers may be how Pebble and Veronica Mars raised millions, but the truth is that those boldface projects are the exception rather than the rule. The average successful rewards crowdfunding campaign, according to data published in the Wall Street Journal, raises less than $10,000. And successful campaigners (like Daly and others) point out that motivating their networks to support a crowdfunding project is key to that project’s success.
Consider U-Doodle, a Miami-based non-profit that successfully raised $10,000 on Indiegogo in December 2013.
“I’d say we knew or interacted with 80 percent of our funders,” says Jordan Magid, Co-Founder of U-Doodle. “And getting contributions from our closest friends and colleagues was critical to gaining momentum.”
That’s the key – getting members of your network that you already know to contribute, and turning newcomers into members of your network through one-to-one communication and relationship building. And that key unlocks both rewards crowdfunding campaigns and equity crowdfunding offerings.
General Solicitation Lessons
When considering conducting a potential General Solicitation equity offering to accredited investors – presently the only option for an equity crowdfunding campaign – many entrepreneurs expect the public, online nature of the process to do the work of fundraising for them.
Of course, the ability to publicly advertise investment opportunities significantly increases the potential for such offerings to ‘go viral’ and attract investors the issuer did not previously know. We encourage every issuer to utilize their online marketing options as much as possible and incorporate PR and social media into the fundraising strategy.
But the concept of knowing – or getting to know – ’80 percent’ of your funders still applies. We recommend that issuers strategize to raise 40-50 percent of their funds from 1st degree contacts (friends, family, close colleagues) and 30-40 percent from 2nd degree contacts (friends-of-friends and acquaintances). That leaves 20-30 percent to come from broader connections and the crowd.
Importantly, reaching and converting investors in each tier of your network involves a lot of campaigning… and online marketing isn’t enough. To fund your campaign successfully, you’ll need to conduct personalized outreach to all interested investors, send frequent updates to your extended networks, and do lots of in-person networking.
That’s another thing that applies to both rewards and equity crowdfunding: it’s hard work.
“It’s a full-time job,” says Daly of crowdfunding. “Every day of the campaign is important.”