1. Crowdfunding Central
Advancing Crowdfunding through Research and Best Practices
The power of the crowd
The power of new Crowdsourcing assets and the use of social networking and
related Web 2.0 technologies are helping film-makers, musicians, politicians About
and charities finance new projects. Football clubs like Ebbsfleet United have Crowdfunding Central
funded operations through fans subscriptions; Obama has used the internet to
reach a new and much broader funding audience, while redesigning the
campaign financing business; and sites like buyacredit.com allow people to Crowdfundingcentral.com
buy a credit or become an executive producer based on their level of produces member driven
patronage. research to highlight the
opportunities, concerns and
Now may be the time for other growing companies.In practice, this is a very best practices to businesses,
immature method of raising capital. Substantial legal obstacles, a lack of best investors and entrepreneurs
practices and formal governance techniques need to be addressed for
of Crowdfunding.
Crowdfunding to become feasible to a broader audience.
For more information go to
What is Crowdfunding?
Crowdfundingcentral.com
Wikipedia defines Crowdfunding as:
“An approach to raising the capital required for a new project or enterprise by
appealing to large numbers of ordinary people for small donations”.
Crowdfunding in theory delivers significant opportunities for small growing
companies looking for capital to finance growth. If an organization can Tell Us:
motivate a network or crowd to invest in a company, in theory, it will have a
dedicated and invested community to help develop the company. Many • Where to focus our
verticals have differing levels of brand association and engagement. The
research agenda
technology market for instance is a very networked community with fans
already supporting different communities (open source, technology
• What best practices we
languages, and brands) to achieve personal and organizational goals.
need to explore and
The Crowd phenomenon is allowing organizations to look at social and
professional networks including family, friends, customers and suppliers as a • How to get the word out
source of competitive advantage, and of funding.Organizations can tap the
expertise, passion and online networks of customers, analysts, friends, and Leave a comment for us at:
interest groups to finance their organizations. The crowd can already exist as
a community but an open call for funding and participation can suddenly Members Comments
transform a disparate group to a focused group of investors passionate about
owning, growing and representing a common goal.
Charities like Kiva.org, Donorschoose.org, Globalgiving.com and
Pifworld.com are using Crowdfunding as a successful funding technique. Web 2.0 technologies like video,
blogs and twitter help illustrate project activities that drive donation giving and lend credibility and a voice to
show how participation will support a project’s mission. These technologies can transform a traditional donor
to an energetic ambassador as they engage their online personal networks and highlight the Crowdfunding
cause with which they support.
The implications of Crowdfunding do not stop there. It is proving to be a new model for raising money that
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2. technology companies, in particular, should consider. The implications are far reaching for firms with fans
(think Apple, Amazon, eBay, and Facebook). The film and music industries are being transformed by budding
producers filmmakers and musicians like (Artemis Eternal, A Swarm of Angels, Akamusic, and ArtistShare)
looking in some cases to dis-intermediate an entire industry or just get funding to bring life to a project that
promotes only conservative mainstream films from established directors and writers.
A lack of venture capital to grow 21st Century businesses
Crowdfunding provides emerging companies with a new source of finance in a period of acute VC slowdown.
Over the past 18 months, venture capital firms significantly decreased the appetite for new and potentially
risky investments (including follow-on rounds for existing portfolio companies). The most recent PwC Money
Tree analysis of venture capital investment for all sectors in the US indicated that only “$6.9 billion was
invested in companies during the first half of 2009 indicating a return to the lowest VC investment
Figure 1. Venture capital investments in the Noughties (2000-2009)
Source PWC Money Tree Report
There is a current lack of money supply in the marketplace to finance legitimate growing organizations. This is
highly acute for small businesses that are in early stages of development as VCs continue to nurture existing
investor portfolio companies rather than take new bets on early stage firms. Big commercial institutions like
banks, ventures capital firms or even record labels in the music industry have significantly reduced their risk
profile for new investments.
In this environment VCs have the upper hand and entrepreneurs clamour to get their attention. The need for
more than family, friends, angel investors and traditional VCs to fund a company is forcing entrepreneurs to
make an “open call” for funding.
Crowdfunding provides an alternative to traditional venture capital gatekeepers and presents a marketing
platform upon which to raise funds, drive interest in the product, service or issue and get input and feedback
to company direction.
Like any new fad unscrupulous individuals will jump on the latest trends promising financial returns “not found
from conventional financial assets. The target unsophisticated investors and those individuals that are not of
sufficient wealth where they believe they can make a quick buck from just riding the wave of speculative
investments. It will be necessary for prospective investors to separate the “wheat from the chaff” and
examine Crowdfunding proposals thorough due diligence on the company’s short-term and strategy and
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3. viability. Individuals must examine the number and quality of other Crowdfunding investors. Identify if the
Crowdfunding initiative is under performing or has not met milestones. Many organizations will want to time
bound the exercise (3-6 months) so examine what will happen if the money is not accumulated by that date.
Crowdfunding Steps To Success
For organizations evaluating Crowdfunding consider the following issues:
Define Your Crowd. Organizations looking to leverage the Crowd for funding need to first establish a clear
perspective of the value proposition they wish to propose to the Crowd and indeed define a crowd of potential
investors. There is a need to understand the audience in terms of motivators, behaviours and proposed
messaging. Entrepreneurs need build a crowd of sufficient size to find funding and how long will it take for the
crowd to mobilise on the funding proposal. Initially a target audience can be identified from personal and
professional networks. A larger crowd, one that requires an open call may need to occur through identifying
influencers that are prevalent in the market in which you are operating such as third party advisors, financial
and industry analysts, bloggers, and brokers. In many cases, companies look to exchange equity or debt for
VC investment and will want to ensure that potential investors are qualified in terms of high net worth
individuals or have sufficient experience in investing in illiquid and highly risky investments. The next
challenge is figuring out how your organization should interact with your defined Crowd to achieve your
funding objective (email, mail, phone calls, newsletters, webinars, blogging, video).
Navigate state, federal and international regulations. The chief hurdle to Crowdfunding’s ability to get off
the ground in the US will be governed by state and federal regulations. There are rules and regulations on
how organizations can solicit financial investments and more regulations will likely appear after the financial
scandals of 2008 (e.g., Madoff). There is a need for Crowdfunding to be regulated, to prevent scams and
protect those involved in the programs. Organizations must create transparent practices that meet state and
country laws and create trust in the online world.
Negotiate with the Crowd. A successful Crowdfunding solution or service has to solve many problems in
order to be a feasible alternative for start-ups and investors alike. Some investors may be lacking in requisite
expertise. Their numbers may be so numerous, or so dispersed that they become utterly dependent on
centralized management and require outside counsel and or explanation of benefits or terms. A major
obstacle is how investors are able to negotiate agreement terms. There is an obvious need for process
simplification (de-mystification) and standardization concerning documents such as Term Sheets and
Shareholders’ Agreements.
Nurture Transparency. Organizations have to provide as much information as possible without disclosing
trade secrets. Companies have to decide at what point, if any, written contracts, non-disclosure agreements
should be used particularly if potential investors live in different jurisdictions. Careful consideration of type of
content has to be explored and managed throughout the Crowdfunding arrangement. If a small contribution
obtained via Crowdfunding is actually an equity investment or even a loan and is being marketed as an
investment opportunity with an expectation of a return then Crowdfunding companies will need to work within
securities laws. Lack of sophisticated investment expertise, appreciation of risk/reward analysis and
explanations for appropriately marketing the opportunity for a company or idea provide barriers to
Crowdfunding success.
Manage the Crowd. Posting an open call for funding quickly becomes an investor relations exercise that
engages your defined target audiences (investors, regulators, customers, analysts and partners) over a
lengthy, sometimes undefined time period. Defining and acquiring the right participants, motivators and
behaviours for the development of a crowd is required. Tools include rewards, communications, engagement
and feedback opportunities. Extensive use of web-enabled communication, reputation building and
community platforms allow participants to follow, communicate with, invest in as well as provide input to the
development of ideas, projects or companies.
Get help, research and best practices from the growing Crowdfunding
community…www.crowdfundingcentral.com
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