Crowdfunding has come a long way since the first crowdfunding projects surfaced a few years ago, with the first Kickstarter project coming online in 2009.
The concept of getting the public to fund an idea or product, has been around for a few years now. But there’s still a lot of uncertainty about its place as a source of funding for startups and early-stage companies.
The National Crowdfunding Association of Canada, which counts more than 700 organizations across the country as its members, hosted a webcast on Feb. 21, discussing the state of crowdfunding in Canada.
It explored how crowdfunding has changed from a fringe way of fundraising to a mainstream, accepted way to prove an idea or project has support and traction. Here’s a quick roundup of the highlights of the webcast.
1. More than ever, crowdfunding will continue being about the co-creation of value.
While it’s easy to see crowdfunding as a way of simply asking people for money, it’s a lot more than that, said Christopher Charlesworth, co-founder of HiveWire Inc. and a speaker on the panel for the webcast. Beyond just an avenue for funding, crowdfunding is about allowing other people to get involved with an original idea.
“We’re heading in a direction where there’s almost an escalator form, where there is an opportunity for the crowd to support ideas and innovation, even at the very nascent stage, right from where the ideas are formed,” he said.
“And the crowd’s able to say, this is a great idea, to allow other people to jump on board and support those ideas, to allowing deep capital, pre-sales, to then having the larger financial services providers to be able to step in.”
Crowdfunding also allows startups and individuals to test their assumptions about the marketplace, said Lyn Blanchard of Creekstone Consulting Inc. One of the best ways to see if a product will catch on is to see if people are interested in funding it, she added.
Eventually, what may change crowdfunding is the availability of data, Charlesworth said. As data analytics become more entrenched in the tech industry, it’s inevitable they’ll also shape how people do crowdfunding.
For example, many people believe women tend to be more successful at crowdfunding. However, once data analytics come into play, people will be able to make more sense of market signals and verify beliefs like those, he added.
2. Right now, crowdfunding involves directing backers to a crowdfunding site. But we’re going to see more and more crowdfunding-as-a-service solutions.
Most crowdfunding involves setting up a campaign on a site, with the most well-known platforms being Kickstarter and Indiegogo. While featured campaigns often get a lot of page views, the downside to this is that campaigners have to direct backers away from their own sites, lowering their traffic, said Daryl Hatton, CEO of FundRazr, one of Canada’s biggest crowdfunding platforms.
The solution to all this? Crowdfunding as a service, Hatton said, adding FundRazr introduced a software plugin in December 2013, allowing people to embed crowdfunding campaigns directly onto their own sites. Indiegogo also did something similar last month with a new feature called Outpost, he noted.
3. While some may have thought crowdfunding would disrupt the traditional way of financing companies, that hasn’t happened yet.
Instead of seeing crowdfunding as a way to compete directly with venture capital and the usual ways of financing an early-stage company, the two are complementary, Blanchard said.
“The question is, is crowdfunding disruptive to a finance ecosystem? The quick answer is, it’s not disruptive,” she said. “It’s just another arrow in an entrepreneur’s quiver.”
As she noted before, if a project reaches its funding goals, that can be a good indication of whether a marketplace will want a particular product or service. But smashing a crowdfunding goal can also show investors that a startup or early-stage company has potential, she added.
“It’s about the art of building a company that is fundable,” Blanchard said.
4. Equity-based crowdfunding is on its way, but don’t expect it to look the same as regular crowdfunding.
With crowdfunding becoming an increasingly mainstream concept, its definition has changed a fair amount, said Alixe Cormick, a securities lawyer at Venture Law Corp.
For example, some people might not consider equity-based crowdfunding, where individuals invest in a company in exchange for an equity stake, as true crowdfunding since that’s not open to the public in the same way a regular crowdfunding campaign might be.
That being said, it’s still early days, Cormick noted. While equity-based crowdfunding is legal in Canada under an offering memorandum in every province except Ontario, provinces have set their own rules on how much capital a company can raise using equity-based crowdfunding.
For example, Saskatchewan was the first province in Canada to allow equity-based crowdfunding, approving the move in December 2013. However, it has set a ceiling of allowing funding for two campaigns for $150,000 each per year. Plus, no individual can invest more than $1,500 per offering.
However, there are now equity-based crowdfunding portals operating in Canada, so there’s progress on this front, she said. She added she expects to see a lot of changes in Ontario’s crowdfunding space in the next 12 months, as Ontario will be releasing details on its exemption for equity-based crowdfunding soon.
“We have barely, barely touched the surface,” Cormick said. “You will have a normalization of crowdfunding where it won’t be such a new tool … We will always have people looking for equity investment.”