Crowdfunding Basics Every Canadian Entrepreneur Should Know

Crowdfunding, as recently defined by Merriam-Webster’s dictionary, is the practice of soliciting financial contributions from a large number of people, especially the online community. Entrepreneurs have enthusiastically embraced electronic platform crowdfunding since its prominent introduction less than a decade ago.This brief examines several basic components to understand before commencing such an endeavor in order to increase crowdfunding awareness and to avoid some of the associated pitfalls when crowdfunding for the first time.

THE MARKET

There are an estimated 582 active crowdfunds available since April 2013, up from 462 in the year prior, according to the research firm Massolution, spanning 160 differing countries, and across differing focuses (e.g. general, musicians, software, charity, non-profits, political, etc.). Crowdfunding was estimated to have reached $5.1 billion in pledges in 2013, up from $2.7 billion in 2012, according to Massoluation, and other opinions by The Crowdfund Centre have placed this figure at $2 million per day through 50,000 daily pledges. The World Bank commissioned a study that projected crowdfunding could reach between $90 billion to $96 billion by 2025.

Crowdfunding is currently largely driven by developed economies with North America accounting for roughly ~60% and Europe accounts for ~35%, as per Massolution, with the top most successful campaigns, as reported by The Crowdfund Centre, being the United States, United Kingdom and Canada. However, crowdfunding’s true potential may lie in emerging markets, especially China and Brazil.

The four crowdfunding models are donation (free funding generally for a cause), rewards (campaign owner provides a reward for the funds received), equity and debt (shares or debt issued by the campaigning venture). The first two are the only models legal in Canada for non-accredited investors (i.e. layperson) and account for roughly 50% of total global funding, as stated by Massolution, and are thus the focus of this brief.

        PREPARATION TIME

Operating a successful crowdfund campaign is not as simple as completing some paperwork in a couple of hours. According to Reality Crowd Media Corporation, successful crowd funding can take up to three months of pre-launch activities, which includes business planning, intellectual property, social media, public relations, campaign strategy, networking, team building, website development, as well as profile and video construction. Many crowdfunding activities would overlap with the other business launching related activities, and thus time can be saved by incorporating a crowdfunding perspective at each overlapping stage.

Each model requires a unique emphasis on differing aspects, as per Reality Crowd Media Corporation. Donation based crowdfunding is heavily dependent on a compelling story that inspires; engaging relationships; strong public relations and social media execution; as well as properly articulating the potential taxable benefits when available. Rewards based crowdfunding is highly dependent on engaging relationships; public relationships; social media; and a very compelling video pitch. Additionally, reward crowdfunding should obtain 30% of the project funding goal within its first week. Some projects are suited for either type of model; therefore the campaign owner should choose the model which best reflects their strengths. For more detailed information consult Manolis Sfinarolakis presentation Crowdfunding: Financing Your Small Business on Slideshare.

        CHOICE OF PLATFORM

The three largest and most renowned reward and donation based platform choices are Kickstarter, GoFundMe and Indiegogo.

Ø  Kickstarter funds creative based projects across 15 categories. It is quick to boast their existing statistics, which include $1,350 million raised to date for over 71 thousand projects, alongside a 40% success rate and, according to the freelance writer Kristy Hines, an estimated of 5.5 million U.S. visits per month.  Additionally, Kickstarter reports that out of 43,193 funded projects, there have only been 4 reported cases of fraud (i.e. 0.01% fraud rate).

Ø  GoFundMe targets fundraiser initiatives and it has raised over $500 million from over 6 million donors, and has an estimated 2.3 million U.S. visits per month.

Ø  Indiegogo does not publish any numbers; however, analysts have estimated that it is roughly 1/6^th the size of Kickstarter given that its monthly traffic is estimated to be 919 thousand according to Kristy Hines, and that crowdfunding freelancer Jonathan Lau in Aug 28^th, 2013, estimated that Indiegogo successfully raised $99 million versus Kickstarter’s $612 million.

Canadian platforms face relatively strict legislation that differs on a provincial basis. Nonetheless, there was an estimated 45 crowdfunding platforms in Canada as of April 2013, up from 17 in the year before, according to Massolution. The National Crowdfunding Association of Canada estimated that there were over 106 active, beta and closed portals and service providers in Canada, as of September 9^th 2014.

Canadian Crowdfunding Directory

Portals & Service Provider - September 9^th, 2014

It may be wise to choose a platform within your provincial jurisdiction, especially if your project is locally based and if it caters to the projects targeted category (e.g. software, charity, etc.); however, one must also consider funding requirements (e.g. total amount required post associated fees), type of rewards offered, the duration of the project, and the desired geographical scope of the venture.

       TERMS OF SERVICE

    Donation and reward crowdfunding platforms tend to have a similar style regarding the terms of service. Prior to engaging in crowdfunding, one should carefully consider the most notable terms of service:

Ø  Campaign owner’s requirements: The campaign owner must complete the project and fulfill each reward/donation, or bring the project to the best possible conclusion for the backers. This may result in full or partial refunds to contributors. Note that most platforms clearly state that they are not responsible for overseeing project performance or mediating disputes between users (e.g. Kickstarter and Indiegogo). In some circumstances, vague references are made with respect to the platform acting as a dispute intermediary, such as enforcing project creators for the full liability of any chargebacks and refunds that the platform handles on their behalf (e.g. RocketHub).

Ø  Funding: Varies between each platform. Donation platforms are generally free, while rewards based platforms charge a fee. All platforms require the campaign owner to establish a funding goal, whereby some platforms only fund if the goal is reached. Established reward platforms charge 4% to 5% for projects that reach their goal, with some charging 8% to 9% for those that do not reach the planned goal. Additionally, a 3% to 5% fee is likely to be applied for credit card charges, alongside a potential fixed fee of $0.30 per transaction or per currency group. Also, applicable taxes may be imposed given local regulations. As such, prior to launching a crowdfund campaign, one should be aware of a potential 14% fee plus fixed charges, and applicable taxes. Less established platforms will likely charge less in the beginning as they try to encourage mass user acceptance.

Ø  Submitted Intellectual Property: Content posted on any platforms may be used globally, non-exclusively, perpetually, irrevocably, royalty-free, sublicensed, transferred with the right to use, commercialized, modified, and exploited for marketing and promotional activities. Therefore, campaign owners should be careful when posting any content on any crowdfunding platforms, especially if they believe that content is valuable.

Ø  Create an account or license: It is quite standard and expected that all sites require the creation of a non-transferable, revocable account or license. Non-compliance with the terms of service can result in account deletion. Among the reasons for cancellation include breaking the law, falsifying information, spamming, hacking or stealing data, victimizing, as well as tampering with their platform.

      FINAL THOUGHTS

        Although only two models are currently legal in Canada (for the time being), the donation and rewards based models can still provide for some notable assistance. Given the three month preparation time and some of the key terms of service, one must properly consider if this avenue, with no guarantees of success, is truly worth the time. Additionally, the choice of platform shall largely impact the ability to raise funds, alongside the total amount obtained after the deduction of fees. Therefore, campaign owners must wisely choose their platform based upon their value proposition for its respective industries and location.  Nonetheless, crowdfunding has definitely demonstrated itself to be a great tool for raising funds, and there has never been a better time to explore its usage.