NEW YORK (MainStreet)—Thinking back to the '90s frenzy around Napster, it seemed like, with the resources, people would always choose to share information and resources for free, and that denizens of the web didn't want to pay for anything they didn't have to.
A lot has changed since then, as we've seen people voluntarily donate to their favorite bands and causes, and as we've watched the web become ever more local. One of the ways that people put their money behind ideas and connect with their community is through crowdfunding.
Websites like Kickstarter have grown by leaps and bounds in recent years. The basic concept is that regular folks can raise money for nearly anything—an art project, a charity, a startup—and other regular folks provide that money in exchange for being part of something. Also, they usually receive some sort of swag or recognition in exchange for their contribution.
The landscape of crowdfunding is changing, and the next frontier is equity- or debt-based crowdfunding, in which contributors don't just get a little swag, but actually invest in a startup company. This allows regular people to act like investors without starting venture capital firms, and it allows companies access to funding when traditional avenues aren't an option.
A panel at Internet Week New York explored this in depth this week. Panelists included Candace Klein, the CEO of Bad Girl Ventures and SoMoLend; Jon Ostrow, Campaigns Director of Cyber PR, and an entrepreneur who has successfully funded his business endeavors through crowdfunding; Stacy Robin, the Director of Marketing at EisnerAmper; Matthew Savare, Partner at Lowenstein Sandler; and Vladimir Vukicevic, the Founder and CTO at RocketHub, one of the biggest crowdfunding platforms.
Ostrow recently ran a crowdfunding campaign on RocketHub with the goal of raising $50,000. He ended up raising $61,000 in 36 days. His company is a niche-focused PR firm specializing in bloggers, podcasters, and other online creative professionals (a large part of his business is social media coaching). He ran the crowdfunding campaign to raise money to have a book edited, published, printed and distributed, outlining the company's philosophies and strategies for clients. He also asked for money to create a detailed, nine-week social media proficiency e-course.
Ostrow learned a lot from the experience, but, Robin was more sobering in her outlook. "A lot of startups think they'll earn a lot more money more quickly and easily than they expect," Robin said.
So what are the nuts and bolts of running a campaign that begets contributions?
Different Types of Crowdfunding
There are four basic kinds of crowdfunding: Rewards-based, donations-based, equity-based and debt-based. The first two are currently legal, and, as Klein noted, the JOBS act was supposed to make securities-based crowdfunding legal—namely, for equity- and debt-based crowdfunding. The SEC, of course, hasn't completed making rules to bring this to the level of implementation.
Many platforms are operating with these concepts, Klein said, but in limited capacities.
What the Most Successful Crowdfunders Do
According to Vukicevic, there are three pillars of a successful campaign. First, there's the project itself and how you tell your story. "People want to be involved with other people," he said. "We've found that the most successful campaigns step beyond the 'what' to why this matters, why they should be involved." Having a strong personality and presence goes a long way.
The next pillar is a network of supporters. "Every campaign that's successful starts with a core network first," Vukicevic said. "There are followers who trust you and will jump on board no matter what. Crowdfunding is like going to restaurant; you want to go to one that's hopping, and you see from the outside that there are other people involved. If you manufacture that initial support from friends and family, it's a spiral."
The third pillar is rewards. "These allow you to target your audience in a different way," Vukicevic said. "Some people may want to give you $10 or $15, but some want to give $1,000 or $5,000, and if you don't make it compelling they won't." Klein suggested that many people who give a little bit of money at the beginning are likely to come back later and give more if you communicate with them. She also recommended thinking about intangible rewards: "You might say you'll give a keychain to people who donate $5, but now someone from Zimbabwe donated and you have to spend $45 in shipping." She recommended intangibles instead, like putting people's names in movie credits or giving them the right to name something. (Klein herself paid around $500 to have a cocktail named after her.)
Klein has consulted with 350 separate crowdfunding campaigns and has found that one of the most important things is to prep in advance. "Most campaigns don't need to go beyond 45 days, because longer ones trickle off anyway," she said. "Think about what you want to do ahead of time, online and offline. Will you have a kickoff event? The first and last seven days are generally the most successful, so what will you do in middle to keep people's attention? Throw a happy hour? Celebrate milestones? At what point will you send emails or ask that influential blogger friend to write an article on your behalf?"
One big mistake Klein has seen is campaigns sending out a press release at the wrong time. Many launch a press release on the day they launch, she said, but then the press visits the project page. "They think, 'What the hell? Even your parents don't support you?'" Klein said. She suggests quietly making 30% of your goal before you even start, so you can close it quickly and then send out your release. "If they see momentum from the first day, you're much more likely to hit your goal," she said.
Vukicevic adds that campaigns with videos are two to three times more successful.
The Treachery of Intellectual Property
Some would-be entrepreneurs are hesitant to jump into the crowdfunding game for fear that they'll share their idea on their project's page, and someone else will steal it.
"There are a few different mechanisms to protect your intellectual property," said Savare. He explained that copyrights are for works fixed in a tangible medium, like book or script.
Meanwhile, patents are for inventions, and trademarks are indications of source, like a logo or a trademarked sound. Pure ideas, however, are "free as air," he said. You can protect an idea through a non-disclosure agreement, but if you're advertising your idea on a crowdfunding platform where you explain your concept, you should be careful.
"If you only have an idea, I'd caution you not to disclose just the idea," Savare said. "Try to build your IP around the idea, have a prototype, a business plan, something you can fix that's protectable.
"There's a way to talk about IP without giving it away," Klein said. "Obviously don't post your patent application on a crowdfunding platform."
The Future of Debt- and Equity-Based Crowdfunding
There are more considerations if you're hoping to raise equity or debt.
"You have to provide a business plan, three years of financial statements, and if you don't have those, personal tax returns," Klein said. "We'll have to pull a criminal and credit background report on every owner, officer and director in the company."
Robin notes that there are a lot of legal implications if you are going to raise equity. "It's great you raised $61,000, but do you have to pay taxes on that?" she asked. "If you're not a nonprofit and yet you're raising revenue, it's not just donation you can put in your pocket. What about the cost of products you're sending out to thank people? I've heard of campaigns raising $60,000 to $100,000, but winding up with $5,000 to $10,000 in the end because they didn't factor in the cost of the campaign, taxes or materials." Another consideration is if your "rewards" really amount to a presale of a product. If so, you might need to pay sales tax.
Despite all these considerations, crowdfunding is a trend that has taken serious hold in recent years, and, if the regulation is any indication, this trend is here to stay.
--Written by Allison Kade for MainStreet