Since its inception more than a decade ago, online crowdfunding has been a godsend to both entrepreneurs and artists, turning their dreams into reality.
One of the earliest platforms, US-based ArtistShare, was launched in 2003 as a means of helping music artists fund their projects through donations from their fans.
Its first success story was a jazz album by Maria Schneider, which raised US$130,000 and went on to win a Grammy award in 2005. Depending on their contribution amount, fans received rewards ranging from a digital download of the album to being named as an executive producer of the album.
Over the years, online crowdfunding has spread its influence all over the globe, spurring the growth of startups in Taiwan, Brazil, and China. A 2013 World Bank report even predicts that crowdfunding in China could hit US$50 billion in 2025.
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It has bankrolled projects such as the Pebble Time watch, which had the backing of 78,471 people to the tune of more than US$20 million. By 2013, the online crowdfunding industry had raised over US$5.1 billion.
Crowdfunding has also attracted the likes of celebrities and industry leaders.
Some have leveraged their popularity to fund their campaigns. LeVar Burton, famous for TV shows such Star Trek: The Next Generation and Reading Rainbow, raised US$5.4 million from Kickstarter to fund the revival of Reading Rainbow. Hollywood actor, Zach Braff, famed for TV show – Scrubs, launched a Kickstarter campaign, raising more than US$3 million for his film, ‘Wish I Was Here’.
Other prominent people chose to lend their support instead. When India-based startup, Connovate Technology, raised US$50,000 through Indiegogo for its Bluetooth device, it attracted one very prominent backer in tech industry – Apple co-founder, Steve Wozniak. Hollywood comedian and producer, Seth Macfarlane, pledged US$4 million to Reading Rainbow’s campaign.
The allure and pitfalls of the rewards-based crowdfunding model
Some of the notable Internet crowdfunding platforms include Indiegogo — which sees 15 million visitors monthly and has hosted more than 275,000 campaigns — and Kickstarter — which has successfully funded about 88,000 campaigns, raising more than US$1.8 billion.
Like ArtistShare, both Kickstarter and Indiegogo operate on a rewards-based framework, i.e., backers are offered a plethora of incentives, ranging from merchandise to exclusive meet-ups depending on the amount they chose to pledge.
The core difference between Kickstarter and Indiegogo is that Kickstarter uses an “All or Nothing” (AoN) model, meaning to say that if the project fails to reach their funding goal, the money would be refunded to its backers.
Indiegogo, on the other hand, is more flexible; offering both an AoN model, and a “Keep it All”(KiA) model, which allows the campaign owner to keep the entire amount pledged to it, regardless of whether it has reached its funding goal, refunding the campaign’s backers is optional. Indiegogo would, however, collect a higher fee if the campaign fails to hit its goal.
Rewards-based crowdfunding may sound like an ideal platform for startups, especially those offering tangible products, but there are several drawbacks to this system, especially to its backers.
While backers get to reap immediate rewards once the campaign succeeds, they have no say in the company’s trajectory nor would they share in the company’s future profits despite effectively laying the foundations of its success.
A prime example would be the Oculus Rift Kickstarter, which saw nearly 10,000 donors left in the dust (save for a t-shirt or an early prototype of the product) when it was acquired by Facebook for US$2 billion. Many backers felt short-changed and betrayed as they believed that Oculus Rift’s success was the direct result of the Kickstarter campaign. In addition, major investors who backed it after the campaign saw manifold returns. What’s worse is that because their contribution qualified as a donation, not investment, they could not get a refund.
To compound that problem, about 75 per cent of projects fail to hit their delivery deadlines, and 60 per cent fail to hit their funding goal. On the upside, only 0.1 of the campaigns turned out to be frauds.
Can equity-based crowdfunding be a better alternative?
What if crowdfunding gave backers the opportunity to accomplish more? Giving them a chance to be more than mere donors, but angel investors or even evangelists of the product or service.
Equity-based crowdfunding offers such a value proposition to backers. Instead of fixed instant rewards, backers are given a share of the company in return for their contribution, effectively becoming investors.
Such platforms include Fundable, which offers both reward-based and equity-based crowdfunding. AngelList offers equity and debt-based investments, it also allows startups to recruit and hire incubators. Crowdcube, a British equity crowdfunding firm, has raised over US$144 million to fund more than 270 startups.
RocketClub offers a different take on the equity-based system. Investors do not need to fork out a single cent to back a startup, instead they help the startup to gain traction by accomplishing certain tasks.
In the case of Spottly, a travel startup on its platform, investors have six months to refer the company to at least two friends, complete one feedback survey as well as post a spot on its app every four months.
In return, Spottly allocates two per cent of the company’s stake to all its investors on RocketClub. The first 1000 investors will receive a combined percentage of one per cent, meaning to say each of these recipients would own 0.001 per cent of the company. Considering the company’s current valuation at US$3 million-US$5 million, backers can expect to receive up to US$50 for their share.
That sum may sound minuscule but the Co-founder of RocketClub, Erik Chan, says the investors shouldn’t be focussed on the current value of their share, but look at the long term potential of it.
“Early-stage company valuation is really an art, so I wouldn’t look into the numbers too much. It’s really more about the upside potential of these shares. The key is the multiplier on that share, not its existing value today,” he tells e27.
“Our goal is simple – to align the interests of early adopters and companies and offer alternatives for companies to build traction,” he adds.
In the future, the startup might see a profitable exit. Investors who have the foresight stand to benefit more in the long run.
For startups that are working to gain more traction and exposure, this form of equity-based crowdfunding platforms will provide greater benefits than those that offer rewards. Many of RocketClub’s clients are startups that provide services in the Fintech, Foodtech and Traveltech industries.
The scalability of their platform as well as valuation to future VCs or other angel investors is heavily dependant on how much traffic and how many users users it has.
The space for crowdfunding is expanding and its framework is constantly evolving, startups now have a greater array of choices when it comes to pooling resources from a community that goes beyond monetary value. The backers can also choose to be mere customers, opting for a one-off transaction or be an active investor, holding out for a bigger payoff.
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