Despite the fact that modern-day crowdfunding has been around for almost two decades and has experienced rapid growth in popularity over the past seven years, misconceptions about the concept still abound.
With recent news that the Securities and Exchange Commission adopted final rules on Title III of the 2012 JOBS Act on October 30, 2015, the growth of crowdfunding will only continue to increase in the years to come. So, we wanted to take time to set the record straight on 10 of the biggest crowdfunding myths that still exist today.
- Everyone Gets a T-Shirt
Actually, let’s talk about equity crowdfunding
By now, most of us probably know someone who has used crowdfunding to raise money for a personal endeavor such as a business or a charitable project. Some cash-strapped campaigns incentivize backers with nominal rewards that range from T-shirts to products to virtual high-fives. But there’s a difference between rewards-based and equity-based incentives in crowdfunding. With equity-based crowdfunding, entrepreneurs can leverage the power of the crowd to raise funds in exchange for equity—if all goes as planned, investors could earn cash returns. (Frankly, we’ll take that over the T-shirt any day.) But beware, equity investing, even in a crowdfunding context, is risky.
- Build It, and They Will Come
You’re going to need more than a website
Back when crowdfunding was relatively new, some endeavors benefitted from “roaming backers”—people who funded projects at random while perusing crowdfunding websites. Now, with a more dense and mature landscape, entrepreneurs need to do a lot more than just put an idea online. Successful crowdfunders must either tap into networks of savvy, accredited investors and find platforms that have the bandwidth to champion their business to such networks or choose platforms that are widely accessed by populations looking to invest in great ideas. Aligning with equity crowdfunding firms and choosing the best platforms will help take some of the hustling burden off of the entrepreneur, but, in short, every would-be crowdfunded endeavor needs great marketing—and a lot of it.
- Money, Money, Money
Cash investments aside, crowdfunding brings value across the board
While most businesses engage in crowdfunding for the simple reason that they need cash, approaching the process as if money is the end-all and be-all would be to miss out on a huge number of opportunities to build your brand. To be successful, entrepreneurs need to skillfully communicate the story and values behind their brand to potential backers. By doing this, entrepreneurs can carry key messages to a wider audience of investors and customers, capitalizing on a tremendous value-add to the business in the way of marketing and PR.
- It’s the Wild, Wild West
Actually, there IS a sheriff in town
Many have bemoaned the lack of hard-and-fast rules in the arena of equity-based crowdfunding as compared to other means of investing. While the JOBS Act was passed in 2012, allowing for entrepreneurs to access this type of funding, it took the SEC over three years to adopt rules governing the sector. However, last month the SEC did just that, setting forth concrete standards to guide entrepreneurs and investors alike.
- Too Many Investors is Too Complicated
Entrepreneurs can easily organize and simplify cap tables
It’s a common misnomer that having too many investors complicates cap tables and turns off future and potentially bigger investors down the line. There are actually several ways that companies can simplify this process and streamline their cap tables to remove any complication. And more investors can translate into more ambassadors for your business.
- Crowdfunding is for Your Mom
Sure, your mom can invest in your business. But, so can millionaires
Crowdfunding has long been plagued with the incorrect assumption that it’s an unsophisticated method of raising funds for business, where entrepreneurs are publicly hitting up their family and friends for capital. This is categorically untrue. Many progressive and accredited investors actively seek out opportunities to participate in crowdfunded investment rounds for businesses, as it offers them a chance to diversify their portfolios, tap into exciting new markets and products, and increase their profits while minimizing risk.
- Crowdfunding is for Businesses Looking for Small Investments
Multi-million dollar rounds are becoming a norm in crowdfunding
Crowdfunding is no longer for individuals seeking a few thousand dollars to get a project off the ground. Today, many business owners and inventors have managed to raise millions of dollars for their endeavors through crowdfunding. For example, one video game designer used crowdfunding to raise a mind-blowing $93 million, shattering his initial goal of $500,000.
- It’s Going to Make You Look Bad
Tell that to Neil Young and Lawrence Lessig
Some have cited that crowdfunding is for amateurs to conclude that anyone participating in it won’t be taken seriously by major investors. But in reality crowdfunding has been embraced by the new- and old-school alike. Take Neil Young’s $6.2 million crowdfunded round for his digital music player Pono or Lawrence Lessig’s $6.1 million crowdfunded campaign for his Mayday PAC.
- But, I’m Not Making a Movie
Anyone can use crowdfunding for their business or endeavor
While popular crowdfunding sites like Kickstarter and IndieGoGo were initially created in large part to serve artists, the appeal of crowdfunding has since extended to entrepreneurs, activists, and inventors across sectors. In short, it’s for anyone in need of capital to further their business goals.
- Crowdfunding is for Millennials
Crowdfunding investor demographics favor those born before 1980
According to the Kauffman Index of Entrepreneurial Activity, individuals over the age of 45 made up 30 percent of all entrepreneurs in the U.S. in 2013—up from 25 percent in 2003. And the Crowdfund IQ Benchmark Study of 2013 also found that the most common investors in crowdfunded businesses were middle-aged with an upper middle income. While it may be a “younger” investment mechanism, its appeal crosses generational and income divides.
It’s clear from today’s trends and data that crowdfunding has become a much more popular and mainstream way for entrepreneurs to fund their businesses. And the more education that becomes available to dispel the myths above, the more attractive crowdfunding will be.
We’d love to hear about your personal experiences with crowdfunding and answer any questions you have about creating a crowdfunding strategy for your business. Please leave us a comment in the section below or send us an email today!