The Crowdfunding Escalator: How to Pick the Right Crowdfunding Platform

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Crowdfund Insider | Bret Conkin |

Funding Escalator picAs Alternative Investments emerge as an exciting new asset class for institutions and retail investors, entrepreneurs have a wide choice of options on crowdfunding model and platform for their campaign. What are the key factors for Entrepreneurs to consider in their decision?  Introducing the concept of the Crowdfunding Escalator.  The escalator is a device to help select the right model and platform strategy for entrepreneurs as their business grows over time.  Next stop – The Top!

What key things should projects look for in a platform? In other words, what factors markedly distinguish one platform from another?

In terms of platform selection, there are 3 key factors to consider for firms raising capital – A) Business stage, B) Business Sector and C) Platform track record:

  1. Business stage

The amount of capital you need and the stage of your business are critical to a decision on the model to use and platform to select.  As I first mentioned in the Globe & Mail, I use the analogy of a ladder or Funding Escalator where firms move up the escalator over time and as their funding requirements increase.  The models tapped into by entrepreneurs typically raise different amounts – in the range of:

  1. Donations < $10,000
  2. Rewards – $10 – $100k+
  3. Lending – $25-$150k
  4. Equity – $250k – $3M+

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  • Step 1  – Idea 

Early stage capital is often marked by founders picking up the expenses directly or turning to love money.  Could consider a Donation campaign to better administer the friend and family support and create awareness or a Rewards campaign if demand for Pre-Order of their product or service is judged to exist – like was the case for Vancouver Sausage House Bestie.

  • Step 2 – Revenue

A real business activated and operating with revenues.  Can consider turning to the crowd to supplement cash flow and expansion needs with a Rewards campaign if their business is well suited to this model like hardware, film or social ventures.  The marketing benefits are as valuable as the funds.

  • Step 3  - Validation

Break-even and validation of business model over a couple of years.  Could consider Lending if they meet the criterion and have a good credit rating.  The benefits can include paying lower rates than the banks while creating community advocates from the local investors they are borrowing from.  Plus, equity can be very expensive at this stage given that valuations are not maximized.

  • Step 4 – Expansion

Rapid scaling via new locations, increased inventories, more staff or increased capital investment to drive production, service delivery and revenues.  This expansion phase can be a good time to consider Equity as the valuations will be much more favorable.  Accredited investors have proof of your ability to run your business and may be quite interested in participating in the benefits of your growth.  Debt crowdfunding or traditional bank lending or Angel investment may also be options to consider given your maturation to fundable status in their eyes.  The latter two do not provide the marketing benefits though.

  • Step 5 – Maturity where you can comfortably fund the business from cash flow after 5+ years in operation.  Your goals will drive your model decisions from here.  Do you want to consider exit?  Still keen on growth?  Entering new markets?  Your options are many at this stage of your business, possibly including institutional sources via crowdfunding or traditional financing or venture capital firms if you fit their criterion.

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