Seref | Christopher Mirabile | January 15, 2015

Crowdly CEO Dan Sullivan and I did a talk for The Capital Network on the pros and cons of crowdfunding for entrepreneurs and investors. The key point I made is that most people still confuse two very different kinds of crowdfunding activities.

It is critical to understand that Product crowdfunding is what is going on on sites like Kickstarter and is a very interesting way of financing innovation at the product level.  It is alive and thriving, as witnessed by the regular-as-clockwork news stories of successful Kickstarter and Indiegogo campaigns.

Related:  8 Things About Hardware Crowdfunding We Learned From 20 Campaigns

Equity crowdfunding, where you take stock ownership in a company, is a much different and more complicated thing. It is still evolving and, until the JOBS Act, was a violation of SEC rules. Although equity crowdfunding is now permissible amongst accredited investors, important SEC restrictions still apply.

To break this down further, I’ve created an outline of the key points to keep in mind for each type of crowdfunding...

Product Crowdfunding

Pros

• Access to capital you might not otherwise have
• Marketing buzz built-in if you tell your story well and understand social media
• Allows you to get your market validation before you launch
• No risk - don’t have to pursue if market interest insufficient

Cons

• Competitors alerted to your market interest level and its demographics
• Competitors know your price point
• Competitors know your design and feature list
• Competitors know your exact timing and can spread F.U.D. and launch alternatives

Product Crowdfunding Makes Sense For:

• Physical product companies (a minority)
• Consumer-oriented products that are relatively easy to understand
• Niche markets
• Smaller budget and more buzz-dependent projects

Product Crowdfunding Doesn’t Make Sense For:

• Entrepreneurs looking to build a big, long-lasting, multi-product company
• Complex products which take sales to explain
• B2B/Enterprise where customers cannot be reached through crowdfunding
• Products which do not prototype well and cannot be made in small initial batches

View:  2015 Canadian Crowdfunding Directory

Equity Crowdfunding

Pros

• Could lower the cost of capital for companies
• Could democratize funding and returns from early-stage
• Could be good for national innovation and competitiveness
• More liquidity and efficiency in economy - redeploy resources faster
• Anti-globalism: helps the “little guy” compete better
• Freedom and individual empowerment
• Environmental benefits - productive work can happen anywhere
• Good for small, local one-off projects
• Potentially quickest source of capital - focus on product, not fundraising
• Raise small amounts quickly to hit early milestones - make next raise easier
• Build a large pool of advocates - ecosystem of support and ideas
• Built-in customer validation and feedback
• Extra buzz for early crowdfunding pioneers
• More data point than with one crazy billionaire investor

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