University of Toronto - India Innovation Institute | Feb 2013

Research Prepared by Lindsay Hart, Sandeep Pillai, Sean  Tyler, Mikayla Wicks under the supervision of Professor Dilip Soman

Executive Summary

Perhaps one of the key enablers of an effective innovation engine is the presence of adequate financ- ing that allows new ventures to launch, scale and expand their offerings. In the past couple of years, in India and indeed the rest of the world, Crowdfunding  has emerged as a simple and innovative online tool that provides small businesses and start-ups with opportunities to increase their social media presence, investment base, and funding prospects. Crowdfunding  has been used to fund activities that range from social enterprises1, creative arts2  and more traditional inventions (see Appendix for case studies). In this report, we

a)    Review and analyze Crowdfunding initiatives

b)   Identify conditions under which it might be particularly successful c)    Describe a process for implementing a Crowdfunding strategy

d)    Provide some case studies, and raise some issues for how this nascent model might evolve over the next few years

Crowdfunding  permits one party to finance a project using contributions received from multiple other parties. Three models of Crowdfunding  have emerged: the Donation  Model, the Investment Model, and the Lending Model. In each of these models, donors provide a contribution in exchange for some type of value. For the donation model, donors receive an intangible personal benefit associated with participation;  for the lending model, donors are paid back their contribution with monetary or material rewards; and finally, for the investment model, donors receive equity in the invested business or start-up.

Under existing security laws in Canada,  it is illegal for a company to sell equity through Crowd- funding, thereby preventing Canadian  businesses from utilizing the investment model.  However, Canadian firms have begun lobbying to change security laws and, recently, the Ontario Securities Commission published Consultation Paper 45-710: Considerations for new Capital Raising Prospectus Exemptions. Though this paper represents a positive step forward, Canada  will risk falling behind Europe and the US, both of which have begun to legally implement Crowdfunding,  if Canadian regulators fail to act quickly.

Related:

• Equity Crowdfunding Frequently Asked Questions in Canada
• Webinar:  Equity Crowdfunding & Global Trends

Despite the current legal unknowns, we have identified several key elements that a business can leverage in order to implement a successful Crowdfunding campaign. For instance, a campaign must successfully identify and understand its “crowd” and must recount a compelling, shareable story to that crowd. The campaign must have a specific goal and must utilize the most appropriate online Crowdfunding platform for its particular marketing strategy. It is also important that Crowdfunding campaigns are launched with a big, fast start.

Furthermore, for a company to extract  maximum value from its Crowdfunding  campaign,  it is recommended that they have one or more of the following characteristics: companies must be inter- ested in product pre-sales, particularly  to finance manufacturing;  companies should be early stage organizations  or individuals with a specific project; companies should be willing  to do their own marketing and have an outlet to reach people; and companies should lack sales infrastructure, such as a payment processing options. Overall, companies that fit this profile are the most likely to suc- cessfully capture donor interest through a Crowdfunding platform.

Crowdfunding can be a valuable tool for businesses, but must be implemented carefully, strategical- ly, and intelligently. Accordingly, the following report serves as a guide to those who wish to pursue Crowdfunding.  The report examines the pros and cons of Crowdfunding  and provides a guide to finding out whether or not Crowdfunding is right for your business. We not only examine successful Crowdfunding  case studies under different Crowdfunding  models, but we also present a checklist and a “how to” guide for launching a successful and innovative Crowdfunding campaign. We also present a number of questions and unresolved issues that will animate discussions with respect to how Crowdfunding is adopted around the world going forward.

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