At one time, opportunities to invest in a tech firm with the potential to become the next Google were limited to a select few angel investors. Today, thanks to crowdfunding, that is no longer the case. Offering the ability for almost anyone to invest in startup companies, crowdfunding has dramatically changed the face of investing, and opened the door for the public to get in on the ground floor of all types of exciting startups, including tech firms. (For related reading, see article: What Crowdfunding Means To Investors.)
While in the past it might have taken technology startup firms years to attract the attention and financing they needed to launch their products and services, the new federal regulations that have made crowdfunding possible are also significantly shortening the launch time for new technology.
A Brief History of Crowdfunding
Crowdfunding remains relatively new. The first examples of crowdfunded projects were launched just a few years ago. Today, companies such as SeedInvest, Indiegogo and Kickstarter are driving the crowdfunding trend. Quantcast estimates that Kickstarter is now able to reach 12 million people monthly. While Kickstart and Indiegogo are certainly among the most well-known names in the crowdfunding sector, Crowdsourcing.org has almost 3,000 crowdfunding platforms listed in its directory.
Since the first crowdfunded programs were launched in 2003, crowdfunding has matured quickly, rapidly gaining followers and participants from every corner of the globe. Numerous factors have attracted prospective investors to the concept of crowdfunding, including the fact that it acts as an equalizer, delivering high-quality investment opportunities in an array of sectors that otherwise would not be readily accessible.
The release of the 2012 JOBS Act, which included numerous regulatory changes, has made it even easier for small startups to raise money and everyday investors to become involved in potentially lucrative investment opportunities. As a result of the new regulations, startups gained the ability to advertise their available shares. Removal of previous restrictions regarding general solicitation has made it possible for startups to advertise on everything from social media to online crowdfunding investing portals. (To read about outstanding startups that have drawn the attention of a lot of investors, see article: 10 Hottest Startups In 2015.)
There have been a number of different models of crowdfunding over the years in which it has been around. During the early days of crowdfunding, startups often tended to rely on a rewards model that provided investors with products or services developed by the company, recognition of their backing, or special perks. Startups would also sometimes utilize a pre-order model in which products were sold before they were actually produced in exchange for backing. Donation models were also popular, especially for creative projects and charities. In each of these models, no financial return or ownership was expected.
As interest in crowdfunding began to grow, many began to experiment with other models for securing necessary funds. Today, investors are often able to obtain an equitable stake in the startup in exchange for their investments. This model is most similar to the use of venture capital investors for funding startups. The only difference is that, thanks to the crowdfunding platform, investing opportunities are made available to investors from all around the world.
Currently, under Title III of the JOBS Act, the U.S. Securities and Exchange Commission (SEC) limits crowd investing to individuals who have an income exceeding $200,000 per year or assets over $1 million in value, excluding their primary residence.
In the last few years, real estate crowdfunding has received an impressive amount of attention, but an increasing number of tech startups are now turning to crowdfunding platforms to obtain the funding needed to launch new products and services. A variety of reasons often drive investors to invest funds in tech companies via crowdfunding, including the potential for getting in on the ground floor of what could be a billion-dollar company. Although not all tech startups funded with crowdfunding will succeed, the potential is enough to whet the appetite of investors. (For related reading, see article: Number One Country For Tech Startups: USA.)
Tips for Investing in Tech Startups via Crowdfunding
As is the case when making any investment, it is always important to conduct due diligence for startups requesting crowdfunding. It is incumbent upon crowd investors considering tech startups to carefully judge the project based on available information, which is often limited. Many tech startups seeking investor funding via a crowdfunding platform will provide something akin to an elevator pitch and a few financial highlights. Crowdfunding investors can often expect to receive brief information on founders and some background information, often needing to make decisions based on very little information. This is similar to the process used by many early-stage venture investors.
Tech Crowdfunding Success Stories
While not all tech startup companies taking advantage of crowdfunding will succeed, the potential is certainly there. Pebble Time, a California-based smartwatch manufacturer, kicked off its first crowdfunding campaign on Kickstarter in 2012. Today, Pebble Time remains the most funded campaign on the platform, and has also earned a reputation for being able to meet its campaign goals the fastest. Recently, Pebble Time set an initial goal of raising $500,000 and secured $1 million in less than one hour. The company has put that funding to good use by working on its hardware, outfitting its Pebble Time Steel Watch with a Gorilla Glass Lens and boosting its app store, which now has more than 6,000 apps. While the world has been eagerly awaiting the launch of Apple's first wearable smartwatch, Pebble beat them to the finish line by introducing the first-generation smartwatch, and also by releasing a second-generation model.
The startup behind Ouya, an Android-based videogame console, set an initial fundraising goal of $950,000 and ultimately raised almost $9 million. PonoMusic, a digital music service, managed to attract more than 18,000 backers on Kickstarter. While PonoMusic's initial fundraising goal was only $800,000, they eventually managed to bring in more than $6 million in funding on Kickstarter.
Currently, the crowdfunding industry is waiting for the final crowdfunding rules to be issued by the SEC under Title III of the JOBS Act. Despite the fact that the JOBS Act was signed more than three years ago, there has been little news forthcoming regarding the final rules. At the same time, the United Kingdom has made significant strides in enacting regulation regarding crowdfunding. Crowdfund Insider reports that the UK's light touch regarding those rules has resulted in thousands of companies raising more than £175 million.
The Bottom Line
Crowdfunding is still evolving and will most certainly undergo changes in the coming years. It is already providing a viable avenue for investors from around the world to invest early in tech companies that have the potential to change the world.