Crowdfunding evolves into test market for start-ups
Companies can raise cash while seeking validation
Nine years ago, Bobbie Carlton started hosting a once-a-month gettogether for start-ups to mix, meet and get advice.
By 2014, the Boston-area marketer for tech companies and entrepreneurs found herself invited to one-too-many “all-male, all-pale” discussion panels, noting the lack of women and people of color represented.
“I would think, ‘I know 20 women who know more about this. Why aren’t they onstage?’ ” Carlton said.
So she turned to Kickstarter to test a business idea: a searchable database of those women and the event managers looking for them. She called it Innovation Women. Within months, she’d raised $22,000 — $2,000 above her original goal. That helped pay for a website. Yet the exercise gave Carlton something even more valuable: 200 women who opted for a database listing as a Kickstarter reward instead of a Tshirt or business card phone case. Today, Innovation Women has 3,300 members and interest from an Angel — or early-stage — investor.
“If you want to get funded by an Angel group or a venture capitalist, you need more than just an idea,” said Carlton, 52. “You need to prove that there’s a need, to prove you know what you’re do- ing when you run it.”
A decade after Kickstarter and Indiegogo were born as a way to fund projects and start-ups during the Great Recession, two of the most important sites for entrepreneurs are evolving. For developing companies not yet ready to approach a billionaire investor or venture capital firm, rewards-based crowdfund-
ing can be a way to test a market before — or even while— searching for bigger infusions of cash.
People “hear crowdfunding and they think of the funding part. But arguably, for an entrepreneur, that’s not the most valuable part,” said Erik Noyes, an associate professor at Babson College who teaches crowdfunding. “It’s really the market validation, the strategic insight and what a growth cap might be.”
Kickstarter has raised more than $3.6 billion for its users since it began in
2009, according to detailed statistics on its website. And Indiegogo has raised almost $1.5 billion for users since its 2008 debut as a way for filmmakers to fund projects. Just last year, Indiegogo’s own revenue rose 50% from 2016.
Kickstarter projects that reached their funding totaled about $608 million in 2018 compared to $1.7 million in 2009, according to the company. Indiegogo doesn’t release annual figures.
By comparison, Angel or seed investing, typically an individual or firm focused on helping a nascent company take its first big growth step, totaled
$6.65 billion in 2017, according to PitchBook and the National Venture Capital Association. That’s down from a peak of
$8.55 billion in 2015 and up from $1.5 billion in 2008.
There are now dozens of more specialized kinds of crowdfunding, in addition to rewards-based crowdfunding led by Indiegogo and Kickstarter. One group includes Wefunder and Netcapital, as well as Indiegogo, which last year broadened its offerings. They involve a method called equity crowdfunding under the 2012 federal JOBS Act and enacted in 2016.
In equity crowdfunding, smaller, or “unaccredited,” investors can legally invest in a piece of a start-up — actually own shares or debt like an Angel or VC — for the first time since the Great Depression in the 1930s. Entrepreneurs using this method are allowed to raise up to to $1.07 million. Proponents who pushed for the new rules are now advocating a higher cap, say $5 million. Before 2016, only accredited investors could purchase equity in a start-up. That meant having an annual salary of at least $200,000 and a net worth of $1 million.
Total crowdfunding under the JOBS Act rules rose to 481 companies funded in 2017 from 178 in 2016, with $76.8 million raised so far, according to Crowdfund Capital Advisors, which compiles statistics for the Securities and Exchange Commission.
Sweat Cosmetics, which sells makeup that doesn’t run or cake during vigorous exercise, used Indiegogo once before in 2015 while developing its website and after squeezing $800,000 from friends and family. The rewards-based Indiegogo round, which fell short of its $30,000 goal, was “strictly for brand awareness,” said Courtney Jones, CEO of Denverbased Sweat Cosmetics and a former professional soccer player. The company is now raising funds via Indiegogo under the JOBS Act changes.
“This was a cool way for us to go back into the public,” Jones said.