Dianne Buckner is the host of CBC’s Dragon’s Den, a member of CBC News’ business team, and writes a regular column about small business on CBC.ca. Today she takes a look at the popularity of online crowdfunding and weighs the pros and cons:
Trying to lay your hands on some cash? Daryl Hatton wants to help you.
Hatton is the founder and CEO of Fundrazr, Canada’s most established crowd-funding website. “I’m an entrepreneur,” he says. “I love the idea of helping entrepreneurs.”
Hatton wants to raise the profile of his site — but good luck with that. The crowd-funding scene is exploding at the moment. The most famous ones, Kickstarter and Indiegogo, have been in the news for both good reasons and bad.
Indiegogo is the home of the so-called “Crackstarter” campaign to raise the money to buy the infamous Rob Ford video, while Kickstarter spawned the most successful crowd-funding effort ever, a total of over $10 million, for Canadian Eric Migicovsky’s Pebble Watch.
Meanwhile, a British crowd-funding site called Crowd Cube has just launched in Canada. If you’re looking to raise money for your business,they want to hear from you.
Hatton is a relaxed-looking guy from Vancouver, who loves to talk about how Fundrazr has raised 25 million dollars for various causes and businesses in its three years of operation. That’s a far cry from the mega-bucks generated by Kickstarter and Indiegogo, but it’s a respectable number.
“We’re just coming out of start-up land,” says Hatton. “We expect our revenue to grow 10 times what it is now over the next year and a half.”
Strangely, almost all of Fundrazr’s campaigns so far have been for projects in the U.K. and the U.S. (“We’ve done what we’re told we’re supposed to do: export,” says Hatton.) His favorite example right now is a campaign that raised $90,000 for a little Australian girl to travel to Switzerland for surgery to restore her voice.
But he wants to generate more activity here in Canada. And he’d like to do more with entrepreneurs — while also reminding them that this type of financing does come with strings attached.
“People think crowd-funding is this great thing that you plug into the sky that gives you money,” says Fundrazr’s Hatton. “But there’s always an obligation to deliver something to the funders.”
He points out that there are four different models of crowd-funding:
- Donations This is typically used for disaster relief, election campaigns, or to help people with big medical expenses. Recipients of the funding are obliged to report back on how the money was used to complete the project.
- Rewards People give money in exchange for a something tangible – a copy of the CD or DVD that’s being produced, a sample of the product (such as the Pebble Watch), or perhaps a discount on the final product.
- Debt Microfinance websites such a Kiva are an example of this, where funders are actually lending money to entrepreneurs and others. (in May Google invested in a site called Lending Club).
- Investment Funders receive an equity stake in the company. This is legal in the UK, Australia, and Germany, among others. Last year, Obama’s Jobs Act cleared the way for American entrepreneurs to raise up to $1 million of early stage financing. Canada is getting on the investment bandwagon too. The Ontario Securities Commission is in the midst of reviewing the rulesaround actually buying stock in companies via crowd-funding websites.
There’s no question that crowd-funding can go a long way to solving the long-standing problem for start-ups: limited access to capital. But Fundrazr’s Hatton isn’t sold on selling shares over the internet. “We may not go that way,” he says “Equity is one of the hardest ways to do this.”
He’s on the CAPS Council (Crowdfunding Accreditation for Platform Standards), an international group that’s been involved in the implementation of the Jobs Act initiative in the U.S., and says the process is bogging down.
Brokerages have become involved, (how NOT surprising), and the whole process is getting more complicated than originally envisioned. Hatton thinks Fundrazr may stick with the rewards and donations models.
In any case, crowdfunding just keeps getting hotter and hotter. “The traction has been phenomenal,” says Craig Asano of the new National Crowdfunding Association of Canada, which launched last October.
“We’ve had a steady stream of questions and interest.” Daryl Hatton is likewise enthused about all the action in the space, and the many new ways to utilize this access to Internet crowds. He points to a site called Pic a Tic.
It’s a way for event organizers to pre-sell tickets for an event, and guage interest from the crowd before they go to the expense of putting it on. How smart is that? Very!
“Change is coming so fast, a quarter in our business is like a year in any other business,” he says. But how can a site such as Fundrazr compete with so many new entrants, along with the big, well-established ones?
“Fundrazr is too small of a platform,” says Gimmy Chu, the University of Toronto graduate who recently ran a successful Kickstarter campaign to fund his eco-friendly light-bulb company.
“With our project we knew that we needed a decent amount of funding to make it happen,” he explains. He and his partners hoped to raised $20 thousand. They collected over $200,000 (and of course paid five per cent of that to the site, and another three-to-five per cent to Amazon for credit card transaction processing, which is typical).
Hatton thinks his competitive edge comes from the way Fundrazr combines social media and storytelling. He says the company uses Facebook in a way that increases visibility 300 per cent for people running campaigns.
To me the crowd-funding phenomenon is undoubtedly exciting — thrilling even, especially for all those small ventures that traditionally have such a hard time getting financed. I wish Daryl Hatton well, and I do feel heartened that so many people are willing to contribute to help make the dreams of others come true.
But I also wonder how sustainable this current craze can be, when players are crushing in. The crowdfunding scene may already be over-crowded.