Equity vs Reward Crowdfunding – A Fork in The Road for Startups
You come up with the idea for the next big thing. The trouble is your choice of capital; equity vs reward crowdfunding. Now more than ever banks are very tightfisted when it comes to business loans, the VC market has many barriers to entry and it’s just never a good idea to borrow money from friends and family. That leaves you with crowdfunding.
There’s your fork in the road; equity vs reward crowdfunding. Both can raise money fast leaving you with one clear distinction; do you want to sell stock in your company and share the ownership (and the profits) OR sell the product or service you have in mind in the first place?
This isn’t a question with a black-and-white answer but it’s a good place to start.
If you’re seeking $20 million to roll out something large, a Kickstarter isn’t going to get you there.
On the other hand, a Kickstarter can raise more money than some equity crowdfunding campaigns can.
Consider these two examples:
This Kickstarter raised $1 million on day one. By the time the campaign was over the raise was nearly $1.7 million. They plan to start shipping products in October.
This equity crowdfunding campaign raised $125. This campaign is running for over a year and has a maximum funding goal of “only” $250,000.
Here’s the clincher; both companies have a very similar product on offer. Look at both campaigns and see all of the astonishing similarities for yourself. Yet one company raised 800% more money than the maximum goal of the other in 1200% less time.
How is this possible?
Promotion for starters. KatVR did insane amounts of crowdfunding marketing and did everything humanly possible to get the word out there. Omnipad did ZERO crowdfunding promotion. This is a perfect example of the “build it and they will come” crowdfunding myth.
Then there’s the level of risk. KatVR has successfully crowdfunded and delivered before and the crowdfunding backer is exchanging their money for a tangible product. Omnipad is asking investors for faith that the company will develop a finished product, that consumers will buy this product in sufficient quantities to drive sales high enough such that the company is acquired – approximately 5 years from now. In other words, your money is locked up for about five years and even then, you might lose your entire investment or possibly break even or make money. Looking at the deal, I can’t see anybody doing that. As to experience, Omnipad’s principal has a very impressive resume so it’s safe to say he knows what he’s doing and can be expected to deliver, assuming sufficient capital is raised.
That being said, equity crowdfunding campaigns can meet their funding goals every single time. I’ll let a friend of mine, equity crowdfunding attorney Irwin Stein, explain it to you….
An intelligently planned, well-funded, and professionally executed crowdfunding campaign should be successful in raising the desired funds every time.
So what’s the answer to Equity vs Reward Crowdfunding? It depends.
To learn everything you’ll ever want to know about equity crowdfunding including if you should pursue it at all, check out Irwin’s website – Law and Economics in Capital Markets.