For startups, crowdfunding might seem a foolproof way to raise capital. Wrong!
Entrepreneurs are hereby warned that it takes exhaustive preparation: building a network, maintaining a robust online and social media presence and, above all, having a viable idea. Companies that fail to meet their funding goals can appear tainted in future investors’ eyes. Equally worrisome are companies that fail to deliver the pre-orders or perks they promise.
Speaking at a recent "Smart Talk" session at the University City Science Center’s Quorum, William Duckworth, a founder of FeverSmart, put it succinctly: "It’s a 30-day process that takes a year to do."
FeverSmart is actually a crowdfunding success story, raising $65,000 in 2014 -- 157 percent of its goal -- in 35 days on Indiegogo, one of several popular platforms. The company, which makes a "smart" wearable thermometer, raised 75 percent of its initial $40,000 goal in the first 24 hours, winning a coveted space on Indiegogo’s home page.
At Quorum, ROAR for Good co-founder and CEO Yasmine Mustafa described how, in a case of cold feet, she lowered her company’s goal from $100,000 to $40,000 just before launch. The company, which makes a wearable personal-safety device, raised $267,000.
"Crowdfunding was a validation that people would buy [our product]," she said. "It was a test about whether we really had a company."
Wayne Kimmel of SeventySix Capital, an early investor in Indiegogo, added that "crowdfunding has truly democratized the funding world."
And now, crowdfunding is taking a giant step. Effective May 16, new ruleswill allow startups to raise capital by selling equity shares in their company.
"The risks are acute and there will be a lot of stumbling blocks," argued attorney Matthew R. Kittay, who specializes in crowdfunding at Fox Rothschild. "But 1,000 people will share a $1 billion lottery ticket. It will happen and it will be a big story to tell."