posted on November 3rd 2015 in Austin CFP Team Posts & Your Financial Advisor with 0 Comments /

Rewind to 2010. “Crowdfunding” was a term you heard and thought “Oh, that sounds fun.” At the time, your eyes probably opened wide when you heard that it accounted for $880 million in project funding.

Today, we’re sure your eyes would open even wider when you hear this: a recent report from Massolution states that the global crowdfunding market is set to surpass venture capital funding by 2016, with crowdfunding raising a projected $34 billion to VC’s $30 billion.

That’s worth repeating — in the next calendar year, crowdfunding will be the source of funding for more projects than VC. But what exactly is crowdfunding — and when does it make sense to become a contributor?

What crowdfunding is

By definition, crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”

The general tactic of crowdfunding has arguably been around for centuries, but it wasn’t until recent years that innovators decided to leverage the internet for it. Today, there is no shortage of niche crowdfunding platforms. Kickstarter, GoFundMe, and Indiegogo are predominantly for general, personal fundraising, while others exist on a more specific level: like teespring for t-shirts; DonorsChoose for education; CrowdRise for causes and charities; Pubslush for authors. The list goes on, but the general idea remains the same for all: people, groups, or companies post projects with a video, a story, and various levels of rewards depending on the level of contribution from pledgers.

Where most of crowdfunding was donation based at the beginning, the passing of the JOBS (Jumpstart Our Business Startups) Act in 2012 brought it to a new level as it opened the doors to equity-based crowdfunding. This opened the range of motivations for people funding projects: now, not only can the general public support community ideas in exchange for rewards or donate to a cause they believe in; they can actually gain equity in ideas and companies that take off.

The investment that crowdfunding has become

Despite the JOBS Act being passed in 2012, it wasn’t until June of 2015 that Title IV of the Act was passed, opening up equity crowdfunding to “non-accredited” investors — AKA everyday citizens. With this change, small businesses can now raise up to $50 million from both accredited and non-accredited investors in what some are referring to as a “mini-IPO.”

What does this mean, exactly? Well, where original crowdfunding sites like Kickstarter set the path for people to contribute to campaigns and purchase products via crowdfunding, backers didn’t reap any benefits if the project took off. Take, for example, when Oculus Rift (a virtual reality headset for video games) raised $2.4 million to launch its company in 2013 with the help of 9,522 backers. A year and a half later, the company sold to Facebook for $2 billion. Kickstarter backers received nothing, where it’s estimated that had the campaign run on an equity crowdfunding site like Crowdfunder, the would have gotten a 200x return on their investment.

Title IV to the JOBS Act lessens the risk of that happening again, making equity crowdfunding a literal investment and giving everyone the right to become a pseudo venture capitalist.

It’s not complete free reign, though. Regulations protect everyday citizens who aren’t experienced investors from “losing it all” on one crowdfunding project by limiting their investment to 10 percent of their income/net worth per year.

Will crowdfunding completely oust the need for VCs? It’s not likely in the short term, and it’s important to remember that seasoned investors bring more than money to the table for a lot of startups, often serving as an advisor. Yet we’re sure things will change, and it’s set to be an exciting ride.

Crowdfunding: not just for bootstrapped startups

Crowdfunding isn’t just popular amongst bootstrapped startups who can produce a great video and write compelling copy. What makes crowdfunding truly interesting is the breadth of companies, groups, and people turning to crowdfunding to back their projects and ventures.

In the summer of 2015, FirstBuild (a partnership between GE and Local Motors) brought its Opal nugget ice maker to Indiegogo, setting its sights on $150,000 in funding. $2.65 million later, Opal was 1,699 percent funded.

Meanwhile, not-so-corporate entities like bands are using crowdfunding to produce new albums. Take Sum41, for example, the Canadian punk rock band that hasn’t released an album since 2011. The group is using yet another crowdfunding platform, PledgeMusic to raise money, with rewards from a Skype call with the band to a signed guitar, and more.

With the rise of equity crowdfunding, it’ll be incredibly interesting to see what ideas come to market with the help of a new wave of nontraditional investors.

Crowdfunding not for all

Even with the potential of a return on your investment, crowdfunding isn’t necessarily a no-brainer. There isn’t — and probably will never be — a perfect formula that will guarantee the success of a crowdfunding campaign.
To see if crowdfunding is a fit for your portfolio, schedule a call with one of our advisors who can walk you through the pros and cons of crowdfunding as a portion of your portfolio. Schedule your call here.

about the author: Brooks Morgan CFP®

brooks640x640Brooks Morgan CFP® is the Compliance Officer and director of advisor support for WorthPointe. Brooks works closely with the three custodians (Schwab, Fidelity, and TD Ameritrade) as well as WorthPointe’s technology providers. Brooks holds the Series 65 securities license. Learn more and/or Contact Brooks

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