Venture Deals, 3rd Edition

CHAPTER 9 Crowdfunding

When we wrote the first version of this book in 2011, the idea of using crowdfunding as a financing mechanism was nascent. Since then, it has emerged as a powerful approach, both for product development and equity financing. In this chapter we will discuss the various crowdfunding approaches and legal implications, and how crowdfunding differs from more traditional methods.

Product Crowdfunding

Crowdfunding typically refers to two different approaches that are relevant to financing companies. The first, popularized by Kickstarter and Indiegogo, is product crowdfunding.

Product crowdfunding is typically used for physical products. The company puts its product idea up on Kickstarter along with content showing what the product will do and a series of different rewards for backers. In most cases, the product is in an early design stage and far from ready to ship. The rewards vary by dollar amount and often include things that, while linked to the product, are experiential or tangential to the product, such as logoed stickers and T-shirts, sponsorship recognition, or real-world events to celebrate the launch of the product.

Most campaigns have a 30-day funding target that, if not achieved, results in the campaign failing and funding not occurring. This is the hardware equivalent of building a software minimum-viable product (MVP). If the campaign is successful, you know you have a compelling MVP. If the campaign does not reach its funding target, your potential ...