- By SeedInvest
- September 6, 2016
- 2 minute read
When explaining the concept of equity crowdfunding to the uninitiated, their first response may well be, “Oh, like Kickstarter?”
While Kickstarter may be a good point of reference for the idea of equity crowdfunding via Internet portals, the two models are vastly different. Kickstarter promises rewards for successful projects in the form of anything that is not monetary, whereas equity crowdfunding, as its name suggests, promises a financial slice of the pie when it comes to startup and small-business investment. As a result, the average amount raised on Kickstarter is approximately $5,000 whereas equity crowdfunding will yield much larger funding amounts. When significantly larger dollar amounts are at stake, investor protection plays a much larger role, as explained in this Forbes.com article. This is not to say that Kickstarter is not concerned with the security of its backers, since all projects are screened rigorously before being eligible for funding, but that when it comes to a more long-term relationship between investor and entrepreneur, heightened regulation for equity crowdfunding is necessary.
Kickstarter is also a platform for mostly creative and artistic endeavors, where often simply the excitement behind supporting an original idea is enough to justify the contribution. Getting their hands on a new product early or a shout-out on film credits is enough for backers although they have zero opportunity for a financial return. In an AllThingsD.com article, Kickstarter CEO Perry Chen said, “People are supporting projects because they want to see them happen. It’s so different than giving money because you want to make a profit.” As a result, Kickstarter has publicly said multiple times that it will not enter the equity crowdfunding space.
Creativity in equity crowdfunding should not be thought of as taking a back seat, but when profitability comes into play, investors will likely make more informed decisions, leading to more sustainable business ventures. Remember that in a recent survey, the CFPA found that 20% of investors surveyed said that their main motivation was to be part of something bigger than themselves, which is testament to the fact that investors are not merely investing based on returns.
Differences from Kickstarter aside, there is one other commonality, which is that crowdfunding, whether rewards-based or equity-based, aims to serve those who have great potential but are unable to get the attention of the big players. Both espouse the philosophy that ideas should not fall by the wayside just because the entrepreneurs don’t know the right people or have ready access to capital. Both models leverage the Internet to democratize access to capital by allowing large audiences to support new ideas and businesses. Thus, no matter the motive behind pitching in, crowdfunding can be said to be one of the next big drivers of innovation.
This post was written by SeedInvest on September 6, 2016