This is a guest post by Kiran Lingam, a corporate and securities lawyer and regular writer and speaker on crowdfunding and the JOBS Act.

One of the biggest advantages to raising funds through Kickstarter is the potentially broad community of backers formed around the fundraising campaign.  These backers create an instant base of potential beta testers, early adopters, customers, suppliers, evangelists, and Twitter followers (and retweeters).

New and established companies should consider how crowdfunding can be used to generate revenue (as opposed to investment).  People who have skin in the game, even a small amount, are much more likely to be loyal customers, give valuable feedback, refer you to new customers, and help the company in countless other ways.

Here are some scenarios that we could see playing out:

1)  Growth Stage Startups: A startup like Birchbox with over 100,000 subscribers closes a $25 million Series C financing round.  It then allows each of its customers the opportunity to participate in a $1M crowdfunding follow-on round on the same economic terms.  Their current customers would be thrilled to have the opportunity to participate in the upside of the Company and, with skin in the game, would be more likely to recommend the product to their friends, give feedback, and help the company.  More people would want to become customers in order to be part of the “club.” Also, because this would be a follow-on to a venture backed investment, many of the concerns about fraud are minimized.

2)  Local Franchise Businesses:  A local business like Vezzo allows everyone within its zip code to participate in a crowdfunding round for purposes of opening a new store.  Local investors will become local customers and evangelists and suddenly the pizza stores have hundreds of new local people financially incentivized to promote the new and current pizza stores.

3) Early Stage Startups Requiring Critical Mass:  Some businesses (particularly social media) don’t work without a critical mass of users (see facebooktwitter, foursquare, quantia MD, quora, lawpivot, etc.) to create network effects.  Even if a company is capable of raising money through the traditional angel or VC route, it may actually prefer to go with a crowdfunding round in order to gain access to this potential early user base.  After a successful crowdfunding round, the company would be able to tap into hundreds or thousands of early adopter types with skin in the game, forming the necessary critical mass.

4) Early Stage Startup Customer Development: One of the key tenets of Steve Blank’s customer development principles is to get customer validation prior to going through the expense of creating a product.  You would do this through surveys, landing pages, mock screen shots, and letter of intents where potential customers agreed to be early users.  Getting a customer to invest in a product before it is created may be the best way to validate the product before it is created and will be a great indicator on whether a customer would buy, or at least try, a product once created.

The feasibility of each of these scenarios is highly dependent on the rules that the SEC ultimately comes down with on what can be contained in a crowdfunding notice and how it may be delivered.

What else?  How else could crowdfunding be used to generate revenue?


The information on this blog is not a substitute for professional legal advice. The opinions expressed herein are the solely the opinions of the author and not of any law firm, employer or organization affiliated with the author. Nothing in this blog shall create an attorney-client relationship, nor is it a solicitation to offer legal advice. If you ignore this warning and convey confidential information in a private message or comment, there is no duty to keep that information confidential or forego representation adverse to your interests. Seek the advice of a licensed attorney in the appropriate jurisdiction before taking any action that may affect your rights.

This post was written by ryanfeit on March 29, 2013

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