Entrepreneurs in contemporary society are regularly using crowdfunding to fund their startup ideas. In a competitive startup environment, crowdfunding can be a great way to validate business ideas, find early adopters, and develop a community of online supporters. Although crowdfunding likely will not solely take a business from idea stage to an IPO, it can be a great tool to help fill funding gaps along the way.

Some recent examples of successful local entrepreneurial campaigns can be found on the local crowdfunding platform, FundRazr. FundRazr is the best crowdfunding company in Canada having raised over $50M from over 45K campaigns globally.

This short film, Becoming Sophie, was the vision of Ashley Alexander and her team. They sought funds through crowdfunding to be able to finance this project. The costs of producing such a film are quite high, especially considering the film is only 15 minutes long. With FundRazr they were able to raise over $13K and make their dream a reality. They also boosted the popularity of their campaign by adding rewards for contributions such as getting your name in the credits, an autographed poster, and movie coupons.

 

JusTea is a social enterprise with the goal of creating sustainable employment and fair wages for Kenyan tea farmers by purchasing directly from the farmers. These Vancouver based entrepreneurs used crowdfunding to raise $20K to build a processing kitchen so that farmers could process their own tea rather than only realizing 1% of the market value by selling it through traditional means. These entrepreneurs not only bring us amazing tea, but also empower Kenyan farmers with a direct route to the market, fair trade, and a sustainable business model.

This organization focuses on using the sport of boxing to unite, mentor, and help at-risk women and youth in Vancouver. Aprons for Gloves hosts an annual FundRazr and allows different members of their community to raise their own money through their own campaigns. In total they have raised over $83K, and continue to spread the word and help teach discipline, respect, hard work, and self control. The organization has found that the program results in higher self-esteem, improved health, and camaraderie for participants.

The interesting thing about fundraising through crowdfunding is that it provides financing options for a wide variety of stages of business. When a founder has an idea, they need some funding to test whether or not the idea is viable and will satisfy needs of consumers. For this stage they can turn to crowdfunding for some seed money to get started, or for some this is a variation on the traditional ‘friends and family funding’ stage.

Secondary fundraising can start when there is actually a prototype or functioning product the business has created. Crowdfunding campaigns in this stage can act like pre-sale, giving actual product to those that financially contribute to the campaign at this stage. If there is a vision for a great product, consumers are often keen to participate and make the product a reality.

After a business is up and running, with established production and customers, generally financing becomes more substantial. Startups typically approach venture capital firms for sizeable investment that can help to scale their company. This is the new landscape where equity crowdfunding comes into the mix.

Instead of pitching to 50 different VC firms or investors searching for funding, equity crowdfunding campaigns allow startups to seek funding from the crowd in return for small fractions of equity in the company.

Because of the risk involved in investing in startups, there are many regulations surrounding how much money and what types of investors can invest. Currently, the regulations loosening the policies on which investors can participate are being reviewed by regulators and are expected to be approved in BC later this year, as well as many other provinces and US States.

The issue here is that there is a difference between accredited and non-accredited investors when it comes to securities regulations. An accredited investor has a combination of $1M in liquid assets, has net income before taxes above $200K for the past two years, or has net assets of at least $5M. Rules differ for non-accredited investors in order to protect them from making uninformed and unsophisticated investment decisions.

If the proposed rules get approved, British Columbia will allow startups to raise up to $150,000 in financing per offering, and would allow two offerings per year. Non-accredited investors however would be limited to investing a maximum of $1500 per offering and the total investment in equity crowdfunding would be capped at a certain level annually.

Currently the only functioning Canadian equity crowdfunding platform is SeedUps.ca, but many other platforms will certainly materialize once the rules are finalized. It will be very interesting to watch the equity crowdfunding landscape unfold, as we have already seen such exponential growth in crowdfunding with early stage startups. Stay tuned!