What is Equity Crowdfunding?

Have you ever backed a kickstarter campaign?

There is something exhilarating about having the ability to support innovation in such a pure form...in its infancy.

Most campaign's are simply an idea. A well thought out idea, but an idea nonetheless.

You are excited to be one of the first to get your hands on this product after you fall in love with the entrepreneur's vision, and you put some money down.

For the entrepreneur, the process of crowdfunding is a great way to test the validity of the idea. If the campaign gets funded, that is, customers are willing to pay money for your product, even before it exists - then you now have empirical data that there is indeed a market for your product. Not only that, if the campaign does extremely well, then you also have the added benefit of the marketing engine such a platform can provide, from getting featured on the homepage, to be syndicated across multiple media publications who in turn take note and write about how novel your idea is, significantly increasing the overall exposure of the project.

This is Crowdfunding, you pay money to buy an innovative product - it's pre-ordering, and sometimes it takes literally years for you to receive the product depending on how technically challenging it was to produce.

If you invest $500 to back the latest electric skateboard, you receive the electric skateboard.

 Boosted Board via Kickstarter

Boosted Board via Kickstarter

So what is equity Crowdfunding?

In comparison, you can consider Equity Crowdfunding to be the next step, targeted at the company that is a little further along, companies that already have market validation.

Continuing with the skateboard example, imagine that your $500 does not get you a skateboard, but a small stake in the Skateboard company...this is equity crowdfunding.

Think about that for a second.

In one scenario, you invest $500 in a skateboard, the other, you invest $500 in the Skateboard company.

If they sell a million boards, you get one board or your $500 is now potentially worth thousands or tens of thousands.

If you look at risk vs reward, it is most definitely a better scenario for the investor. Now that is critical point, because it doesn't necessarily mean it's the best scenario for the entrepreneur. In one scenario they fulfill orders at a much lower margin and they are up and running with 100% ownership of the company belonging to them, in the other scenario - they have 100% of the funding but they have given up equity.

The greatest difference is in the stage of the company.

When it comes to traditional crowdfunding - these companies are very early. Most campaigns distill their idea into a compelling marketing video that demonstrates the product and gives you a general overview of the companies vision. It is generally not investment ready. For instance no venture capital firms simply back ideas. Investors require that businesses have real 'traction', with real customers.

Equity crowdfunding sits at this next stage.

It is beyond the idea. It is working, making money - and certainly less risky than backing the vision alone. They could have already participated in a world-class accelerator program and be earning millions in revenue with a sustainable business model. They are looking at fundraising to take them to the next level and as an alternative to venture capital. Simply put, they have more substance.

What you need to do (as the investor) is keep in mind, that both are risky.

While we have a significant due diligence process at Wealth Circuit, the dream of backing the next Facebook is just that, a dream, the odds are slim to none.

Make sure you do your homework, read our general risk warning, and invest cautiously.


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