A couple years ago many great product ideas were sitting collecting dust in the minds, workshops and hard drives of entrepreneurs. These ideas sat behind the barrier of funding – often dismissed after the entrepreneur exhausted their bootstrap, government and private lending finance options.
But crowdfunding changed that. Using online platforms, crowdfunding meant new product ideas could be pitched to a wider global audience and funded through individual donations. These fundraising efforts have led to some pretty impressive success stories, the most notable being the Pebble Smartwatch which fundraised $10.3million using Kickstarter in 2012.
In Canada, this new finance model has spread like wildfire. In under a year Canada has gone from a crowdfunding neophyte to experienced innovator. It was only eight months ago that the largest global crowdfunding platform – Kickstarter - launched its Canadian operations. Already the tally is massive - 1,400 projects and $14 million in donations!
For people with new product ideas fundraising is quite literally at their fingertips. It only takes five simple steps. Launch a Kickstarter or Indiegogo account, tell the world why your idea is amazing, collect the donations design it and go to market. Simple right? Not for everyone.
While this scenario may have worked for a minority of crowdfunded projects it is difficult to fund an entire startup through donations and non-monetary incentives without giving up equity.
On March 20, that all changed. The Ontario Securities Commission announced plans to open the door to equity-based crowdfunding – effectively leap frogging the U.S.’s progression in crowdfunding regulation. This means Canadian entrepreneurs now have the opportunity to fund their new product ideas and business through two crowdfunding models which include:
Model 1: Fundraising Based Model (Donators)
This is the standard crowdfunding model everyone is familiar with and the mode used popular platforms Indiegogo and Kickstarter. The mechanics are straight forward: post a project set a funding goal and add some non-monetary rewards for donation levels. The main risk with this model lies with donors – there is no guarantee they will receive their reward.
For physical products, the risk is heightened. Product development doesn’t happen overnight and donors sometimes wait more than a year to reap their rewards. This was the case for the Pebble Smartwatch. Its first watch rolled off the assembly line 18 months after the Kickstarter campaign launch. On the other hand, Design 1st’s Ottawa client, Nuvvyo, used this method to fundraise over $30,000 for their Tablo DVR product on Indiegogo last fall. They cut shipping by a third, sending the first product to buyer doors only six months later.
Model 2: Equity Based Model (Investors)
This is the new innovative model already adopted by several countries including the UK, Germany and Australia. It functions similar to the fundraising model where entrepreneurs pitched their ideas online but it has one interesting caveat: it generates investments not donations. This equity model replicates the IPO process but without the red tape, accounting and legal fees which are sure to make equity crowdfunding a disruptive finance model for startups and established enterprises.
While Ontario was first in Canada to come forward with the new equity-based crowdfunding regulations, similar proposals have been drawn up in Quebec, Saskatchewan, New Brunswick, Manitoba and Nova Scotia.
Across the board the newly proposed rules limit investors to a $2,500 per venture and a total of $10,000 per year. Investors are also required to sign a “risk acknowledgment form” stating that they are aware they could lose all the money. Any online platform that adopts equity-based crowdfunding is required to have individual regulations, register with Canadian regulators and do background checks on participating companies.
This is an exciting time for Canadian entrepreneurs. Funding is often the biggest barrier to the launch of new ideas and products. Access to equity crowdfunding is sure to disrupt the status quo. After all, not everyone can a land a deal with dragons….