Mass appeal

When venture cap and bank financing are scarce, what’s a cash-poor company to do? Turn to the public for contributions in a crowdfunding campaign.

On a Friday evening late last November, Thomas Sychterz and two classmates introduced their big idea to the World Wide Web. Eight months earlier, University of Ottawa engineering students Frank Bouchard, 26, Toby Maurice, 41, and Sychterz, 27, realized the product they had created for an entrepreneurship course — an eco-friendly erasable notebook that’s a cross between a paper notepad and a whiteboard — had real market potential. They decided the best way to gauge the broad appeal of their invention was to see if prospective buyers would support it. So that Friday night, they turned to crowdfunding website Kickstarter to launch a seed-money-raising campaign.

Using the site’s template, Bouchard whipped up a bare-bones page that included pictures of the books, a short product description and a three-minute video explaining the concept. A pledge of at least $25 would net each backer a free Wipebook upon completion of the project. Their goal: to raise $4,000 in 30 days — enough validation to proceed with development. Otherwise, it would be back to the drawing board. "It was all very casual," recalls Sychterz. "We knew there was potential, but we also knew we’d be crazy to put 100% confidence into a crowdfunding campaign — they’re hit or miss."

Bouchard pushed the page live and the three friends agreed to speak after the weekend to see if their product was attracting any interest. There was no way they could have imagined what was about to happen.

Modern crowdfunding — the process of raising money through small contributions from the public using online payment platforms — is credited to a 1997 campaign by British rock band Marillion, where fans donated about $60,000 to fund a North American concert tour. Fan-funding entered the political realm in 2008 when Barack Obama’s US presidential campaign took to the Internet and collected about US$500 million from small online donors. These days, crowdfunding has gained mainstream status as the best chance for hopeful entrepreneurs and small to midsize enterprises to get new ideas off the ground.

"Many SMEs find the venture-funding landscape difficult to navigate and the amount of venture capital available scarce," says Craig Asano, founder and executive director of the National Crowdfunding Association of Canada (NCFA), a national non-profit organization based in Toronto. "Crowdfunding portals and models help SMEs and startups gain access to a new source of efficient and relatively inexpensive ‘crowd’ capital, which becomes an enabler for organizations to innovate, develop, grow and commercialize their business."

Furthermore, crowdfunded projects can be built in no time, says Christian Catalini, an assistant professor of technological innovation, entrepreneurship and strategic management at the MIT Sloan School of Management in Cambridge, Mass., who has been studying the burgeoning industry since 2007. "It bridges the gap between ideas and investors faster than other methods," he says. "You get an immediate sense of interest in your idea. There’s no faster way to find out if something is worth commercializing than crowdfunding."

There are three main crowdfunding models gaining popularity online, according to the NCFA. One is the lending model, which is similar to micro-financing, where folks offer up low-rate loans on websites such as Kiva to support small businesses in developing countries. The second is the equity-based model, which essentially allows investors to own shares of the companies they fund — it’s projected to have the most potential for growth in the coming years (see below). The third, and most widespread of the bunch, is the reward-based model, which allows people to give money to projects and get rewards — usually the final product — in return.

Kickstarter is the mecca of this model — the site has surpassed US$45 million coming from Canada since last September. (Other well-known players in this category include Indiegogo and RocketHub, and the homegrown FundRazr). In 2013, backers from more than 214 countries spent US$913 a minute on Kickstarter campaigns, two of the most successful being the Pebble Smartwatch (which raised US$10,266,845 from 68,929 backers) and the Oculus Rift, a virtual reality headset for gamers (raising US$2,437,429 from 9,522 backers). The platform takes 5% off the top of successfully collected funds, plus another 3% to 5% in processing fees — not a bad price to pay, considering Kickstarter hosts the campaign, has an amazing track record (80% of projects that raised more than 20% of their goal have been successfully funded) and brings in millions of surfers looking to donate to cool startups.

When Sychterz and his partners were ready to raise capital and put Wipebook out there for the public to weigh in on, going to Kickstarter was a no-brainer. "We knew the traditional bank route would be painful. We did a few pitches to venture capitalists early on, but they expect a very large return and the feedback suggested we’d be better for angel investors," he says. Kickstarter better fit the trio’s vision. "We knew if any site would give us real validation, it would be Kickstarter."

Late Sunday morning, two days after the launch of Wipebook’s crowdfunding campaign, Sychterz is sitting in his living room after making a bite to eat. The phone rings. Bouchard is on the other end. The minute he answers, he can hear the excitement in his friend’s voice. "Have you looked at the page?" asks Bouchard. Before he can reply, Bouchard blurts out, "We raised over $8,000!" Sychterz’s eyes light up, and in his head he’s yelling, "Holy cow!"

From there, interest snowballed — friends and family posted details about the page on social media sites, strangers started sharing it on Facebook and the trio’s story ended up on CBC News a few days later. That generated even more hype, with several media outlets, including Breakfast Television Montreal, the Montreal Gazette, Slate.com and a slew of blogs, covering the Wipebook campaign.

The best part is, through Kickstarter, the team is able to interact with customers on a daily basis and get feedback on how to improve the product. In fact, 90% of the changes it made — such as adding a hard embossed cover instead of a plastic one, getting a detachable binding and offering grid paper — were suggested by donors. "We didn’t just sell a product, we were selling the experience of getting involved in its development from the beginning," says Sychterz.

In the meantime, he and the guys kept checking their page. "We watched as we hit $15,000, $20,000, then $35,000. Kickstarter put the product-development cycle in fast-forward. We did in a few months what companies usually do in a year," he says. When they surpassed the $40,000 mark, feelings of sheer excitement and joy started turning to worry. "The adrenalin wore off. A lot of people were asking for our product and we weren’t expecting the response," he recalls. "We had to figure out how we were going to attack that monster."

The tremendous speed at which a successful crowdfunding campaign can take off is just one of many potential pitfalls for entrepreneurs. The most common challenges, according to the Canada Media Fund, include a lack of business skills to bring funded products to fruition; failure to protect projects from idea theft and plagiarism; donor fatigue; and reputational damage if a campaign doesn’t meet its goals or fails miserably. Many do end badly: one of the most infamous crowdfunding fails was the New York City Opera’s Kickstarter campaign. It asked for US$1 million in donations over a 22-day period but raised a mere US$300,000. The opera filed for bankruptcy four days after its campaign ended.

Wipebook faced its own share of problems, from setting up the company’s internal structure, to dealing with supplier issues with materials and manufacturing, to figuring out the scope of shipping. It was here that the team failed to consider a key component of the campaign, with near-fatal results for the upstart.

Kickstarter accepts pledges from every continent. But in their shipping estimates, the Wipebook guys didn’t account for the cost of sending a one-pound device overseas. "We charged $5 for shipping — period." says Sychterz. "We just didn’t foresee that 30% of our orders would be international." The gravity of their oversight hit them when they discovered the actual cost to ship a Wipebook overseas was almost $40 — more than each donor’s entire pledge. The team had no choice but to eat the cost of those internationally shipped orders. "It was our fault, and it was an annoying mistake to make," says Sychterz.

Glitches and gaffes aside, by the end of its campaign, Wipebook had raised $424,314 from 7,978 backers — $420,000 more than the original goal. "It was a big shock — beyond our wildest dreams," Sychertz says enthusiastically. Wipebook now ranks as one of the top-10 most successful Canadian Kickstarter campaigns ever. (About $35,000 went toward Kickstarter’s fees.) As for fulfilling its end of the bargain, Team Wipebook delivered on the campaign’s initial goal of 250 books by January this year and the rest — a total of 10,000 books ordered by 8,000 backers — went out within the following two months.

Like the crowdfunding industry, Wipebook is poised to evolve. At press time, the company had sold more than $600,000 in product through its website, wipebook.com, Kickstarter, and select university bookstores. But its newest clients, corporations on a quest to go paperless, could ramp up sales quickly as they’re buying in bulk for employees and customers.

In May, the team released the Wipebook Mini (a pocket-sized version that fits easily into handbags) due to consumer demand. And the guys will be appearing on the hit CBC show Dragon’s Den this season to pitch their creation to a panel of hotshot investors, with the hopes of partnering with an expert who can help take the company to the next level. "I work from 7 a.m. to 11 p.m. on Wipebook and haven’t taken a day off since Christmas — I eat and breathe the business," says Sychertz. "People want our product and that’s the best problem to have. It’s really been a hell of a ride."

THE EQUITY-BASED MODEL

For companies that want to raise capital on a much larger scale than the Kickstarters and Indiegogos out there can provide — think early-stage growth companies in the technology, life sciences and real estate sectors — equity-based crowdfunding is an option. Businesses seek out accredited investors who are comfortable making $100,000-plus contributions in exchange for an active role in the business, says Matthew McGrath, president and CEO of Optimize Capital Markets, a Toronto-based investment banking firm that has the only online equity crowdfunding marketplace in Canada.

"These are people who have exhausted their friends and family for funds and large investment banks won’t touch them because they’re too small and don’t have access to networks of large investors," he says. (One of the most successful Canadian equity-based campaigns is Prairie Paper Ventures Inc. — a Manitoba-based company cofounded by actor Woody Harrelson that has discovered a way to produce paper using agricultural waste.)

While this type of crowdfunding previously wasn’t legal in Canada, it is today, as long as the "crowd" is made up of accredited investors. Equity crowdfunding south of the border has also been gaining momentum, with the passing of Obama’s JOBS (Jumpstart Our Business Startups) Act in April 2012, which allows members of the public to receive company equity in exchange for their contributions. Regulators including the US Securities and Exchange Commission and Ontario Securities Commission are currently developing rules surrounding equity crowdfunding.

CROWDFUNDAMENTALS

Tips for a successful campaign

  • Build a better mousetrap. The technology behind the crowdfunding model may be new, but that doesn’t mean the public will blindly hand over its cash. "People think crowdfunding is easy and a quick way to make money, but you really need to make sure your product or service satisfies a need," says Thomas Sychertz, cofounder of a successful Kickstarter campaign for Wipebook.
  • Be authentic, open and honest. The public needs to know that there’s a committed management team behind the idea, despite the challenges that new ventures face. "We had to be super-transparent about any issues we were facing to keep our backers’ trust," says Sychertz.
  • Prepare for any outcome. You may think you’ve got the best idea since sliced bread or perhaps your expectations for your somewhat-novel idea are quite low. Either way, you have to be ready, says Sychertz: "It’s a shot in the dark when asking for money from people, but be prepared for success."

About the Author

Lisa van de Geyn


Lisa van de Geyn is a freelance writer based in Toronto.

comments powered by Disqus

Highlights

Update your knowledge and strengthen your network at this must-attend conference covering the most important issues and trends affecting audit committee members.

It’s probable that someone you know is deep in debt. If you are observant, you might see one of these seven signs.