people looking for funding for specific purposes and to gain access to specific crowds. For example, PubLaunch is a Toronto platform for people who want to publish books. “Authors were often being forced to choose between affordability and a good quality book, and PubLaunch allows them to do both,” says Meghan Behse, PubLaunch president. With successful crowdfunding, authors can cover editing and production costs and test the market for interest, promote their book, and gain a following. But that’s just one type of crowdfunding.
Crowdfunding models Crowdfunding is loosely categorized into models: donation, reward, lending, and equity. Donation-based crowdfunding is used by non-profits to support causes. Reward-based crowdfunding offers something (products, services, discounts) in exchange. “The most popular kind of crowdfunding — and the one most people will recognize — is reward-based crowdfunding, where new products, such as the Pebble watch — $30 million raised — or the game “Exploding Kittens” — $9 million raised —
can be pre-sold to consumers,” says Cory. For technology companies developing consumer products, reward-based crowdfunding presents an opportunity to validate products with consumers. “You get all kinds of good things when your product is out there crowdfunding,” Cory says. “Investors always want to know: will the dog eat the dog food? This is proof positive that your product has some traction.” Like JamStack’s success with the Dragons, companies can leverage that traction into successful angel or venture capital funding. “There’s a very short line now often between a successful crowdfunding campaign and follow-on funding. That’s the big deal,” says Cory. And with reward-based crowdfunding, you don’t have to file a prospectus, which is expensive for a young company. By comparison, the other lending and equity crowdfunding models are more complicated and far, far less developed here. “In Canada, equity and lending crowdfunding remain in their infancy due to regulatory constraints that limit the participation of small investors,” says Cory. “This is not the case for large or accredited investors,
Prendergast pitched JamStack on Dragon’s Den and got what he wanted: $200,000 at 20 percent equity. however, who can invest in the shares or debt of companies listed on several crowdfunding platforms such as AngelList and Crowdmatrix.” The lending model, which provides opportunities to borrow and lend money at attractive interest rates, must follow all the same regulations and underwriting guidelines as their bank and lender counterparts that govern financial transactions with consumers and may also be subject to rules and regulations governing banks and other lenders.1 Meanwhile, in Europe, Cory says crowd lending is the biggest area of growth. “If you look at the U.K., crowd lending is a wonderful thing for businesses because they’re able to crowd source loans at better rates, and it’s a very efficient system. They do a better job often than banks are able to do.” The equity model, which means company shares are given in exchange for investment,
Chris Prendergast’s invention, JamStack, is the world’s first attachable guitar amplifier. It connects directly to the base of an electric guitar and integrates a smartphone to allow for effects, loops, and the ability to play along with songs.
is mostly available only to “accredited investors” — basically, people with a lot of money. And therein lies one of the key reasons Canada is behind with equity and lending crowdfunding. “The delay in the US and in Canada with crowdfunding has been the focus of the regulators, not on big investors, but on the mom-and-pops, on the small investors,” says Cory. “The regulators have a difficult job, because they always have to be seen to be protecting the small investor. It’s a bit of a tug of war between momentum in the marketplace that wants more crowdfunding, and the tug of regulators trying to ensure people are protected.” And there is risk: “Investment in either the equity or products of early-stage companies is always risky,” says Cory. “Kickstarter reports that only 36 percent of projects were successful in meeting their fundraising targets. Only 20 percent of technology projects met their targets, and only 18 percent of all funded campaigns raised more than $20,000.” However, there are also some impressive success stories. Chris Charlesworth, an advisor for the National Crowdfunding Association of Canada and the CEO and co-founder of HiveWire, says the regulators’ protective role has become more challenging because, over the past five years, there are so many examples in other markets of activity that has been safe for consumers. Moreover, the regulatory focus on risk at an individual level is creating delays with implications on a much larger
Markham Markham VOICE VOICE Winter Winter 2017 2017
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