The past is never dead. It’s not even past.

–William Faulkner 

As Investment Crowdfunding beckons, it might be useful to reflect on Crowdfunding 1.0: crowdfunding that gathers small contributions from many individuals to fund projects or causes, but is prohibited from offering financial returns. Fund raisers often promise yet-to-be-developed consumer products or other tokens of appreciation for donations. In 2012, this first-generation form of funding raised an estimated $1.5 billion for charities, artists, and product developers. Even when the SEC issues final rules under the JOBS Act, allowing crowdfunders to issue securities and open up crowdfunding to even larger crowds, Crowdfunding 1.0 will not disappear. It will not be dead, or even past.

Rather, the first generation of crowdfunding will coexist with Investment Crowdfunding, where many of its lessons will inform successful Investment Crowdfunding campaigns.

Here are five lessons Crowdfunding 1.0 offers Investment Crowdfunding.

  1. Successful crowdfunding campaigns establish strong emotional connections with donors.  People want to feel connected—and crowdfunding is a strong demonstration of that, where communities form to support campaigns that advance their shared beliefs, goals, and aspirations. Crowdfunded philanthropic donations, support for documentaries or art projects, or campaigns for local business development are all reflections of individuals’ personal identification with causes seeking funding. Even campaigns offering tangible rewards, like the Pebble smart watch, create clubs of early adopters who take pride in their contributions to products’ development and their ability to identify success.
  2. Crowdfunding is work. Crowdfunding requires more than posting a video on a website and waiting for the money to roll in. Entrepreneurs must establish their networks and brand identity; establish their credibility through their business plan and management team; create presentations that simultaneously excite donors’ emotions; and convince audiences that goals are achievable with the funding sought. They must be relentless in asking for money and responding to donors’ concerns and inquiries. The intensity of the effort during a campaign is as important as the preparation.
  3. Successful crowdfunders must honor their promises to contributors. In the movie The Candidate, Bill McKay (Robert Redford) wages a brutal Senate race, outmaneuvering the heavily-favored incumbent. When learning of his victory, McKay stares blankly, asking “What do we do now?” That cannot be the reaction of entrepreneurs when they receive crowdfunding proceeds. Entrepreneurs must anticipate how to execute their plans once they receive funding. Crowdfunding 1.0 fundraisers unable to meet their commitments suffered blistering publicity; Investment Crowdfunders who are not serious about their obligations to investors will receive harsher reactions.
  4. Diligence by the Crowd works. In the context of crowdfunding, due diligence refers to the process of evaluating the merits of a particular campaign.  Communities of contributors considering crowdfunding campaigns conduct due diligence by crowdsourcing: individuals share their knowledge and expertise to shape collective decisions. How well does it work? At Kickstarter, the crowd showed that the Mythic video game campaign was fraudulent, with plagiarized demos and fictional management credentials. In foreign models of Investment Crowdfunding, the crowd has also thwarted fraud. For instance, the ASSOB in Australia, the world’s oldest Investment Crowdfunding site reports that it has financed companies since 2005 without incidence of fraud.
  5. It’s not just the money. Crowdfunding campaigns create new communities of enthusiasts and ambassadors, of customers and connections for crowdfunding companies. The emotional and social connections that bring contributors to crowdfunding campaigns persist beyond the initial financing. People instrumental in funding a restaurant or a new consumer brand tell their friends and become repeat customers themselves. In many ways they become the brand. Additionally, the engagement and interaction provide early market validation and invaluable customer feedback.  These are benefits that traditional forms of financing cannot match. As Investment Crowdfunding reaches even broader audiences than those contributing to Crowdfunding 1.0 campaigns, expect these effects to multiply.

Join the iCrowd today to get ahead of the Investment Crowdfunding curve. iCrowd is committed to providing advice and education to help entrepreneurs succeed in starting and growing businesses.