Some Thoughts on Crowdfunding

Jeffrey Glazer
August 26, 2015

It's not exactly news that equity crowdfunding has not taken off as expected here in Wisconsin. To-date there have been three registered equity crowdfunding attempts: MobCraft Beer, Common Man Brewing, and Timber Mill. All used CraftFund as their Internet Portal, and none of them met their funding goals.



So why hasn't crowdfunding taken off or been a success? I think it's some combination of three reasons: 1) it's really hard; 2) statutory requirements; 3) demographics.



The first of the reasons is that crowdfunding is really hard. Even assuming everything goes in your favor, the odds are against you. If you look at Kickstarter's statistics you can see that the vast majority of successful projects were actually quite modest: less than $10,000. It would be absurd to do an equity crowdfund for less than $10,000. Projects in excess of $100,000 account for approximately 2.5% of Kickstarter's successful projects, and are less than 1% of all Kickstarter projects. Thus, even on a mature platform like Kickstarter, raising significant amounts of money from "the crowd" is extraordinarily rare.



Second, statutory requirements make raising money via crowdfunding even more difficult. For intrastate raises (which equity crowdfunding must be for now), there are simply far more efficient uses of your time: finding certified/qualified investors. By and large, state securities exemptions these individuals from needing sophisticated disclosures. Thus, rather than pay a lawyer or take the time to create those disclosures (including, potentially audited financial statements), the entrepreneur's time is better spent finding angels, super angels, or other qualified/certified investors. If the entrepreneur tries that route and is unsuccessful, that might be a clue to the fund-ability of the project in general. As many of these investors have said: "Good projects don't have a hard time getting funded. The money is there for the best teams." Of course, for a variety of reasons, some industries aren't exactly trendy, or ripe for angel/super angel investment - for example, lifestyle businesses, and high capital-cost or quasi-manufacturing businesses like food and beverage. It might take $100,000 to $500,000 to get a food and beverage company started, but the returns will be slow and relatively low for a long time, even assuming the entrepreneur has aggressive growth plans (which many do not - but that's another post for another day).



Finally, demographics - especially in the state of Wiscosnin, are against you. Even assuming you have a great project, and it's in one of those hard-to-fund areas like food and beverage, raising "a little bit of money" from "a lot of people" is difficult - we don't have "a lot of people" here. Dane County has a population of roughly 500K, the greater Milwaukee area is, generously, 1.5 million. Let's use the "classic" example of the "local bakery" that needs $100,000 to get started. The local bakery is realistically not going to serve the entire state, it's fundraising is limited to, at most, its city. If that city is La Crosse, for example, that's 50K people. The bakery would need to raise $2 from every single person in the community!! If they get 1% of the community to support them, 500 people, they would need $200 from all 500 people. That is a tough ask; $10 from 500 people maybe, but $200? And that is an extraordinarily optimistic 1% of the community supporting them. And, that isn't to mention whether the legal hassles of DEALING with 500 $200 investors is even worth the money! As I said, your time is probably better spent convincing one or two rich people who can spend $50K each to fund the entire project.