Innovation

Opportunity 2013: Social Financing

As crowdfunding begins to grow up, Canadians are raising money on foreign websites—though not in Canada

Written by elisab@rogers.com

In a year when many obsessed about Facebook’s IPO, a small army of adventurous investors flocked to a very different financing scheme promoted by a 25-year- old Vancouverite named Eric Migicovsky.

Last spring, the University of Waterloo grad, who now lives in Palo Alto, Calif., launched a campaign on crowdfunding site Kickstarter.com to raise US$100,000 for his Pebble watch. Migicovsky’s invention combines e-paper and Bluetooth technology in a wristwatch capable of running apps, playing music and syncing with other devices. Within hours of his Internet call for contributions toward the watch’s production, the offering went viral, and rapidly shattered Kickstarter’s records, ultimately raising more than US$10 million.

For entrepreneurs looking for seed capital, the Pebble watch story is more significant than the Facebook IPO, and points to rapidly growing interest in alternative financing platforms that leverage the power of social media. “It can offer a springboard to bigger things,” observes Nabeel Ahmed, editor of SocialFinance.ca, a crowdfunding information hub.

The sites function like micro stock exchanges, providing an online platform and advice for promoting the project, then charging a commission based on a percent- age of funds raised. Typically, the “pitches” are time-limited, and some operators release the funds only if the company meets certain financial requirements.

While crowdfunding remains off limits in Canada, a growing number of U.S. and international sites have cropped up, thanks to legislative changes, including Rocket- hub.com, Indiegogo.com and the U.K.- based CrowdCube.com, which caters to more sophisticated investors. Many sites are geared to one-off arts or not-for-profit projects. Others, however, use crowdfunding to pre-sell products or raise equity in business ventures, such as Kammerling’s Ginseng Spirit, a specialty spirit for which a London entrepreneur raised £180,000 within three months.

There are various restrictions on who can invest and who can pitch projects, depending on the site and jurisdiction. CrowdCube, for example, is available only to companies registered in the U.K., whereas Rockethub takes pitches from anyone, including Canadians. Canadian entrepreneurs can ask for contributions or pre-sell products on foreign crowdfunding sites, but it is illegal for them to sell equity.

Crowdfunding’s popularity is growing fast, especially in such countries as Australia, the Netherlands and the U.K. According to i-Canada Alliance, crowdfunding sites attracted $1.5 billion worldwide in 2011, a tally expected to double in 2012. The funding seems to work: University of Pennsylvania researchers who analyzed US$200 million pledged for 46,000 projects launched on Kickstarter found that three-quarters have been completed (albeit more slowly than the proponents promised investors).

Crowdfunding got its biggest push to date this past April with the passage of the U.S. Jumpstart our Business Start-ups Act, which eases restrictions on alternative financing. Canadian regulators, concerned about the risk of fraud, have been slow to follow suit, says Milo Anderson, CEO of Em Gateway, a Calgary firm developing a platform that connects issuers of “exempt securities” (private investments available to accredited investors with $1 million-plus in net worth) with prospective funders. He argues that Canadian entrepreneurs face chronic funding gaps at two points: after they’ve tapped out credit lines and family-and-friends money; and between the angel and venture stages. The Pebble watch story shows the need for Canadian crowdfunding rules so our entrepreneurs don’t need to leave to access this kind of capital, he adds: “The amount of jobs and potential we’ll lose is huge.

Read more from PROFIT’s 2013 Opportunity Guide

Originally appeared on PROFITguide.com