If Canada is going to support the crowdfunding model here, as the U.S. has decided to do with the passage of the JOBS act, then it must consider one important question: How likely are crowdfunded startups to succeed, and return money to the investor?
Jeanne Pi at AppsBlogger made an extensive post looking at Kickstarter statistics, complete with an infographic, based on data from June 23. There are several eye-opening data points, mostly showing how tough it really is to succeed on the crowdfunding platform. For example, 9 out of 10 failed projects do not even reach 30 per cent of their funding goal. Less than five per cent of projects more than double their funding goal, and being featured by Kickstarter was the biggest predictor of success – 89 per cent compared to 30 per cent without being featured.
But perhaps the most concerning statistic is that only 25 per cent of the projects that do reach their funding goals end up delivering on time. Give them eight more months past their self-set deadline, and up to 75 per cent of products are delivered. The larger the project, the more likely it is to be delayed and the longer it will be delayed.
Kickstarter’s model of allowing projects to raise money by promising future products or services (or often just related T-shirts) isn’t quite the same as equity-based crowdfunding. But proponents of that model have pointed to it as the closest example. These new statisitics could raise some reason for concern.
During a live discussion in Toronto earlier this week Sherwood Neiss, one of the architects of the equity-based crowdfunding model made legal in the U.S., was fielding questions from the audience. “How would the businesses that use crowdfunding to raise money be held accountable?” one audience member questioned.
Neiss answered that if condoned under securities law, which is provincially regulated in Canada, then entrepreneurs would have a legal obligation to be accountable to their shareholders. Not working towards making their commitments could have legal ramifications, so businesses would be in communication with their crowdfunding investors to update them on how close – or how far – they were from meeting their goals.
While being responsible to securities regulators may dissuade fraudsters from taking advantage of a crowdfunding platform, it doesn’t address the issue of legitimate businesses failing to meet goals. As in any investment, crowdfunding investors must accept there will be risk to the business failing and their money not being returned. Regulators can’t punish a business for not succeeding if they followed all the rules.
The risk isn’t a reason to avoid an equity-based crowdfunding platform altogether. But it is one more consideration to be made when designing a system that equally balances startups’ need for capital with the common investors’ need for protection.