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Standing out among the pack: tech companies and the benefits of crowdfunding

By Jonathan Breido, Associate Partner with EY’s Private Mid-Market practice

In times when traditional sources of capital have become more difficult to secure, many tech startups have turned to crowdfunding as a means to raise capital. While still a new means of raising capital in Canada, the option of using crowdsourced funding to finance startup companies is steadily expanding and rapidly evolving. The number of sites providing avenues for tech startups is growing. And the notion of using the internet to raise capital is gaining legitimacy among investors who are looking to support innovative ideas of private business entrepreneurs. The crowdfunding industry is exploding with tech entrepreneurs and investors looking to take advantage of this promising fundraising channel for private businesses. Many privately owned tech companies have been able to launch successful startups with the funds raised through crowdfunding portals, and have been pioneering the trend of looking to the internet for validation of new business ideas. Crowdfunding portal Kickstarter has helped a tech company like Ouya, video game consoles, raise over $8 million through its platform. Other successful campaign launches have included inXile entertainment and Obsidian Entertainment, who each have raised well over $4 million through crowdfunding.

Alleviating the capital crunch Crowdfunding helps solve a serious access to capital problem so many Canadian tech startups face. Many new tech business owners can attest to the struggle and relentless effort that is required to obtain financing for a new startup business from more traditional forms of lenders. Crowdfunding adds a new dimension to the existing traditional banks, angel investors and venture capital firms.

The Canadian government has been slower in determining guidelines around crowdfunding than compared to the United States. In March 2014, the securities commissions in Ontario, British Columbia, Quebec, Manitoba, Saskatchewan, New Brunswick and Nova Scotia announced proposed rules to regulate the raising of limited amounts of capital, and the selling of shares, through crowdfunding websites. The Ontario Securities Commission, for example, would allow companies to raise a maximum of $1.5-million in equity in any 12-month period through crowdfunding. Individuals would be able to invest no more than $2,500 in a single project, to a maximum of $10,000 a year.1 Currently, equity crowdfunding is mostly used by tech start-ups. However, real estate firms, restaurants, manufacturers and other businesses have recently seen the benefits of using crowdfunding portals to raise capital. For industries that pose a significant risk to traditional sources of raising capital, crowdfunding has become a key way to demonstrate to lenders the demand for the product or service, and validate financial projections included within the business plan. Traditional lenders find comfort in tech startups that have successfully secured investors, as it solidifies and provides legitimacy to their ideas.

1 OSC, Introduction of Proposed Prospectus Exemptions and Proposed Reports of Exempt Distribution in Ontario, March 20, 2014, Volume 37, Issue 12 (Supp-3) http://www.osc.gov.on.ca/documents/en/Securities-Category4/csa_20140320_45-106_rfc-prospectus-exemptions.pdf

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Standing out among the pack: tech companies and the benefits of crowdfunding

By Jonathan Breido, Associate Partner with EY’s Private Mid-Market practice

Testing the waters Crowdfunding is not just a means for raising capital. It allows new private company tech entrepreneurs to validate their ideas, test markets, generate buzz around their brand and establish a marketing platform that resonates with their target market. Assessing demand is a big deal, not just from an operational standpoint, but also as a way to pique the interest of investors. One of the hidden benefits of crowdfunding is that it lowers the risk of spending too much time on creating new ideas that may not be viable. It also allows potential customers to voice their opinions, likes and dislikes before officially going to market. Instead of investing the time, money, and energy required for a full launch, crowdfunding enables tech innovators to test their ideas to determine if the public is as excited about the project as they are. Crowdfunding paints a viable and accurate picture of how a tech product or service will do in the real world. Investors and potential customers have immediate access to information and the business plan presented by the startup on the chosen portal. Feedback and questions are raised immediately, which provides new business owners with the ability to address any concerns early on, and tackle any outstanding issues that may arise throughout the crowdfunding process.

A new way of marketing Crowdfunding also provides the ability to build brand awareness and increase brand reach, which – if properly managed – can create a strong and loyal community of excited and engaged customers who

are invested in the idea from the start. Particularly in the tech space, the benefit of having product or service supporters waiting for the project to be completed can produce invaluable word of mouth advertising for a startup that can catapult the business to success. Aside from the promotional advantages of having a product or service in the forefront, tech companies can use crowdfunding as a testing ground for new and innovative products in the marketplace. To stay ahead of the competition, businesses must sometimes take risks. A lack of funding, however, may halt a business’ efforts right from the start. By capitalizing on crowdfunding platforms, private tech businesses can test cutting-edge ideas, while not sacrificing large amounts of capital. The result of this strategy is generating renewed interest among existing customers, and introducing new potential customers to existing product/service line-ups.

Into the future There is little doubt that crowdfunding in Canada will shake things up in the world of investment, but it will also alter the ways in which tech companies formulate and alter their business plan and go-to-market strategies. Crowdfunding allows passionate entrepreneurs to bring forward new and cutting edge technologies, and provides financial backers with the ability to gauge market response before committing investment dollars. In essence, crowdfunding is an excellent way for tech entrepreneurs to receive the financing and exposure they need in order to verify, execute, and help their ventures grow. With the industry still evolving and becoming more efficient, there is no

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Standing out among the pack: tech companies and the benefits of crowdfunding

By Jonathan Breido, Associate Partner with EY’s Private Mid-Market practice

better time for creative, tech visionaries to take advantage of the associated benefits!

Jonathan Breido is an Associate Partner with EY’s Private Mid-Market practice, focused on helping tech companies of all shapes and sizes succeed. He has over 15 years of experience advising private companies on all aspects of their business—

from strategy, planning, compliance, accounting and expansion. Learn more about EY’s Private Mid-Market Services at ey.com/ca/pmm and follow us on Twitter @EY_Private_co.

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