Why Crowdfunding is So Hot Right Now

Since the days of the first Kickstarter campaign, crowdfunding has grown from just another quirky form of Internet commerce to a well-established way to raise funds and generate buzz around a new product or company.

Need proof? At January’s Consumer Electronics Show in Las Vegas, more than half of the 478 companies with trade booths at the Eureka Park innovation showcase got their start through crowdfunding, says Craig Asano.

“I think it’s a stepping stone, or some people call it a ‘funding escalator,’” says Asano, the founder and executive director of the National Crowdfunding Association of Canada (NCFA).

The pre-sales generated by a crowdfunding campaign serve as tangible proof of concept, generating some growth momentum for your business and attracting advisors and investors. “You’ve got a proven model, you have quite great strength in terms of product as well as customer feedback,” notes Asano. “It’s a much more plausible pitch to [investors].”

On March 3, Asano’s organization will host the second annual Canadian Crowdfunding Summit in Toronto. The event comes at a pivotal moment for the financing model, with five provinces having introduced new regulatory model for equity crowdfunding in January.

The new rules allow startups and other companies to raise up to $1.5 million per year from retail investors, subject to certain conditions. Businesses looking to raise capital will need to list with an online funding portal. (Think Kickstarter, but for equity).

But there’s a lot of prep work before you get to that stage, notes Asano. “You really need to have a better understanding [about] whether you’re ready to raise capital,” he says. “You’re going to want to learn about the cost to raise capital, and [to] connect with the people that can help you facilitate the actual process of raising capital.” One potential complication: managing the large number of stakeholders created by offering equity to the crowd.

As an entirely new industry, there’s plenty of opportunity for new businesses and new kinds of businesses: platforms, vendors, consultants and so on. “It’s early days-there’s a lot of innovation to [come] in this space,” says Asano. “But the idea is that we’ll have wider distribution, streamlined costs, and eventually entrepreneurs could focus on their business rather than spending so much time trying to raise capital.”

But it all starts with the portals, and quite a few are likely to crop up in the near future. Asano employs a well-known rule of thumb: the Canadian market is a tenth of the size of the U.S. “In the U.S. alone to my knowledge there’s around 178 real estate platforms,” Asano notes, using one popular vertical within the crowdfunding world. “I’m not saying there’s going to be 17 real estate platforms in Canada overnight, but that is the potential.”