Is Crowdfunding Equity a Good Idea for Developers?

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For the past several months, crowdfunding platform Indiegogo has tested the idea of allowing the masses to purchase equity in startup projects.

Early companies participating in the equity-crowdfunding experiment have included Artcraft Entertainment, developers of the online role-playing game “Crowfall,” and BeatStars, a social marketplace for music distribution.

Now Indiegogo plans on escalating things with a new system that will combine the prizes of traditional crowdfunding with equity investment. In other words, your hundred-dollar investment in a startup could not only earn you a tchotchke, but also an incremental share in the business.

“We made the decision to double down on the product delivery side of things,” Indiegogo CEO Dave Mandelbrot told TechCrunch at CES. “We want to be the best crowdfunding platform, of course, but it’s equally important to us to help companies with what comes before and after.”

But investing in startups—whether a few bucks via a crowdfunding site or several million through a traditional VC firm—is inherently a risky business. Many startups fail without producing so much as a dollar in profit. And even if they do survive, the chance of a substantial payout to the smallest investors is usually slim.

There’s also the possibility that any profits will end up reinvested in the business, rather than deposited in investors’ pockets. Take Artcraft Entertainment, which has raised $376,734 from 660 investors via MicroVentures, Indiegogo’s equity-crowdfunding affiliate. In comments beneath the investment documents, founder Todd Coleman stated: “While we may decide to use potential profits to pay a dividend, it is equally likely that we will instead use those profits to reinvest in the company [to] drive growth.”

In a separate response, Coleman stated: “The most likely liquidity event in our space and for independent developers… is acquisition. It’s not unreasonable to believe that, if our game is a hit, we will have any number of suitors that would be interested in acquiring ArtCraft.”

For independent developers who need to raise money for their next big thing, equity-crowdfunding could provide an avenue for funding—provided that the crowds want to actually invest in the project. But with the tantalizing possibility of fully financing a project via micro-donations comes the potential for equally massive headaches, not the least of which is the significant dilution of the founders’ equity if enough people pile into the funding round.

Even if a crowdfunded startup makes a viable product and ends up successfully acquired by a larger firm, there’s still a potential for negative repercussions. When Facebook acquired Oculus Rift, once the darling of crowdfunders, it irritated those early backers who felt they had enabled a massive corporate takeover with little to show for it. (Oculus ended up handing out free headsets to early Kickstarter supporters.) If the crowd’s payouts for an acquired startup are too low or nonexistent, it could spark a backlash—a real problem for the acquiring company at a sensitive moment.

But all potential means of funding a project come with pros and cons; developers will have to evaluate whether they can generate the awareness necessary to successfully monetize their dream via the crowd, and go from there.

Image Credit: vladwel/Shutterstock.com

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