Social media harnessed to raise investment dollars

Vancouver's is the latest company to base its business model on crowdfunding

Tue Jul 24, 2012 12:01am PST

Crowdfunding is still a relatively new approach to raising money for charities or commercial ventures, but already there are more than 450 startups scrambling for dominance in the space. So says Daryl Hatton, founder and CEO of FundRazr. But the creators of Vancouver's newest crowdfunding platform – – think they've found an edge over their competitors.

"We're the only crowdfunding platform that doesn't take a cut of the money that is raised," said 23-year-old co-founder and COO Trevor Loke. "The other thing we do differently is we're solely non-profit based."

All campaigns are vetted by to ensure they belong to legitimate non-profit organizations. The company has not settled on how to monetize the site, but Loke said it would likely try to generate revenue through premium campaigns with large corporations. One of the first local charities to launch a campaign with was BC Children's Hospital Foundation, which has a $200 million capital fundraising campaign to build a new hospital. Its fundraising target is comparatively modest: $5,000.

Crowdfunding relies heavily on social media and email to spread the word, and because BC Children's Hospital is a big user of social media, the organization felt a campaign was a good fit as part of its larger fundraising strategy.

"We like to embrace social media," said BC Children's Hospital Foundation spokeswoman Terra Scheer. "We find that we have a really great following on Twitter and Facebook."

Social media gives crowdfunding its steam and distinguishes it from traditional online donating.

Hatton said crowdfunding is based on building a community around a cause. FundRazr's most successful campaign so far was $1 million raised for Save the Children. Much of the critical mass for that campaign came from an unlikely source: gamers, including players within the World of Warcraft community.

"Properly motivated, a bunch of people who you would not expect to be the most philanthropic in the world, helped raise a million bucks for starving kids in Africa," Hatton said.

Unlike, FundRazr can be used to raise money for various purposes – not just registered charities. The company takes a 5% cut of the transactions – about $1 million per month. Crowdfunding is also being tested as a way for entrepreneurs trying to raise seed capital, either through small equity investment or microloans.Canadian securities laws prevent Canadian companies from crowdfunding for equity financing. While friends and family can invest in a commercial enterprise, only accredited investors or people of high net worth can invest in a company with whom they have no family or personal relationship.The JOBS Act is removing some of the legal obstacles to crowdfunding in the U.S. by making it legal for a company to crowdsource up to $1 million a year without having to make a public offering. The BC Technology Industry Association (BCTIA) is lobbying for something similar in Canada.

Hatton is part of that lobbying effort, although even he has reservations about crowdfunding as an alternative to traditional equity financing schemes.

"It's really easy to sell some shares in a company," he said. "It's really hard to get those investors a return on their money and get them out in the end. It's kind of like the Hotel California: you can check in, but you can never leave."

One way around current crowdfunding restrictions for commercial ventures is a rewards-based model that allows anyone to invest indirectly in a company by buying rewards. When the company has enough money to start producing its product, rewards-buyers would typically get it at a reduced price.

Because crowdfunding is inherently vulnerable to fraud and scams, the Crowdfunding Accreditation Platform Standards (CAPS) has been formed to certify crowdfunding sites that adhere to best practices.

Tags: fraud, lobbying, Facebook Inc, Twitter Inc., British Columbia Technology Industry Association, computing and information technology, social media

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