Crowdinvesting vs. Crowdfunding Platforms for Hardware Startups

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Upverter Expert Crowdinvesting vs. Crowdfunding Platforms for Hardware Startups

Which crowdfunding platform should you use to build your hardware startup? The answer is not so simple…

Do a quick search for “crowdfunding platforms” on your favorite search engine, and you’ll find plenty of results with disparate requirements, terms of use, pricing structures, and target audiences. If you’re part of a hardware startup and you’ve got a great idea, a working prototype, or a finished product that you’re ready to take to market, how do you choose which platform to work with?

In this post, we’re not going to sit here and compare different crowdfunding platforms for hardware startups; there are simply too many of them to make an accurate comparison. Instead, there are some important regulatory issues you need to consider when determining how you want to fund the next step of your new venture. As always, don’t take what is written in this post as financial or legal advice . Always consult an attorney if you have questions about the legality of any crowdfunding campaign.

Crowdinvesting vs. Crowdfunding Platforms

Raising money from the crowd to fund your venture is an excellent way to start taking your idea and bringing it to your target market. A large number of people each contributing a small amount of money can add up to a large funding round for your company. There are two possible routes you can take as you consider building your crowdfunding campaign.

Everyone is probably familiar with a traditional crowdfunding campaign. This resembles a Salvation Army donation campaign, except you intend to deliver a real product to market, and possibly even to those who provided funding. The goal is to find people who connect with the project emotionally and ask them to give a small amount of money to support it. The crowdfunding platform you use to support your fundraising efforts will charge a commission for any money you raise.

The other option is crowdinvesting. Although crowdfunding and crowdinvesting may sound like interchangeable terms, they absolutely are not the same thing. Crowdinvesting could reasonably be called “equity crowdfunding,” meaning those who contribute money to the project are expecting to see a return on their investment. In other words, they are buying equity in your company.

This brings up an important issue of risk. Hardware startups that want to raise money through crowdinvesting platforms need to provide some assurance that they can create value (i.e., sustained return on investment) for their investors. This means the company needs to be closer to having a working product they can release to market, or the company should be at the point where it is ready to scale.

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Crowdinvesting is better for companies that are ready to scale

In contrast, companies that seek contributions through crowdfunding platforms tend to carry much greater risk. Contributors must understand that there is no guarantee that there will ever be a working product for sale on the market, and contributors do not own any equity. This can be good for a hardware startup, as they still have a chance to raise significant funds without diluting their equity in the company.

The implication of the above differences is that the two types of platforms attract different contributors. This makes crowdfunding and crowdinvesting platforms ideal for hardware startups in different stages and with different levels of risk. The requirements to participate on a crowdinvesting platform tend to be more stringent than on a crowdfunding platform, as we will discuss below.

Crowdinvesting Regulations

Once you start looking at the landscape of crowdinvesting and crowdfunding platforms, you’ll realize some important differences. First and foremost is the issue of obligations. Anyone that seeks contributions on a typical crowdfunding platform is under no legal obligation to provide a return on investment, or even a working product, to anyone that contributes money. With crowdinvesting, contributors are purchasing equity, meaning they are entitled to dividends in the future, or they are entitled to a portion of proceeds from the sale of any company assets should the company be liquidated.

There is also the issue of investor classes, which limits who is allowed to invest in any company advertised on a crowdinvesting platform. In the US, the Securities and Exchange Commission (SEC) defines two classes of investors: “accredited” (a.k.a., wealthy and financially savvy) and “non-accredited” (a.k.a., not wealthy). Some crowdinvesting platforms only allow participation from accredited investors, while others allow non-accredited investors to participate.

If you are part of a US hardware startup and you want to solicit investment from non-accredited US investors, then you will need to sell equity securities under Regulation CF or claim an exemption under Regulation A. If you want to solicit investment only from accredited US investors, then you need to file a securities registration exemption under Regulation D. If you want international investors to participate, then you also need to file an exemption under Regulation S. Regulation D and S exemptions are easy to file because they carry softer regulatory requirements.

Other countries will have similar legal requirements regarding investor classification and citizenship. You’ll need to weigh the potential options carefully before deciding how you will raise funding. You should also do your homework and verify that the platform you want to use is legally authorized to run these types of funding campaigns. Although I have never heard of a scammy or illegal crowdinvesting/crowdfunding platform, you should still take the time to investigate unknown platforms before you create a crowdinvesting campaign for your hardware startup.

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Don’t forget about your regulatory environment if you’re running a crowdinvesting campaign

Speaking to Different Audiences

If you’re still at the breadboard stage and you’re looking to produce a working functional prototype, and you have no patent or other legal protections for your work, then your company is a very risky investment. This means crowdfunding is probably the best way to raise cash for your venture. People that contribute to projects on traditional crowdfunding platforms tend to do so altruistically, because they want an opportunity to buy the product later, or because they connect with the product emotionally.

People that contribute money on crowdinvesting platforms are not necessarily more or less intelligent than contributors on crowdfunding platforms. However, the legal requirements that must be met for some crowdinvesting platforms (e.g., certifying investor status or citizenship requirements), both for companies and investors, forces companies to raise themselves to higher standards. The typical social media and blogging marketing strategy for a crowdfunding campaign is not applicable to a crowdinvesting campaign, and it may even be illegal, depending on where you live and where your company is incorporated.

Equity investors in new technology are driven by the potential for return on their investment, and you will need to present a coherent strategy that will generate that return. You’ll need to do your research on the market, come up with a realistic business plan, project expenses, and develop a viable marketing strategy for your product. If you do this correctly, then you have a higher chance of convincing a savvy investor to believe in your company and your vision.

No matter which crowdinvesting or crowdfunding strategy you use to raise money for your hardware startup, you’ll need the right design software to develop your product and take your design from start to finish. The browser-based PCB design platform from Upverter® gives hardware startups the design features they need to create a fully functional product. Upverter’s online design platform includes standard features any designer expects to find in their electronics design software.

You can sign up for free and get access to the best browser-based PCB editor, schematic editor, and component database. Visit Upverter today to learn more.

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