Crowdfunding in San Jose – A closer look
Here in the City of San Jose crowdfunding has taken off. The Brookings Institute has published research to show that over the past eight years, the
Kickstarter platform alone has secured funding for 82 projects with a combined value of $16 million. Entrepreneurs are turning to crowdfunding as a relatively fast and easy way to raise investment. The Office of Economic Development recently looked into the figures for San Jose and the wider metro area.
What is crowdfunding? Crowdfunding is soliciting small amounts of capital from a large number of individuals to finance a new business venture. Crowdfunding makes use of the easy accessibility of vast networks of people through social media and crowdfunding websites to bring individual investors and entrepreneurs together. This has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives, and venture capitalists.
There are a variety of different models. The two most popular are the reward and equity model. The reward system is probably the best-known model in crowdfunding. This is the Kickstarter model: supporters can choose the amount of their support and receive special rewards in return. The more money is spent, the higher the reward.
Who is Kickstarter? Kickstarter is one of the best established crowdfunding platforms in the US with $3.9 billion. raised. Check it out on: www.kickstarter.com
Broadly defined, there are two types of Kickstarter projects. The first type seeks to initiate one-time activities, such as an art installation or video production. The second strives to secure seed capital for ongoing ventures that produce innovative software or products.
More than two-thirds fall into the one-time activities category and they enjoy a higher rate of success compared to ongoing ventures. However, they account for a much smaller share of total funding pledged on the platform.
On average across the USA, ongoing ventures raised $32,000 per project, nearly twice as much as one-time activities. A survey of 550 projects in three Kickstarter categories—technology, product design, and video games—found that more than 90 percent of the successful projects remained ongoing ventures, on average adding 2.2 employees each.
Creative industries, art, new media, and software design all feature prominently in the Kickstarter projects.
What are the advantages to crowdfunding? Crowdfunding allows the entrepreneur to highlight and pitch to individual investors worldwide. dramatically shrinking the time required to achieve the funding target. The entrepreneur is in control, framing the offer to investors and the rewards. The risks are obvious: for the entrepreneur the threat of having ideas stolen and for the investor the potential for fraud.
What crowdfunding is going on in San Jose? We are actively reviewing crowdfunding approaches, and our initial analysis shows the following:
- 82 projects within the San Jose metro area area are in the City of San Jose, representing: the highest number of approved projects – 40% of the total.
- More than $16 million have been raised in the past seven years by projects within the city.
- San Jose is raising on average more than $75,000 for each approved project. This compares favorably to cities across the USA and to crowdfunding activities in cities within our metro area, Mountain View, Sunnyvale, and Santa Clara.
In terms of an entrepreneur’s ecosystem, San Jose offers the classic combination of geography, people and finance for start-up businesses. As the local economy moves through the business cycle, access to finance is pivotal to creating or sustaining the next wave of ventures.
How much does it cost to run a successful crowdfunding campaign? We reached out to Dave Bakker, a successful crowdfunding entrepreneur. Dave, co-founder of San Jose-based Pocketlabs, has successfully raised more than $100,000 for each of his three projects. His advice can be summarized as the following: you should budget for between $15- 20,000 to run a winning campaign.
What does that budget cover? Professional quality marketing materials are key to any crowdfunding s
uccess, since investment is driven almost exclusively by the graphics, video and other online visual elements. The most important element of the campaign is the video, so don’t compromise on this. Social media is increasingly significant in getting the word out to both friends and potential customers. Allow up to six months from start to finish.
When to crowdfund? If you are creating a business that is fundamentally driven by producing software or a product, you should align your fundraising with the availability of a complete prototype. Too far out from production and you run the risk that investors won’t ever see an actual product, too close and you could fail to deliver a quality product on time. You can see the pitfalls easily in the comments investors leave on the platform. Credibility in the crowdfunding world comes from delivering a product that works, on time. Only you, the entrepreneur, will know just how close you are and how to judge the risks.
What role can the City of San Jose play in the crowdfunding ecosystem? Brookings’ report suggests that homegrown companies that launch through Kickstarter campaigns may not initially need traditional economic development funding support, but could benefit from intermediaries that can connect them to business management services, mentorship by other entrepreneurs, or access to additional financing. Overall what we see is that there is a clear and sustained appetite for crowdfunding in San Jose.
Crowdfunding and venture capital There is a critical relationship between Kickstarter projects, venture capital investment and high-growth companies. Analysis suggests that the local conditions that yield successful Kickstarter ventures also attract venture capital investment (as measured by National Venture Capital Association based on data from Thomson Reuters) and create high-growth companies (as defined by firms on the Inc. 5000 high-growth firm list).
This does not mean that vigorous Kickstarter communities attract more venture capital and seed more high-growth companies. Rather, it indicates that the sam
e conditions that yield creative activities on Kickstarter may also support those other outcomes.
The regions that received the highest per capita Kickstarter funding are San Jose, San Francisco, Provo (Utah), Salt Lake City (Utah) and Seattle: a combination of established and emerging centers of entrepreneurship.
What conclusions can we reach from this work to date?
Crowdfunding is maturing as a vehicle for securing investment in new projects. The variety of models and platforms give choice for the entrepreneur and investor alike. This is feeding the next wave of business start-ups with an emerging group of repeat investors both small and large. FOMO – “the fear of missing out” – drives the psychological impulse of the repeat investor. Trends in venture capital investment show that projects requiring bigger investment values are leaving more space for crowdfunding to back-fill for the small entrepreneur.
From the city’s perspective, capitalizing on crowdfunding has value and long term impact in building and sustaining the importance of its entrepreneurial ecosystem. This is the start of a new wave of thinking and responding to the needs of entrepreneurs in San Jose. We would welcome questions and input on the subject, by email or phone: Victor.Farlie@sanjoseca.gov, 408/535-8230.