In less than three weeks, rock legend and Pono CEO Neil Young has collected nearly $6.2 million without having to go hat in hand to traditional venture capitalists. With only a listing on the growing Crowdfunder site and investment reform on Capitol Hill, the musician has managed to create the most rapidly funded equity campaign online to date.
So what does Pono’s success mean for artists and entrepreneurs interested in non-traditional funding online?
In September 2013, Title II of the JOBS Act erased a longtime ban on mass marketing private securities, allowing for equity fundraising on the Internet. Private startups can fundraise publicly and employ Facebook or Twitter to publicize investments. While sites like Kickstarter and Indiegogo offer rewards for donations, a new breed of crowdfunding sites, like Crowdfunder and CircleUp, offer accredited investors a return on their money.
Also read: YouTube Embraces Crowdfunding
But why crowdsource equity investments? Because what’s almost as important as the money is the ability to grow a fan base.
“Allowing a community to tell you what they want is a powerful thing,” Crowdfunder CEO Chance Barnett told TheWrap. “Crowdfunder is its own campaign effort and if you can build that community support, it’s great for the project.”
When Young grew frustrated with the sound of poor quality MP3 music files, he helped launch the digital music system Pono, which offers ultra-high resolution music files with 30 times more data than MP3 files. It also offers 128 gigabytes of memory and can store up to 2,000 high-resolution tracks.
Young assisted in raising more than $6 million online for the music player on Kickstarter in April. The campaign offered donors a $99 discount on the $399 unit. Pono’s Kickstarter was the third-highest grossing venture in the site’s history with more than 18,000 backers.
Pono was then able to move over to Crowdfunder to raise additional funds with accredited investors who could purchase shares in the company for as little as $5,000. Young’s Crowdfunder campaign still has 9 days left and has already blasted past its $4 million funding goal with more than 360 investors committing, on average, more than $12,000. Pono has a pre-money valuation of $50 million.
Between Kickstarter and Crowdfunder, Pono created a lot of fans who now have a vested interest in seeing Pono succeed. Not only did Pono create a buzz about its brand, but it raised awareness among potential investors as to the availability of equity crowdfunding.
“Prior to this campaign, a large portion of the 9 million accredited investors in the U.S. were not aware that equity crowdfunding was in full swing today on Crowdfunder, as they believed the JOBS Act was still on hold,” said Barnett.
“With Pono following the growing trend of first validating their business with pre-sales crowdfunding via Kickstarter, then using that validation for raising equity crowdfunding on Crowdfunder from investors, more of the public has become aware of the opportunity not just to donate and support companies online, but to actually become a shareholder,” he said.
So far, Crowdfunder has helped 28 projects raise an average of $1.6 million. CircleUp has seen comparable numbers, having raised $21 million across 21 companies as of November 2013 (TheWrap reached out to CircleUp, updated numbers were not available at the time of this writing).
“We are an open platform,” Barnett said. “You’re able to circle interested people and launch a campaign. We’re looking to de-risk and publicize investment.”
But before throwing a project up online, Barnett cautions entrepreneurs to do their homework and consider offering up a products that come with talent attached. To generate the initial buzz for Pono, Young joined Bruce Springsteen, Eddie Vedder, Tom Petty and Sting in a video to launch the campaign on Kickstarter.
“Generally, projects that are more successful are packaged,” Barnett observed. “Like with Pono, obviously you have Neil’s celebrity. And you also have name backers. Those are some of the most important drivers — who else is investing and social relationships.”
But if an entrepreneur can create buzz for a project, taking it directly to the people is becoming an increasingly viable option.
“In the past, Neil’s only choice would have been to negotiate with VCs for months on end,” Barnett said. “Instead, Pono was able to both get funded by a large number of music lovers, while also use the powerful social proof of equity crowdfunding to attract experienced investors and fund managers in their round as well.”