Equity Crowdfunding: The New Brand Marketing

There are really big changes happening for brand marketing. And the transformation isn’t because of some new great technology or some exciting change in human behavior. The big evolution is coming as a result of a big change to securities law.

Companies have always won or lost market share based on the strength of their product or service. In order to raise money, those same companies went to Wall Street or their local bank. The two worlds – raising capital and marketing – have never converged.

The major reason is that Depression era laws created the Securities and Exchange Commission (the SEC) and a series of impediments to raising funding. The laws were designed to prevent fraudsters from taking advantage of people. The result is that funding for private companies (those that aren’t traded on the New York Stock Exchange or NASDAQ) has been shrouded in a veil of secrecy for more than 80 years. If a company wants to raise money, they can’t advertise; they are limited to talking to investors with who they have a preexisting business relationship.

In 2012, Congress passed the JOBS Act, which fundamentally changed the way that private companies raise money. The biggest change is the legalization of equity crowdfunding.

Crowdfunding is simply the act of gathering money for a particular purpose. This is the way that nonprofits like the United Way raise dollars. In the last few years, a handful of websites including Kickstarter and Indiegogo have made a lot of news. Artists and aspiring product developers have all raised money for their projects using crowdfunding. By “testing the waters” about who would be interested, they have been able to develop their products using money from the crowd. In exchange, the contributors receive either acknowledgement for their donation or some reward for their participation.

Sometimes companies are just looking to validate a product by “pre-selling” it online. vc13_logo1For example, Villy Custom Bicycles appeared on ABC’s Shark Tank and was funded by entrepreneur and Dallas Mavericks owner Mark Cuban. The company chose to use RockThePost to test if their new glow-in-the-dark bike would sell. The campaign generated $10,000 from contributors who essentially were pre-purchasing a bicycle. This gave the company the confidence to move forward with the project. As you can imagine, the startup cost to produce this bicycle is substantial. But because of Cuban’s involvement, money wasn’t the big issue. The real question was whether or not they would be successful once the production was up and running. The crowdfunding campaign gave Villy management the validation they needed to move ahead with the project.

The Villy campaign also had another benefit: it spread awareness of their bicycle to millions of people through the wave of publicity created by the social networking component of crowdfunding. This showcase has provided Villy with something even more valuable than product validation – it has created brand awareness. In many senses, the income received in cash form is nothing compared to the brand equity generated as a result of this type of campaign.

Right now, despite the passage of the JOBS Act, companies can’t quite yet raise money online in exchange for shares of stock. Instead, companies are limited to giving away awards like a small part in a movie, an acknowledgment on twitter or one of the new products once it rolls off the assembly line. The reason is that the SEC is still in the process of finalizing the rules that will implement the JOBS Act.

So in short order, there will be legalized equity (and debt) crowdfunding which is going to fundamentally alter the landscape of brand marketing. Why? Because now instead of being limited to engaging with customers who enjoy a product or service, brands will be able to connect with owners – people who are financially invested in the company’s success.

We know a few things about owners. First, they will frequent a business more often if they own it. Second, they will spend more money when they know they’re supporting “their company”. And third, and most importantly, the new owner becomes an evangelical for the brand – spreading the word to friends in family during both conversations and on their social media feeds.

Savvy brand managers understand the new opportunity here. Instead of customers that are connected through emotional ties stoked by paid advertising featuring clever jingles and the use of adorable puppies (or babies – don’t forget babies), you now have customers that are attached to the brand through a dividend check. In addition, there is a certain amount of status that goes along with being the owner of a local business.

If you have ever had the opportunity to go to a restaurant where a friend is a small minority owner, you know this phenomenon precisely. There is a sheer thrill for the owner to introduce a new guest to “his” or “her” restaurant. There is a pride in ownership. That pride can’t be replicated by simply an enthusiastic customer.

Soon there will be an extensive group of brand evangelicals for each company that takes advantage of crowdfunding. Instead of thinking about crowdfunding as a form of capital, marketing professionals should consider this an important weapon in their quiver. Those that don’t recognize this opportunity may be looking back as a way to expand brand equity.

During the past two decades, the web has emerged as a basic marketing platform while social media has shattered traditional branding strategies. During the next two decades, crowdfunding will create a way for individuals to be deeply connected to brands. The result will be incredible sales growth for the companies that are smart enough to embrace this change.

Of course there will be a number of owners of smaller businesses that are not going to want to “give up” ownership in their company. There will be others that will be uncomfortable sharing financial results with everyone. And some company owners won’t want to deal with people who feel entitled to special treatment just because they’re owners.

So crowdfunding isn’t for everyone. But equity crowdfunded companies will be for the winners in the race for revenue growth. In exchange for a little ownership, they will get an army of owners who will enthusiastically market their main street business.

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Jonathan FrutkinJonathan Frutkin is CEO of Cricca Funding, LLC. He’s the author of “Equity Crowdfunding: Transforming Customers into Loyal Owners” which is available in paperback, Kindle and audio book formats.

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