U.S. President Barack Obama’s legacy will be debated for generations to come. However, what won’t be up for debate is how Obama empowered a generation at the grassroots level and disrupted the political establishment by launching the world’s first-ever successful crowdfunding campaign.

The numbers are mindboggling. During the 2008 presidential campaign, the Obama team raised $750 million US, $600 million of which was generated from more than 3 million donors, for an average donation of approximately $86. In the 2012 election race against Mitt Romney, the Obama campaign raised $631 million in individual donations, $214 million of which came from small donors.

“There’s no doubt President Obama launched crowdfunding,” says Teri Kirk, CEO of Funding Portal, a Canadian company that offers a comprehensive service to businesses to find and secure funding from many sources, both public and private. “The earliest examples of crowdfunding were donor strategies.”

The idea behind this relatively new phenomenon is simple – use digital and social media to engage as many potentially interested stakeholders in a cause as possible, and ask them to support it through direct financial contributions or investment.

Fast forward to 2016 and crowdfunding has now evolved beyond political, donor-style campaigns and is disrupting traditional notions of fundraising both in the profit and not-for-profit sectors. To date, the global growth trajectory has proved stunning.

According to a 2015 report by Massolution, an advisory and implementation firm that specializes in crowdsourcing solutions for private, public and social enterprises, the global crowdfunding industry expanded by 167 per cent in 2014, reaching a total of $16.2 billion US, up from $6.1 billion in 2013. Last year, the industry more than doubled once again, reaching $34.4 billion globally.

The report attributes the spike in the 2014 figures to a 320 per cent upsurge in crowdfunding projects in Asia. North America took the lead position in the world in terms of crowdfunding volumes, growing by 145 per cent and raising a total of $9.46 billion US in 2014. Business and entrepreneurship was the most popular crowdfunding category, collecting $6.7 billion in 2014, the report states.

According to a report by the Crowdfunding Centre, a web portal that provides information on the industry, Canadian crowdfunding generated $40.6 million in 2015 from 8,677 projects.

Canadian success stories

Crowdfunding campaigns are typically divided into two different categories – equity and non-equity. In Canada, equity crowdfunding – which offer shares of the company to investors (i.e. “the crowd”) – is relatively new and is managed by each province’s securities regulator. As a result, there is no national model.

“You can raise $1.5 million by selling shares to the crowd in Ontario, but in B.C., it’s only $500,000,” says Kirk. “We have the typical Canadian patchwork quilt of regulation, province by province.”

Currently, Ontario, Saskatchewan, Alberta, Manitoba, British Columbia, Quebec, Nova Scotia and New Brunswick have instituted new regulations around equity crowdfunding, an industry that accounted for $280 million of investment in 2015. That’s double what it was the previous year, and that surging trend is expected to continue in the future as provinces finalize regulations.

On the flip side, non-equity crowdfunding, which accounts for 83 per cent of all campaigns in Canada, is based on rewards or sales of products, as well as other campaign outcomes focusing on projects ranging from philanthropic efforts to artistic endeavours like books and movies.

An increasing number of entrepreneurs and start-up companies generating funds through crowdfunding are turning to industry-standard platforms like Kickstarter and Indiegogo to tap investor pools.

Kickstarter, with a mission to help bring creative projects to life, has 110,000 successfully funded projects since launching in 2009. The list of successes includes a number of Canadian campaigns like those of Canadian entrepreneur and inventor of the Pebble Watch, Eric Migicovsky, who owns the bragging rights to three of the top five campaigns in Kickstarter history in terms of revenue.

Initially, Migicovsky opted to follow the traditional route of raising capital. In 2012, after being turned away by angel investors and venture capitalists, he tried his luck with the crowdfunding platform. At the time, he smashed crowdfunding records and raised more than $10 million US from 69,000 backers from all over the globe. Migicovsky returned to crowdfunding in 2015 to raise funds for his company’s latest model of the watch, the Pebble Time, and raised more than $1 million in just one hour. Overall, the campaign set a new crowdfunding record by raising $20.4 million in total.

Migicovsky’s story is not unique.

Neil D’Souza admits that if he followed the traditional route to exporting, his company – Mass Fidelity – wouldn’t be as successful as it is today.

Instead, the company decided to seek backers from all over the world through a crowdfunding campaign on Indiegogo, another popular web-based platform for entrepreneurs.

“It was a game changer for us,” says D’Souza, whose Toronto-based company manufactures a high-end audio sound system called the Core. “Not only did it surpass all of our (financial) expectations, but we literally became global, overnight.”

Using Indiegogo the company surpassed its goal the first day, raising $48,000 US. Ultimately, the firm garnered $1.5 million from more than 4,800 backers, and generated another $1 million in presales before the company started delivering Core to customers in 102 countries late last year.

Read about Mass Fidelity’s export success journey here.

When exporting precedes manufacturing

“Many of these companies are essentially exporting in advance of manufacturing,” says Christopher Charlesworth, CEO of Hivewire, a Toronto-based crowdfunding platform developer and campaign manager. “[Crowdfunding] is a game changer because it takes the risk that is inherent in a new project and chops it up into a bunch of little pieces that are bite size for the crowd. And that’s particularly significant for Canada because in the last number of years there has been a real slow down in the amount of risk capital available.”

Hivewire has created a database consisting of more than 600,000 crowdfunding campaigns from all over the globe in an effort to mine the data to better understand the industry from an empirical perspective.

“It’s a different way of looking at it, so we can actually see what is happening – to understand crowdfunding from the ground up,” Charlesworth says. “It provides a well-rounded view from the backers’ side, the tech side as well as the campaigners’ side.”

Hivewire’s research has identified a number of key trends. Among the major findings is that unlike retail, backers don’t decide to buy or support a project purely from a transactional perspective.

“A big part in the decision to support a crowdfunding campaign is connecting with individuals behind the product or service,” explains Charlesworth. “Backers are keen to know all about the entrepreneurs themselves – who they are; what are they about; how did they come to create this product or service and how do they want to make a difference in the world.”

Another interesting observation is that regardless of the platform, more than 90 per cent of the backers come from the campaigners’ own outreach efforts. Campaigners have to engage and do the heavy lifting of building their own networks in advance of the campaign, so that when they are able to go live, they have people to tell about it.

Another plus for companies – compared to traditional avenues of bringing a new product to market – is that crowdfunding immediately brings customers closer to the brand.

“That’s critical,” Charlesworth adds. “Crowdfunding is the opportunity for marketing the opportunity and to gain a presence in the marketplace. Then people know about their product or service without spending a dollar on direct marketing. Simply through word of mouth, the attention they gain from shares on social media enables companies to get that much more exposure, which is invaluable.”

Bridging the gender gap

Crowdfunding is also bridging a gender gap in the world of financing.

“Our research shows that 35 per cent of all successful campaigns are led by women,” says Charlesworth. “That’s significant because we know that from other data sources women tend to have a more difficult time getting access to financing. Crowdfunding is filling a real market gap in terms of accessibility of capital.”

However, not all crowdfunding campaigns are successful. In 2015, the success rate for Canadian campaigns was just 20 per cent.

So what’s the recipe for a winning crowdfunding campaign?

Planning. Preparation. Promotion.

“You can’t take crowdfunding lightly; it’s a huge undertaking,” says Blumer. “You have to be confident that you are ready for it and that you have the details looked after.”

Christopher Charlesworth agrees. His company has developed a methodical process for a successful crowdfunding campaign that starts well in advance of the campaign itself.

“There are many variables to take into consideration,” he says. “But the major point is that you want, at a bare minimum, to spend as much time preparing for a campaign as the length of the campaign itself.”

Key items on a crowdfunding “must-do” list include understanding the target audience and figuring out how to engage potential supporters through a solid value proposition. Once that’s been completed, it’s about telling the story behind the product or service, usually through a video that is, “clear, memorable and compelling, in addition to making the ask for contributions.”

Hivewire’s data shows that campaigns with videos are significantly more successful than those without.

“Crowdfunding works really well when people authentically represent what they are doing, and have a clear sense of the value they are creating,” he explains.

From his experience, Blumer says Revols looked to best practices on Kickstarter before proceeding.

“Don’t try and reinvent the wheel with your campaign,” he says. “Look at what the successful ones have done and replicate them.”

How does the CRA look at crowdfunding?

With crowdfunding a relatively new phenomenon, the Canada Revenue Agency’s (CRA) treatment of monies generated through this channel remains a grey area. In an April 2015 technical memo, the agency identified specific categories by which revenue could fall under. As a result, CRA treats each crowdfunding campaign on a case-by-case basis.

“Depending on the facts and circumstances, monies received by a taxpayer under a crowdfunding arrangement could represent a loan, capital contribution, gift, income, or a combination thereof,” the memo states. “However, since the terms and conditions of these types of arrangements may vary greatly from one situation to another, the CRA’s approach is to evaluate each situation on a case-by-case basis before making a determination on the income tax consequences of a particular crowdfunding arrangement.”

Then there’s the issue of charging HST/GST if CRA deems money raised as revenue.

“It’s complicated,” says Teri Kirk. “But companies need to be aware of this and take necessary steps.”

The bottom line: crowdfunding has opened new and varied doors of opportunity for Canadian companies, and is disrupting traditional financing models. As Kirk points out, the industry will likely change very rapidly in a short period of time.

“Anything that opens up new capital to Canadian businesses is great news,” she says. “It’s a very important tool and a best practice that any manufacturer or exporter should be looking at. However, selling ownership in your company ‘to the crowd’ is a complex way to sell relatively small amounts of capital. There are pros and cons, risks and rewards.”

“It’s really important to understand that this is designed for early-stage companies to raise a niche amount of money and should be seen as part of a broader financing strategy.”