In this post, I would like to summarize the information I posted previously about crowdfunding and discuss the kind of company or individual that would benefit the most from this type of financing. In the donor-based model of crowdfunding, it would be a person or a team with a creative novel idea, something that would make people donate their money to support the idea. It is unlikely that a commercial product or service would get substantial financial backing from donors. After all, donors are not getting any interest in the company. Therefore, it is likely that the most popular projects will be those in the creative field (arts, film, books, etc.).
A start-up looking for seed funding can (and would be well advised to) reach out to their friends and family through an investment-based crowdfunding platform. The advantages include low cost of structuring the investment, the convenience of an internet-based platform to conduct the offering and the ability to raise sizable amounts of money. The disadvantages include (1) limited universe of potential investors (limited only to people with whom founders have pre-existing relationship); (2) legal risks (if founders do not hire attorneys to guide them through the blue sky and federal filings); and (3) limit on the type of investment possible (if the platform offers only one kind of investment structure).
Is crowdfunding a viable option of financing for an already existing business with a multi-million dollar revenue that needs capital for expansion? Platforms like Kickstarter or RockerHub will not be good sources of revenue, as the donors will lack the incentive to donate money to an existing and profitable business. A site like Profounder may not be a good option either, as such platforms tend to be focused on seed capital raises: for example, Profounder specializes in friends and family rounds of investing with an average amount of money raised per company of about $35,000 to $60,000. An established company with multi-million dollar revenue will probably need to raise more money than that, and from accredited or institutional investors. Also, a big company may need to consider the number of investors it wants to attract, if it does not want to trip the 500 shareholder rule. So, a crowdfunding model of investment, where many people contribute or invest small (or relatively small) amounts of cash, may not be the best option for it.
Full series: Part I, Part II, Part III and Part IV.
Wednesday, May 25, 2011
Tuesday, May 24, 2011
Has “App Store” Become a Generic Name?
On March 22nd, Amazon.com launched Appstore for Android, where it offers for sale and download games and other applications available for Android smart phones. Apple Inc., the maker of iPhones, iPod media players and iPad tablet computers, sued Amazon.com Inc. over the use of the term “Appstore” claiming the exclusive right to the term. It is true, the term “App Store” has been in process of registration with the USPTO since 2008; Apple filed the original trademark application in 2008 in three separate classes: class 35 (retail online store), class 38 (transmission of data via Internet, etc.) and class 42 (a whole host of services relating to computer software). However, Amazon.com claims it is not required to obtain a license from Apple to use the term because the term “App Store” has become generic and Apple is not entitled to its exclusive use.
The general rule in trademark law is that a word cannot be trademarked if it serves as a generic term for the products or services offered by that company. A trademark must be unique. If it loses its distinctiveness, it can no longer be identified with the source of the goods or services being provided, which defeats the whole purpose of having a trademark. Over the years of popular use, many labels have become generic. Examples include words like aspirin, cellophane, cola, dry ice, lite beer, matchbox toys, monopoly game, superglue, thermos, and yo-yo. Is “App Sore” about to join the pack? Is the name also merely descriptive? For example, an “app store” can mean a store that is offering applications for smart phones. Do the first three letters “App” stand for the first letters of the word Apple, pointing to the company that invented the concept? Does the term “App Store” refer to a store that offers software applications or to a store that only offers app[le] applications (ie, apps for iPhone, iPod and iPad)?
Review of “App Store”” trademark application file, available at www.uspto.gov, shows that the examining attorney originally refused the application because each word was descriptive and because the mark App Store merely “combined descriptive terms without creating a new non-descriptive meaning”. Apple overcame this refusal by showing acquired distinctiveness. Currently, however, the mark is in publication, and is being opposed by Microsoft.
I look forward to following the progression of the lawsuit and the registration process of “App Store” mark with the US PTO. Stay tuned to find out.
The case is Apple Inc. v. Amazon.com Inc., 11-1327, U.S. District Court, Northern District of California (Oakland).
The general rule in trademark law is that a word cannot be trademarked if it serves as a generic term for the products or services offered by that company. A trademark must be unique. If it loses its distinctiveness, it can no longer be identified with the source of the goods or services being provided, which defeats the whole purpose of having a trademark. Over the years of popular use, many labels have become generic. Examples include words like aspirin, cellophane, cola, dry ice, lite beer, matchbox toys, monopoly game, superglue, thermos, and yo-yo. Is “App Sore” about to join the pack? Is the name also merely descriptive? For example, an “app store” can mean a store that is offering applications for smart phones. Do the first three letters “App” stand for the first letters of the word Apple, pointing to the company that invented the concept? Does the term “App Store” refer to a store that offers software applications or to a store that only offers app[le] applications (ie, apps for iPhone, iPod and iPad)?
Review of “App Store”” trademark application file, available at www.uspto.gov, shows that the examining attorney originally refused the application because each word was descriptive and because the mark App Store merely “combined descriptive terms without creating a new non-descriptive meaning”. Apple overcame this refusal by showing acquired distinctiveness. Currently, however, the mark is in publication, and is being opposed by Microsoft.
I look forward to following the progression of the lawsuit and the registration process of “App Store” mark with the US PTO. Stay tuned to find out.
The case is Apple Inc. v. Amazon.com Inc., 11-1327, U.S. District Court, Northern District of California (Oakland).
Thursday, May 19, 2011
Creating Alternative Financing – Part III: Advantages and Disadvantages of Crowdfunding
Crowdfunding is just one of many ways of financing a business venture or a project. Like all other methods, crowdfunding has its advantages and disadvantages. Below I discuss some pros and cons of raising money through a donation-based crowdfunding platform.
Pros
In my opinion, the main and unique advantage of crowdfunding is that people who are raising capital through crowdfunding (I will refer to them as entrepreneurs) can also use it as a marketing tool. Publishing information about a product or a project with a goal of raising capital on a well-read crowdfunding platform also raises product or brand awareness. Crowdfunding is not just limited to one single website. Supporters of the project disseminate the information using their social networks and encourage people in their networks to do the same.
Also, in addition to the money, entrepreneurs often get feedback. What can be better than “beta testing” your product and simultaneously raising capital for it? If the project does not reach the funding goal, this may be a signal to the entrepreneur that the market is not responding favorably to the offering and perhaps a change is in order. Of course, it is possible that the crowdfunding crowd is not the intended market for the product, hence the limited response. So, entrepreneurs should listen carefully to the market signals they receive through crowdfunding feedback and respond appropriately.
Another advantage of crowdfunding is that entrepreneurs can raise capital without giving away any equity. It is just like receiving a gift or a donation that you get to spend on your favorite project.
Finally, raising money through a donation-based crowdfunding platform is relatively inexpensive (especially given the fact that entrepreneurs do not need to give up equity). There is usually no need to engage lawyers or other advisors to assist in the process. Most sites charge a fee equal to about 5% fee of the money raised and another 3-5% in processing fees. Entrepreneurs also need to pay taxes on the raised capital (that would be income to the entrepreneur) and send out gifts or rewards that entrepreneurs are expected to give to their donors.
Cons
The main disadvantage of raising capital through crowdfunding is that entrepreneurs may be limited in the amount of money they can raise. An average raise amount is between $2,000 to $10,000. This may be enough money for a small project but not for a sizable venture. The reason is simple: people are reluctant to give money if they do not get any return on their investment. This is reasonable, and should be factored into the initial calculation.
Another disadvantage of using crowdfunding as a means of raising capital is the fact that your business idea would be exposed to the whole wide social network and there is no guarantee that someone will not decide to implement it. You cannot sign a confidentiality agreement with the internet.
There are risks for the donors as well. The crowdfunding sites may conduct a preliminary check to ensure the business is legitimate, but it is unlikely that they will be held responsible if it turns out otherwise. Also, the sites usually do not enforce allocation of the funds or that supporters receive their promised gifts. What happens to the project that is only partially funded? Some crowdfunding platforms would still release the money to the entrepreneurs. However, there may not be enough funds to launch the project originally contemplated, which begs a question of how and for what purpose this money would be used then. In my opinion, lack of accountability may present a serious problem as the number of participants on crowdfunding sites increases proportionately to the likelihood of occurrence of fraud. This may serve as a potential deterrent for donors as well as expose the crowdfunding platforms to liability.
In the next post, I will talk about the ideal candidates for using crowdfunding to finance their businesses or ideas.
Full series: Part I, Part II, Part III and Part IV.
Pros
In my opinion, the main and unique advantage of crowdfunding is that people who are raising capital through crowdfunding (I will refer to them as entrepreneurs) can also use it as a marketing tool. Publishing information about a product or a project with a goal of raising capital on a well-read crowdfunding platform also raises product or brand awareness. Crowdfunding is not just limited to one single website. Supporters of the project disseminate the information using their social networks and encourage people in their networks to do the same.
Also, in addition to the money, entrepreneurs often get feedback. What can be better than “beta testing” your product and simultaneously raising capital for it? If the project does not reach the funding goal, this may be a signal to the entrepreneur that the market is not responding favorably to the offering and perhaps a change is in order. Of course, it is possible that the crowdfunding crowd is not the intended market for the product, hence the limited response. So, entrepreneurs should listen carefully to the market signals they receive through crowdfunding feedback and respond appropriately.
Another advantage of crowdfunding is that entrepreneurs can raise capital without giving away any equity. It is just like receiving a gift or a donation that you get to spend on your favorite project.
Finally, raising money through a donation-based crowdfunding platform is relatively inexpensive (especially given the fact that entrepreneurs do not need to give up equity). There is usually no need to engage lawyers or other advisors to assist in the process. Most sites charge a fee equal to about 5% fee of the money raised and another 3-5% in processing fees. Entrepreneurs also need to pay taxes on the raised capital (that would be income to the entrepreneur) and send out gifts or rewards that entrepreneurs are expected to give to their donors.
Cons
The main disadvantage of raising capital through crowdfunding is that entrepreneurs may be limited in the amount of money they can raise. An average raise amount is between $2,000 to $10,000. This may be enough money for a small project but not for a sizable venture. The reason is simple: people are reluctant to give money if they do not get any return on their investment. This is reasonable, and should be factored into the initial calculation.
Another disadvantage of using crowdfunding as a means of raising capital is the fact that your business idea would be exposed to the whole wide social network and there is no guarantee that someone will not decide to implement it. You cannot sign a confidentiality agreement with the internet.
There are risks for the donors as well. The crowdfunding sites may conduct a preliminary check to ensure the business is legitimate, but it is unlikely that they will be held responsible if it turns out otherwise. Also, the sites usually do not enforce allocation of the funds or that supporters receive their promised gifts. What happens to the project that is only partially funded? Some crowdfunding platforms would still release the money to the entrepreneurs. However, there may not be enough funds to launch the project originally contemplated, which begs a question of how and for what purpose this money would be used then. In my opinion, lack of accountability may present a serious problem as the number of participants on crowdfunding sites increases proportionately to the likelihood of occurrence of fraud. This may serve as a potential deterrent for donors as well as expose the crowdfunding platforms to liability.
In the next post, I will talk about the ideal candidates for using crowdfunding to finance their businesses or ideas.
Full series: Part I, Part II, Part III and Part IV.
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