Why is funding all-or-nothing?
This provision means the entrepreneur or business must determine a target amount for their crowdfund investing campaign and work diligently to accomplish that goal. If they reach 100% of the target amount, they will receive the money. If they do not succeed, they receive nothing despite the pledges toward their campaign.
Why is this provisions?
1. Business owners must be clear about how much money they require. The capital needed (e.g. $500K) should always be associated with clear objectives
(e.g. $100K - increasing team, 200K - materials acquisition, 200K - marketing campaigns, etc.). Failure to raise the capital needed affects the entrepreneur’s
capacity of completing objectives and indirectly influences the success probability, which is risky for investors.
2. To keep it lean. The all-or-nothing provision encourages lean startup methodology where the entrepreneur doesn’t want to think too big
(e.g. asking for the maximum of $1 million to open several new locations) and risks getting nothing. Instead, the entrepreneur is encouraged to think more realistically (e.g. ask $500K for a single new location), so the chances of fundraising and operational success are greater and less risky.
3. To discourage fraud. Without the all-or-nothing provision, it could be easier for a fraudster to go online, set up a bogus business pitch and pocket whatever money they could drive into the crowdfund account before being exposed. The all-or-nothing provision essentially grants the crowd time to identify the frauds.