2011 was the year that crowdfunding matured, went pro and on the cusp of mainstream. In prior years, crowdfunding sites were viewed as the only way starving artists and entrepreneurial mistfits could ‘pass the hat’ and get funded – mainly by other altruistic and curious misfits. Crowdfunding sites were derided by traditionalists
merely as being a “charity” mechanism and never a serious means of fundraising for “real” projects and “real” companies.
Just like the folks who criticized blogging, online publishing and social media as merely a playground for kids and amateurs – deriding digital media for not having an obvious ROI model (like newspapers) – crowdfundmetapreneurship.net predictable arguments. What these critics really never understood is that, today, people invest in new projects and new ventures for a variety of reasons that may only loosely be related to a direct cash reward. And just like any other industry on the verge of disruption: While the critics carped, the visionaries built.
Crowdfunding for individual projects of all kinds (technical to creative to social) is one of the most viable and convenient methods of raising money from like minded individuals and kindred spirits. At the end of 2011, the demand for equity Crowdfunding, that is – having hundreds and thousand of people invest small amounts (that add up to large amounts) in promising companies in return for stock – has gained a fever pitch in the US, culminating with the introduction of several bills in the US House and Senate. Up until now, antiquated SEC regulations dating back to 1934 prohibits the concept of equity crowdfunding. In December the US House passed a Crowdfunding bill that is currently under consideration in the US Senate.
In some form or another, it appears that equity crowdfunding, along with its first cousins donation crowdfunding and microlending will soon become a permanent part of the entrepreneurial funding toolkit. Before it catches the traditional investor and entrepreneurial communities by surprise, let’s take a look at the crowdfunding landscape and the major issues.
2. The Pioneers
Historically, “micro-lending” as a form of crowdfunding, was used to help entrepreneurs in underdeveloped economies, Kiva being the pioneer and still the most prominent. As other forms of crowdfunding become mainstream for starting companies in the US, don’t rule out microlending, and its evolved descendant ‘peer to peer’ lending, as credible and viable means of funding entrepreneurial startups.
Today, when most use the term crowdfunding, they are referring to ‘donation’ crowdfunding aka ‘rewards based investing’: What is becoming known as “the Kickstarter model”. Kickstarter has refined and perfected the method of allowing people with interesting ideas for projects to present to ‘the crowd’ asking for funding. The essential steps are:
A. Project details, often along with ongoing progress blogs, are posted. Project owner/creators specify the minimum amount of money the project requires to be successful.
B. The project creators offer potential funders interesting rewards and perks for donating at certain levels, for instance a t-shirt, or producer’s credit on a film, or an invite to the product launch.
C. The funding cycle has a time limit – e.g. 60 days – during which time people ‘pledge’ small amounts of funding. Potential donors commit money to the project during the pledge period.
D. If the pledges exceed the minimum by the deadline, the money is transferred to the project creators, minus a small administrative fee which goes to the site. If the project fails to attract enough pledges by the deadline, the pledge money gets released, No money changes hands, and the project is not funded.
While the odds of a brand new startup project getting a loan, angel or venture capital are still very very slim (most never attract outside investment), crowdfunding sites have a much better track record – even without offering equity:
300 000 people donated an average of $100 through Kickstarter to film and video projects in 2011. Very impressive. Who said Crowdfunding does not work? Over 32 million dollars was donated in 2011 to filmmakers http://www.tribecafilm.com/tribecaonline/future-of-film/What-Does-Kickstarters-100-Million-Haul-Tell-Us.html
By late 2011, the movement pushing congress to revise SEC regulations to allow for equity crowdfunding culminates in several bills in the US House and Senate. The goal: Allow startup companies to raise money using “the wisdom of the crowds” by accepting small investments from thousands of ‘grassroots’ investors.
The author of the first crowdfunding bill, Congressman Patrick McHenry, summarizes the bill in a NY Times Op-Ed:
The number one ‘concern’ of the opponents of equity crowdfunding is the potential for scam artists to take money from unsuspecting and unprotected investors. (note that the same people lobbying against the crowdfunding bill, under the guise of protecting ‘the little guy’ are the same ones that seem to have caused the recent wall street financial crisis – depleting the pensions and net worth of the same widows and orphans that now claim they want to protect).
While there is not enough space on this page to list the known cases of fraud from the traditional financial community, here’s a list of all the known cases of fraud and other scams via crowdfunding sites:
Meanwhile a few crowdfunding sites in the US thought they might offer equity crowdfunding, hoping that the demand would demonstrate the viability of the model. Unfortunately, the company Profounder (established by former Stanford business students) – was quickly shut down by the state of California.