Crowdfunding is a term mashing together the concept of crowdsourcing and funding. This funding model has been in place on sites like Kickstarter and IndieGoGo for artists and others to post a project they’d like to build, perform, or produce. Then the crowd (you and me) find the project and are inspired to contribute our finances (in part) to get the project started. To date, the crowd has donated money to projects with no expected return, but the satisfaction of knowing they’ve helped an artist build their vision. The SEC has not allowed this type of funding to take place for an equity stake in new business opportunities, YET.
Wall Street Journal
Social networking is pretty good for keeping abreast of far-flung friends. Could it work for entrepreneurs looking for investors?
Critics say the idea is dangerous for investors, and even dicey for the entrepreneurs. Yet, it is gaining traction with small-business owners from the Bay Area to New York, who say they eagerly await an opportunity to sell stakes in their businesses through social networking—a process known as crowd funding
The House Financial Services committee last week backed legislation that would make it possible for small businesses to use crowd funding to raise money from investors in exchange for equity stakes. Read the Rest of the Article at the Wall Street Journal
Some are worried by the frontier of crowdfunding and the expansive new territories it offers … However we’re inclined to believe they are likely the wall street bankers concerned about losing control of their industry the way Napster affected the music industry. The way things have been going with the government, they certainly are NOT concerned that the common man would be taken advantage of … since they are primarily the group taking advantage of the common man. It appears any concern over the capabilities of this new medium would be from the parties (i.e. venture capital, hedge funds, private equity firms, investment bankers) that currently control the world of business financing. Their concern is that they’ll lose their footing upon the slippery slope.
Others see this as an amazing catalyst for business opportunities and new business models. Crowd funding not only holds promise for the entrepreneur, it also provides an investment opportunity for unaccredited individuals to place high-risk, high-reward investments that until this is passed, they’ve simply been precluded from taking part in. (Currently the SEC does not allow investors (i.e. the 99%) that do not have over $1 million in personal assetts, not including their home, or annual income of over $200,000 or $300,000 if married to invest in certain start-up businesses.) This rule has been outdated for some time. It is sold as a method to protect people from the snake oil salesmen and cheats. While that has been a noble goal, the laws are outdated and it’s certainly time to revisit these regulations.
Launching new ventures is an extremely difficult undertaking and history has shown us that 80% of start-ups fail. New business opportunities are risky no doubt, but with adequate funding we could experience a dramatic shift in the survival rate. The primary reason businesses fail is that they are under capitalized. Crowd funding could enable the entrepreneurs to spend more time building their businesses and less time raising funding.
We’re happy to see that the SEC is considering making adjustments that would enable the entrepreneurs in the United States to utilize crowdfunding for their new business opportunities.
- When you consider that 70% of the GDP is consumer spending, you realize that the quickest way to get out of a recession is to stimulate consumer spending.
- Next when you consider the most effective way to stimulate consumer spending and you’ll find that employment is the most influential aspect of consumer sentiment.
- Now consider that 84% of all people employed in the United States, are employed through small business (as reported by ADP employment report October 2011). You can see that government MUST create an environment conducive to new ventures. We simply have to foster business opportunities in order to make the most impact on employment.
Crowdfunding holds amazing potential for entrepreneurs as well as the potential to be a catalyst for solving the unemployment problem facing America and thereby improving consumer sentiment and spending which will ultimately translate to making a significant impact on the GDP. We’re obviously excited about the opportunity crowdfunding provides, we’d love to get your thoughts and comments below.