The promise of crowdfunding seems small at first glance, but it has the potential to completely rework the small business, and even the corporate landscape in this country.
If that seems too sweeping, too optimistic, consider this quote from Amy Cortese, author of “Locavesting“:
“If Americans shifted just 1% of the $30 trillion they hold in long-term investments to small businesses, it would amount to more than 10 times the venture capital invested in all of 2011.”
Crowdfunding offers a way to do this. Under the terms outlined in the JOBS Act, any American will be able to invest up to 10% of their income into a crowdfunding campaign to support whatever business, person, or cause they want to. This change means that companies no longer have to minister to a very short list of powerful venture capitalists and angel investors. They can now reach out to anyone in the world that might be a prospective customer or fan, and get those people to support them from the start.
Crowdfunding also offers small businesses the ultimate market testing tool. Because crowdfunding, at its simplest, is pre-selling, an entrepreneur can test their business idea with a crowdfunding campaign, and so find out if their idea has traction before they spend all their startup money and go through years of work. Used properly, this aspect of crowdfunding not only raises money for a startup, but it raises customers and fans and avid promoters as well. And that speaks to yet another hidden benefit of crowdfunding: the people supporting the crowdfunding campaign become promoters themselves, and can do all the same kind of person to person advocating that happy customers do.
The missing link of crowdfunding right now is the ability to sell equity. Generally, companies are not able to sell equity to the crowd without going through a lengthy SEC filing. After the rules of crowdfunding are spelled out by the SEC and other departments in Washington, that may change as well, opening the stock market up in new ways. But for now, crowdfunding pledges (never call them “donations”) are given to people, projects or causes in exchange for something. These are usually referred to as “rewards”, and they are tiered, so that people who give, say, $15 get one small thing, and people who pledge, say, $1,000 get something much more valuable. No one polices the delivery of these rewards, and this is one of the major concerns for crowdfunding as it now exists: What happens if something goes wrong? If a project fails? Nothing too catastrophic has happened yet, but when it does, how the existing laws will deal with it is a bit murky.
Another major shortcoming of crowdfunding right now is that 99% of it has to be done through a public platform, on a site like Kickstarter. Ideally, companies and causes and people will be able to do this on their own sites, without having to worry about having all their money revoked if they don’t make their goal, and without having to shell out as much as 10% of their earnings to fees. We, of course, make such a platform, and are very proud of how well it works, but we do recognize that everyone may need such a robust solution. If you are just getting started, or have a single project to fund, you may be better off using the public crowdfunding platforms rather than buying your own.