Harnessing the Financial Power of the Masses
It’s a concept that goes by many names. Sometimes hailed as crowd financing, peer lending, hyper- or equity-funding, crowd funding is based upon a fairly basic idea: several individuals come together, usually via an Internet platform, to pool their resources and collectively fund a business, organization, or project. In recent years, the increasing popularity of crowdfunding has seen everyone from charity organizations to scientific researchers cast off the old financing model, a dependence upon a few large-sum investors, and embrace the collective financial power of the masses. The idea may be simple, but it’s impact is nothing short of revolutionary in that it has produced a new breed of investor: the everyday Jane and Joe who now brings small dollars to a table at which they formerly had no place.
Crowdfunding does more, though, than provide ordinary citizens with an invitation to the ball. It brings a new sheriff to town: ideas which previously may not have survived the scrutiny of the old order find themselves brought to life by the wisdom of the crowd. Additionally, a successful crowdfunding campaign may do more than buy a fledgling enterprise seed funding; it may also secure potential customers and “word of mouth” promotion.
This new order doesn’t seem to be going away anytime soon: as banks increase interest rates and are hesitant to open their coffers to consumers and small businesses, the crowd lending phenomenon is gaining momentum globally.
What does all this mean for you, the entrepreneur? Well, when it comes to raising money to fund your business, you have options: literally, a whole wide world full of options.
Curious about the history of crowdfunding? Interestingly, at the turn of the 21st century, crowdfunding got its start in the arts.
- Usually regarded as the first instance of crowdfunding, an entire U.S. tour for the British rock group Marillion was underwritten in 1997 via a fan-based Internet campaign.
- The first crowdfunding website, the U.S.-based ArtistShare, was developed in 2000-2001 to fund musical talent.
- In addition to the music industry, many early crowdfunded projects came from other artistic fields (films, blogs, and journalism endeavors).
While many artists still see crowdfunding as their patrons, today, crowdfunding bankrolls all sorts of startups. Several internet platforms and apps focus exclusively on the needs of small businesses and entrepreneurs. If you are considering seeking crowdfunding, you may want to start with these well-known sites:
- Kickstarter.com: One of the original art-funding sites, Kickstarter now caters to designers and inventors as well as artists.
- Indiegogo.com: Another site that had its start with the arts, IndieGoGo now claims it “takes on anything” (sans porn and illegal activities)!
- Prosper.com: This site, which fashions itself a peer lending platform, connects borrowers with lenders and services any loans. Borrowers list loan requests between $2,000 and $25,000 and individual lenders invest as little as $25 in each loan listing they select. Prosper.com provides investors with important decision-making info like credit scores, ratings, and histories.
But Does it Work?
How well does crowdfunding actually work? This is a golden question that has kept many statisticians working late hours lately. The answer seems to be a resounding yes…and no. A recent study, published this summer by University of Pennsylvania-Wharton School, looked at 46,902 crowdfunding campaigns and revealed a total of $198 Million in pledges with a success rate of 47.9% The major conclusion: three specific factors are clear predictors when it comes to crowdfunding success:
- Personal networks
- Underlying project quality
If every cloud has a silver lining, then the reverse is also true. Crowdfunding may sound too wonderful for reality, and you may be right. At the very least, you certainly are partially correct. Before jumping on the crowd lending bandwagon, there are some serious issues to consider.
Here are a few to ponder:
- Risk of Exposure: It may be seriously disadvantageous for you to publically disclose your ideas at an early idea stage. Why? You risk your idea being poached and executed by better-financed competitors.
- The Cons of the Crowd: Crowdfunding draws a crowd, and crowds can be complicated. You may find managing communications with your crowd a daunting task.
- Legal Questions: Simply put, there are serious legal concerns about taking money from “investors” without offering any of the security demanded by legitimate investment schemes. While the recently-signed-into-law JOBS Act allows accredited investors to invest in equity crowdfunding campaigns, the Securities Exchange Commission has yet to set clear rules in place regarding crowdfunding. However, rules are expected to be set by January 1, 2013.
Certainly, crowdfunding has changed the game when it comes to raising startup capital. For most of us, these changes are welcome news! If nothing else, as long as you understand the risks involved, this new phenomenon is surely worth your while to investigate. Who knows?