Crowdfunding, the New VC Funding

The notion of crowdfunding has actually existed for centuries as crowds gathered to hear and support pitches, but digital technology and social media have catapulted that notion to new heights and expanded the playing field and the playbook.

When President Obama signed the April 5th legislation, "Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act" a.k.a. the Crowdfund Act, as part of his JOBS (Jumpstart Our Businesses and Startups) Act, the general public became empowered to fund startups and small businesses and receive stock (equity) in exchange, as well as legalized 'general solicitation,' which means that startups and companies can leverage social media like FaceBook and LinkedIn to raise funds.

Kickstarter’s modus operandi of crowdfunding individual projects has iterated to the next level of VC-like funding, which prior to the President’s action, could only be donation-based — making it illegal in the U.S. for a company to raise money from a crowd that would then grow the business.

Reuters reported that crowdfunding raised $1.5 billion worldwide in 2011, and estimates are that the average American will invest 1% of their income in crowdfunded companies.

Crowdfunding legislation is so new that the SEC hasn’t defined the parameters yet – but is required to do so by July 4th. Two new, oppositional lobbying groups have sprung to life, the National Crowdfunding Association and the Crowdfunding Professional Association.

David Marlett, a Dallas securities lawyer, came up with the National Crowdfunding Association. “I’m kind of a troublemaker, and you need somebody like me,” he told Bloomberg Businessweek. Businesses pay a $600 fee to join and early takers include EarlyShares.com and Return On Change, two startups with Kickstarter-like portals.

Berkeley Geddes, a self-described serial entrepreneur, founder of the Crowdfunding Professional Association, is waving first year fees. “Anybody who believes in entrepreneurship should sign up immediately,” he said. His members include crowdfunding portal Vim Funding and Gate Technologies.

Marlett calls Geddes’s free group “a terrier, chewing at your heel. We wish them well.” Geddes is more philosophical. He says Marlett’s group represents “the actions of one individual. We represent the crowd.” Geddes adds, with “too much bureaucracy, crowdfunding will die,”

PeoplesVC spokesman Noah Tier says, "Since the US SEC laws that were recently changed to allow crowdfunding for equity and stock were adopted only weeks ago, we are potentially entering the 'Wild West' where opportunities will be everywhere."

Fundable lets backers earn product pre-orders, gifts and special incentives in exchange for pledging capital and possible future equity. "The Crowdfunding Bill signals a massive shift in access to capital by startup companies," said Wil Schroter, Fundable CEO and co-founder. "This fundamentally changes how startups get launched." 

Fundable has no intention of becoming a Kickstarter. “We’re not gearing up for the equity wave if it comes,” Kickstarter co-founder Perry Chen told GigaOm. “The real disruption is doing it without equity.” 

Fundable disagrees, and offers investors two options: contribute money in exchange for a product or reward (like Kickstarter); back a startup in exchange for an equity stake. Combining these two models sets Fundable apart from Kickstarter and competitors like CircleUp, not a rewards-based option.

Entrants are springing up such as Crowdfunder, which has raised $400,000 in seed funding and is limiting users to accredited investors until the JOBS act is official. FundaGeek is a crowdfunding site for technical projects, and Invested.in is from software provider Alon Goren. 

“It’s hard not to look at the evolution of crowdfunding in general and compare it to the emergence of eBay back in the late 90s. Within a few years hundreds of existing and new retailers found a new audience for their wares,” comments GigaOm's Stacey Higginbotham. 

“Yes, some of this was savvy people playing arbitrage games with people who didn’t understand or know enough to list their goods on the Internet, or a new type of storefront for existing shops but some legitimate businesses were created. Many view the emergence of crowdfunding platforms in a similar way. The question is whether this new way to build and invest in startups or will it (as is more likely) join an established roster of existing options and open up entrepreneurialism to a slightly wider audience?”

[Image via Shutterstock]