{NOTE: I’m writing this column with a tinge of nostalgia. Long before I started Information Experts and Successful Culture, I was a Capitol Hill journalist reporting on telecom legislation. It was so exciting to be on the Senate floor watching history being debated and laws being written. Now things have come full circle, and I’m writing about history-changing legislation as it applies to entrepreneurship. So exciting!}
This past week, The House of Representatives passed The Entrepreneur Access to Capital Act (H.R. 2930) which would allow businesses to raise up to $1 million over the Web without registering with the SEC or showing certified financial statements.
Companies raising $1 million to $2 million would have to show audited books.
The practice of raising money from investors over the web is known as “crowdfunding.” The basic idea is to raise money through relatively small contributions from a large number of people – combining the best of microfinance and crowdsourcing.
Why is crowdfunding necessary?
Entrepreneurs, startups, and small businesses often have a hard time accessing credit in today’s marketplace. As a result, entrepreneurs can’t fund their businesses, which creates a domino effect. If a business can’t grow, it can’t create jobs.
Today’s entrepreneurs view the world and the future through a different lens than that of current or past generations. If the conventional system won’t accommodate them, then they will build an unconventional system. That is exactly what they have done with crowdfunding.
Concepts such as crowdfunding create value from micro contributions from large networks of people using social tools and technologies to create value. No longer is entrepreneurship about creating something faster, bigger, cheaper, or better. It is about making the previously impossible possible. When communities are activated to come together for a common goal, amazing result can occur, and crowdfunding is no exception.
Other nations – such as Great Britain, Hong Kong, and the Netherlands – already offer equity-based crowdfunding opportunities to investors and startups to spur capital formation.
How does crowdfunding work?
Typically, entrepreneurs and investors in the United States that communicate through internet-based platforms and offer securities are subject to costly SEC registration requirements. Compliance with each individual state’s securities laws and rules – known as “Blue Sky Laws” – is prohibitively costly if companies are seeking to raise only small amounts of money.
The SEC’s general solicitation ban restricts companies from using modern communications to inform and connect to investors.
However, the new legislation creates a crowdfunding exemption from SEC regulations for firms raising $5 million, with individual investments limited to $10,000 or 10 percent of an investor’s annual income, whichever is lesser. (The Senate proposed a limit of $1,000 per investor… that’s being evaluated).
In addition, the legislation pre-empts Blue Sky Laws and eliminates the application of the ban on general solicitation for issuers relying on the crowdfunding exemption.
Basically, crowdfunding enables entrepreneurs to obtain community driven financing without be subjected to prohibitive conditions.
Where can I go to find investors?
There are several online communities now for finding crowd-based investors. I have summarized them here.
(Note: I adopted this content from the blog at www.webdistortion.com. I’m not a crowdfunding “expert” (research may make you knowledgeable but it doesn’t make you an expert… trial by fire and experience makes you an expert). I’ve never obtained crowdfunding. However, I’ve done enough homework to provide value.
KickStarter http://www.kickstarter.com/
KickStarter has received quite a bit of publicity recently for its efforts. Most notably the open source Facebook alternative Diaspora managed to raise $10,000 in just 39 days, proving that the concept had legs, and that crowdfunding as a concept has the community well and truly behind it. It’s not just software projects that the site caters for, out of all the current activity on the site, software is probably the most dull – as creatives around the world have embraced it as a way to realise spectacular dreams. With everything from life sized mousetrap games to one man’s cultural journey across Mexico KickStarter has clearly captured the imagination of its audience.
As far as the rules for funding goes, KickStarter keeps things simple. In order to receive the funding needed, a project must reach or exceed its funding goal or no money changes hands. If you do manage to reach your goal, 5% is taken from the project creator. Personally I think this is fair, with the current traffic / reach of the site, the tools available to manage your project, and the empowerment that a site like this gives individuals 5% isn’t that big an ask.
RocketHub http://www.rockethub.com/
Another very similar site to KickStarter is RocketHub. Describing themselves as a grass roots crowdfunding site, Rockethub’s focus is again within the creative arts, with the two audiences for the site split into ‘Fuelers’ – those providing financial assistance to cool projects, and ‘Creatives’ – those coming up with the concepts, artwork and music and in need of funding.
One fundamental differences between KickStarter and RocketHub is the use of rewards and badges to help encourage interaction on the site, and to help get users engaged with the projects needing assistance. A perfect example of game theory in action.
RocketHub’s fee is actually either the same or lower than Kickstarter’s. Rockethub always charge a flat 8% while Kickstarter charges a flat 5% AND passes along the Amazon Payments transactional fees to the artists who utilize their platform – which can be anywhere between 3% and 5%. So the total Kickstarter fee can be anywhere between 8% and 10% while RocketHub always offers a flat 8% fee.
Quirky http://www.quirky.com/
Quirky offers product designers and inventors a shot at getting their product to market. They call their product a ‘social product development tool’ – which it is, allowing the community to vote for products that they think would sell, and are worth creating, in the process single handedly changing the way people think about product development. Feedback can be received on product direction, strengths, weaknesses, opportunities and threats, all from within the Quirky site, resulting in products that have a stronger vision than those generated through traditional means.
Submitting an idea to the site does cost $99, but with the support and feedback received on an idea, and the Quirky site offering a way of getting a product to market that wouldn’t have otherwise made it, this is a cost that many will and have happily paid. You only need an idea, and a few scribbles / scans to potentially get your idea in front of millions.
Fundbreak http://www.fundbreak.com.au/
Fundbreak is an Australian crowdfunding website, again with the all or nothing funding model, fundbreak insist that your goal is reached prior to receiving any funding at all. Fundbreak fees are set at 5% for invitees, or 7.5% for standard joe public users plus 2.4% for Paypal transaction fees making it one of the more expensive options considering what’s out there at the minute, however sometimes having a dedicated site for a particular country can help attract a local audience.
If you have a project that is performance art or requires a live audience this can be a worthwhile advantage and I’ve no doubt that the majority of Fundbreak’s traffic is currently Australian. Worth noting as well that anyone can launch a project, or support a project to meet its funding goal. You are not required to be in Australia.
Some of my favourite projects being created at present on Fundbreak are ‘Tell me a story‘ and ‘Oceans and Wires‘ two projects that received more than 100% funding and perfectly show the sort of creativity that can be taken for a walk and tested out online.
CatWalkGenius: http://www.catwalkgenius.com
Cat Walk Genius gives all you budding fashion designers out there the chance to launch your own clothing line, all by using the power of the crowd. You can be part of your own fan-funded collection, needing nothing more than your browser, a sprinkle of talent and some creativity. As with the other crowdfunding websites mentioned, their are two audiences. Supporters – the folks interesting in helping a designer financially, and the designers – who create the magic. You can apply to be either or both a designer or supporter.
As a supporter, should you choose to back a designer who’s work you like, you are effectively buying shares in their lines. Starting from as little as £11, not only can you aid the production of clothing that you like, you are effectively investing in their future sales for up to 6 months. If your designer hits the target and their new collection goes on sale you get a share of the sales revenues, proportionate to your share of the funding.
As a designer, Cat Walk Genius allows you to rally your troops, and sell direct to your fans through the site. You will be able to fulfill orders all without the cost of setting up your own online e-commerce shop. Adding images to a profile page is free for designers (up to a point) – with additional images costing a small additional fee.
Overall Cat Walk Genius provides an innovative platform for designers to receive the recognition they deserve, and build a fanbase around their collections, all through the power of crowdfunding. Genius indeed.
Fans Next Door: http://en.fansnextdoor.com/
Fans next door is a European Crowdfunding website (still in beta) and as yet they don’t take a cut for promoting projects through their site, with the only additional costs being the PayPal processing fees. They currently accept all types of art forms, from literature to films, visual arts and craft, music, performances, fashion, design, and video games. As the user base grows and additional forms of projects come along we can expect this to evolve.
The reward concept has been used in the promotion of many of the projects, with the system being architected to show what you get from artists for increasing amounts of funding. For example €10 may get you a copy of the artwork, €20 may get you a copy of the artwork signed etc. etc. The more of a fan you are, the more you can expect to receive.
IndieGoGo: http://www.indiegogo.com/
IndieGoGo offers a wide variety of creative art funding categories, with projects in everything from Inventions to Gaming to Mobile Apps to Performing Arts. No matter what you are trying to raise funds for, there will be other projects in that category currently receiving funding. Another benefit that IndieToGoGo offers is that they have hooked up with suitable partners to help give your project extra reach through commercial channels.
Probably the most impressive of these partnerships is MTV New Media, which could see your work being featured on MTV or VH1 – with of course, your permission. Desirable content includes fictional and non-fictional web series, shorts and other digital content, with the partnership helping to discover develop and distribute the best projects and creative talent on the web. At the very least it gives project creators a chance at much needed additional exposure.
Another recognised side effect that IndieToGoGo have capitalised on for project creators, is unique rewards and pre-sales. Unique rewards have been used by artists such as Dizraeli to provide backers with artwork, private concerts and signed albums to further fund his musical pursuit. Pre-sales obviously allows you to generate interest in a concept or project prior to even starting it, with the web becoming your marketing machine, and IndieToGoGo your vehicle. Unlike a few of the other crowdfunding sites mentioned here, if you don’t fully reach your goal – you keep the current funds to date. With a few of the others mentioned here, (such as RocketHub and KickStarter) you must fully realise your specified amount prior to receiving anything. I’ve no doubt that this financial safety net will appeal to many project creators.
CoFundos: http://www.cofundos.org/
CoFundos operates on the basis of pledges, allowing you to signup, and create an open source project / idea that you would like to develop. Crowd sourcing is used at all stages of the project to allow contribution of the requirements and refinements to the project. Essentially, the system gives users of open source software the ability to fund specific developments that may not already be in the existing software path, and spread the cost amongst the community.
Developers can choose to take your idea or project on, and when the implementation has been agreed by multiple bidders are requested to make the respective donations.
Profounder: http://www.profounder.com/
Profounder operates on the basis that inside everyone’s social circle both online and offline – there are people who are willing to support your dream. Each of those people potentially becomes an investor in your company, and equity is split amongst them. Profounder gives you the tools to raise the capital that you need, and the tools to manage all of the associated book-keeping, legals and compliance fillings. Right now, the site is still very much in alpha status, with registrations due to open in the Autumn. Still you can sign up for status as an ‘alpha entreupreneur’ if you want to start earlier than that, and are serious about using the system.
How do I know if crowdfunding is for me?
I found an infographic that shows how crowdfunding works, as well as the pros and cons. When you click on it, you will need to zoom in on it (unless you can read micro-font).
Here is the link:
http://rww.readwriteweb.netdna-cdn.com/cloud/11.10.27_GL_GOING_PUBLIC_rww2.png
Do you have experience with crowdfunding? Are you considering it? Please comment and let the Successful Culture community know. We are all learning from each other.
