“Revolutions happen fast, but dawn slowly.” This is how Jon Gertner characterized the innovation and resulting leapfrogs in technology that came out of Bell Labs (the research and development arm of AT&T) during the last century. I believe that crowdfunding for equity will follow a similar trajectory.
Donation CrowdFunding for Causes began in earnest just four years ago, with the launch of IndieGogo followed by Kickstarter. Used mostly to generate support for the arts (films, bands, theater) and local organizations, these types of campaigns have been highly effective, raising $784 million in funding during 2011 in North America.
Donation CrowdFunding for Startup Products, the second generation of crowdfunding, saw its first notable success in 2011 with Tik Tok, a nano watchband that raised nearly $1 million. Since Tik Tok, several for-profit startups have used the same sites to raise early capital in exchange for products, including:
- Pebble, an iPhone/Android watch, raised $10 million
- Elevation Dock for iPhone, raised $1.5 million
- Double Fine, a video game, raised $3.3 million
On Kickstarter alone, over $27 million has been raised to date this year for startup game companies.
What makes these companies different from cause-oriented campaigns is that they are for-profit companies that, in many cases, can’t get financing from the traditional means, i.e., personal funds, angel investors, banks and venture capitalists. Donation crowdfunding is fast becoming a way to create buzz, prove customer interest and gain manufacturing experience, but it is not a substitute for scaling a company for launch. While additional capital is still required for the launch stage, a successful donation crowdfunding campaign can increase the odds of obtaining launch funds in the future.
Equity Based CrowdFunding for Startups and Small Businesses is the next phase of crowdfunding. By allowing people to invest in embryonic businesses they believe in, may utilize, and will likely champion, crowdfunding could foster major innovation. Once launched, startups will be able to raise up to $1 million in capital to actually fund the business, not just the cost of building a few thousand widgets in exchange for a donation. With time, members of Congress are hoping to increase the annual allowable fundraising amount to $5 million.
Some argue that equity based crowdfunding is too great a risk for the average American while others point out that they are already taking risks with their money. Americans purchase $45 billion dollars worth of lottery tickets annually, with the average household spending $150 annually. The odds of winning the lottery are one in 175 million according to Aaron Abrams, a mathematician at Emory University. People lose their money nearly every time, yet hope keeps them coming back. The stock market offers better odds but, as we have seen in recent years, can be financially disappointing. Total assets invested in stocks, bonds, mutual funds, pension funds and insurance funds equal about $30 trillion according to the economist Michael Shuman. Today’s college students are incurring an average debt load of $25,000 in hopes that they will pay it back from future jobs, yet nearly half of recent college graduates are unemployed.
Bottom line: many Americans are already taking risks with their money, hoping to hit the jackpot. Crowdfunding for equity will create opportunities for direct investment in local business and/or exciting and innovative startups that people can influence with the power of their network and collective buying behavior. Jobs will be created from this and in some cases there will be a nice payout
We are seeing a transformation in how Americans bring their ideas to fruition with the evolution of crowdfunding campaigns. When the new securities laws are complete and equity based crowdfunding is legal, there will be a sea change in how entrepreneurs can finance their companies. A few early adopters will most likely lead the way (as is happening today with crowdfunding for products), followed by a new age of innovation and small business growth.
To learn more about making equity-based crowdfunding happen ASAP, click here.