“The crowd makes the ball game.”
Ty Cobb, American Major League Baseball Player
Most startups will say that the biggest challenge they face is access to capital. Many good ideas developed by great entrepreneurs fail to get to market, not because of a lack of commitment, innovation or energy, but because entrepreneurs have families to feed and bills to pay.
The current economic downturn has made the funding challenge more difficult with the reduction in available capital. The future, however, is looking brighter for entrepreneurs.
The Present: How Crowdfunding is currently Financing Startups
Individuals, businesses, and nonprofits of all types are successfully using crowdfunding platforms to crowdfund part or all of their ventures, raising anything from several hundred to several hundred thousand dollars.
There are thousands of crowdfunding (also referred to as crowd funding) success stories from all over the world. The TikTok iPod Nano Watch Wrist Strap is probably one of the most well-known. Scott Wilson attempted to raise $15,000 using crowdfunding to fund the production of two Nano watch kits. Scott exceeded his target and went on to raise an incredible $942,000 within three months without having to give away equity or take out loans.
Currently, crowdfunding sites in the United States would fall foul of SEC regulations if entrepreneurs were able offer non-accredited investors equity in return for funding on their platforms. Instead, entrepreneurs can offer rewards i.e. a copy of the software or product, in return for funding. Scott Wilson raised $942,000 by offering ‘rewards’ of his Nano watch kits.
Crowdfunding in this form is working for many entrepreneurs, although for historical reasons there is far greater awareness of its potential in the arts world than the startup community. With this in mind we recently launched Crowdbackers, a crowdfunding platform specifically for entrepreneurs.
The Future: The Entrepreneur Access to Capital Act
Earlier this month, the US House of Representatives voted 407 to 18 in favor of the Entrepreneur Access to Capital Act. If passed by the Senate, the legislation will allow entrepreneurs to offer shares of stock directly to ordinary investors through established and vetted crowdfunding platforms.
Finally, ordinary men and women will be able to invest in the next Facebook or Twitter and entrepreneurs will no longer be limited to seeking investment from inaccessible investors.
No doubt there will be teething problems, and crowdfunding will not be the perfect or complete solution for every entrepreneur. For our part, however, we wholeheartedly welcome this positive step towards the the Democratization of Startup Funding.