Drawing a Crowd: Crowd funding Heats Up

In a down economy, it’s difficult for entrepreneurs to access the capital needed to build their venture from the ground up. Luckily, projects can now be funded by a powerful combination of the social internet and generous networks of friends, colleagues, and communities. This model is called “ crowd funding” and is sweeping the start-up nation by storm. It seems to be an entrepreneur’s dream, but are there problems in the way?

The Current Landscape

According to Gartner Research, $1.6 billion is the estimated value of money generated by crowdfunding platforms in 2009. By 2013, the forecasted value of money created by crowdfunding platforms will be $6.2 billion.

Notable Crowdfunding Sites

Going out and canvassing networks can be laborious. These sites make it easy for entrepreneurs and those with personal projects to connect with interested investors.

Kickstarter was started in 2009, takes a 5% fee, and has raised over $84 million for more than 13,000 projects. Kickstarter claims no ownership over the projects and the work produced, but  operates on a ‘all or nothing’ model where the project’s goals must be met in order for the project to receive full funding. Kickstarter is perfect for projects with a creative purpose.

Indiegogo was started in 2008, takes a 4% fee, and has provided funding for more than 40,000 projects. Indiegogo is open to anyone and any type of project.  Plus, those seeking donations to keep all of the money pledged, even if they don’t reach the funding goal. Indiegogo is perfect for creative, entrepreneurial and cause-related projects.

ProFounder was started in 2009, takes a 5% fee, has raised more than $350,000 for 250 projects. ProFounder is specifically geared toward entrepreneurial projects. It gives entrepreneurs free tools to grow their businesses by reaching out to their social network.

FirstGiving was started in 2003, takes a 7.5% fee, and has raised more than $1 billion for its 8,000 projects. It provides non-profits and individual supporters with the tools to fundraise for their cause of choice. Fundraisers can create their own pages where can direct donors.

Crowdfunding Goes to Washington

Brewhaha is the story behind how a case became a hearing. In an attempt to buy the Pabst Blue Ribbon brewery, marketing executives Michael Migliolozzi and  Brian Flatow created a site, BuyABeerCompany.com, to solicit pledges from the public.  They promised investors a stake in the company and beer valued at the amount equal to how much they invested. Their goal was to get $300 million from public investors. After just 7 months, nearly 5 million fans pledged $200 million. In June 2011, the Securities and Exchange Commission ordered Migliozzi and Flatow to cease and desist for failing to register their offering.

Inspired by this case, Rep. Patrick McHenry introduced legislation to allow private companies to use crowdfunding.

Rep. Patrick McHenry’s Proposed Measure

An unlimited number of people are allowed to contribute up to a total of $5 million to a crowdfunded start-up. The current maximum number of shareholders for a privately  traded company is 499.

Individual contributors are capped at $10,000 each or up to 10% of annual income.

Both Sides of the Crowdfunding Coin

For the positive side: less expensive option to raise money, low risk to investors, and promotes crowd feedback.

For the negative side: investors not protected against fraud or scams, may be difficult to raise desired amounts of funds in a short time, and openness of the business plan allows for potential idea stealing.

What Does the Future Hold?

With the goal of helping small firms access capital and grow, part of President Obama’s “America Job Act” will try to cut the red tape by reducing the regulatory limits set on how small businesses get their capital.

Startups hope that this will mean an expansion in crowdfunding options and mini-offerings.

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