Is Crowd Funding in Your Start-Up Future?

The new hot topic for entrepreneurs these days is crowd funding, which is anticipated to at least supplement, if not replace, the slow and mysterious process of Angel and venture capital investors.

Traditional lending isn't easy to secure, and many banks are leery of lending to small start-ups (with sometimes crazy ideas for their business and little or no history/financials to back them). Now people are turning to new, creative ways to launch companies and gain funding.

This is where crowd funding platforms come in

Practically anyone can be a small business investor today, and it has blown open the door to funding opportunities. Thanks to the JOBS Act, which passed in April 2012, small businesses can seek funding from investors that don't necessarily carry the SEC's stamp of approval (with restrictions). And one way startups can quickly raise capital is through crowd funding.

These platforms allow people (individuals, entrepreneurs, organizations, etc.) with creative visions to set up campaigns to fund their dream projects through monetary donations from friends, families, and even strangers. Each campaign has a specific fundraising goal and is set to run for a certain number of days, and anyone can donate as much or as little as they please. It is an opportunity for start-up companies to reach an audience that is ready and willing to be part of their success by making small donations to the 'cause.'

A number of websites have sprung up to facilitate crowd funding, including Kickstarter, Indiegogo, Crowdfunder, WeFunder and Quirky.

The sites range from the informal to ones that are closer to traditional venture capital and angel investing, with formal review of business plans and approved entrepreneurs offering a stake in exchange for funding.

If you have an innovative idea, a strong business plan, social media savvy and a compelling incentive to offer potential investors, crowd funding might be for you.

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Bloomberg BusinessWeek

Caveat Emptor (“Let the Buyer Beware”)

State securities regulators have put the phenomenon of crowd funding at the top of their annual investment scams list.

Because crowd funding is relatively new, scams are just getting started, regulators from the North American Securities Administrators Association (NASAA) reported recently. The idea is to make investment in startup ventures easily available to the masses. A portion of the JOBS Act will push crowd funding from a “donation” model to a true investment model, and that will make it even more of a lure for swindlers, NASAA said.

"The number of entities out there already pitching themselves as crowdfunding entities online has risen in a significant fashion," said Matt Kitzi, NASAA Enforcement Section Chair and Missouri Securities Commissioner. "Just look at web domain names: it has gone from a couple hundred to well over 1,600 in the past year. They are staking up a position to enter crowdfunding market. There will be a lot more to come on this."

Sources:

1.       Paul Shread,  “Crowdfunding Could Be the Boost Your Startup Needs,” Time,  8/20/2012

2.       Pedro Hernandez, “5 Crowdfunding Sites for Entrepreneurs,”  Small Business Computing.com, 8/17/2012

3.       Beth Pinsker Gladstone, “Crowfunding Tops Regulators Annual List of Investor Traps,”

Huffington Post, 8/22/2012