Something happened on April 5th that may mark a seismic shift in how start-ups get funded. The JOBS Act will legitimize crowdfunding.
Up until now, crowdfunders could only legally accept “thank-you gifts” for their “donations.” Under JOBS, actual ownership and financial returns will be available to the broader public, not just accredited investors, VCs and the like. The implications for new business development, and job creation as a result, are enormous. The SEC has 270 days to shape exactly what that will look like, but companies are already jumping to take advantage of the opportunity.
For those that become the dominant players, it’s a potentially lucrative space to be in. Since the market is opening up fast, it’s mostly been a matter of creating an attractive platform to allow would-be entrepreneurs to make their pitch to the public. Since the site can take a percentage of what’s raised, there’s a business opportunity right there.
However, with increased numbers of crowdfunding sites, it will become important to differentiate and build credibility in the run up to the gates being opened, so as to attract a critical mass of entrepreneurs and investors.
One strategy to demonstrate a site’s viability is to trumpet how many people are already committed to funding companies. However the credibility of this claim is questionable. Take the case of WeFunder (the graphic above stating that $11.6 million is currently in play). In fact, that total is merely what people collectively say on their Facebook signup that they’d like to invest a year. Understanding the full impact of this trend comes down to the quality, quantity, and viability of the companies that pitch to these people, and whether people find their pitches compelling enough to actually invest.
What do established, rewards based donation model crowdfunding sites like Kickstarter and Indiegogo have to say about all this? According to Inc, Kickstarter is keeping quiet, declining to be interviewed regarding the JOBS Act for the moment. Indiegogo on the other hand is cautiously enthusiastic, saying, “It’s hard to tell you exactly what w’re going to do, but we’re leaning forward.”
Crowdfunding as defined by the JOBS Act will be capped at a maximum of $1 million, so it’s not meant for everybody, and I don’t see it outright displacing other methods of funding when greater volumes are needed. However, there are plenty of businesses that have the potential to create an outsize impact and profit with a nest egg of much less than $1 million. Enabling them to reach out to a much larger pool of people to get their financial needs met could well be just the economic stimulus that actually works.
For an interesting roundtable on the JOBS Act implications, go here.
In the video below, Crowdfunder CEO Chance Barnett explains what the implications of the Crowdfunding Act will be.
Readers: What’s your take on the implications/possibilities for crowdfunding in the US and beyond?
Paul Smith is a sustainable business innovator, global trend tracker, the founder of GreenSmith Consulting, and has an MBA in Sustainable Management from Presidio Graduate School in San Francisco. He creates interest in, conversations about, and business for green (and greening) companies, via social media marketing.