Why crowdfunding will work

By | December 27, 2011
I think there's more going on than just "are people willing to invest" at stake.

1) When the economy is bad, the best way to survive if you've lost your job is to create a startup. We're likely to see quite a few startups pop up as a result.
2) With interest rates as low as they are, private investors from the middle class are looking for more lucrative investment opportunities.
3) The barrier to entry for obtaining private capital has decreased (at least here) in the past years. I've seen an increasing number of rather creative contracts recently which 'bend' the rules to allow private investment into startups, mid-sized companies looking to expand, and megaprojects with rather small investment amount requirements (not quite Kickstarter, but close). Even though these are typically not crowdfunded on a central platform like Kickstarter, the presence of such financing mechanisms means that we're already on the right track towards crowdfunding taking hold.

Who does crowdfunding really affect?

The biggest problem I see with crowdfunding is the potential lobby group effect from the financial sector. People crowdfunding startups means that startups aren't going to borrow from banks, and that eats into their profits. Similarly, people may decide to crowdfund personal projects (that normally also come from banks), and governments are at some point going to catch on too – leaving the only real source of income for large financial institutions the complex 'betting games' of financial instruments that they've built up for themselves. That means more banks go bust, and the financial sector doesn't like that in general. I'd expect significant resistance from this rather influential lobby group in keeping crowdfunding from going mainstream.

Then again, we're in an age of revolutions: one traditional business model after the other is being overturned, and the current sector rulers ousted. I expect education and finance are next up.

Reshared post from +Paul Allen

Quick hypothetical survey on crowdfunding:

If you share this post, please include this link to the original post:
https://plus.google.com/117388252776312694644/posts/Frg2y8Sv16H

Question: In the next 2 years, are you more likely to buy lottery tickets or to invest a small amount of capital in a startup company through a crowdfunding website like Kickstarter?

(Assuming that crowdfunding over the internet becomes legal in the U.S. next year)

Expand the comments and click +1 next to the answer that most closely matches your own.

Background for Survey:
It is legal in 43 US states for any adult to buy lottery tickets. The odds of winning are incredibly low. Many experts call this a tax on poor people who are more likely to buy lottery tickets.

It is illegal for those same individuals to buy shares in a promising startup company unless they are personal friends or relatives of the founders. That opportunity is reserved for wealthy business angels and venture capitalists who are deemed sophisticated enough and who can afford to take the risk.

But if crowdfunding becomes legal, it may soon be possible for millions of people to invest very small amounts of capital to help get new startup companies off the ground.

The big question is, how many people would actually participate in equity crowdfunding of new startup companies.

2 thoughts on “Why crowdfunding will work

  1. Sophie Wrobel

    +Dirk Spannaus I agree, banks typically don't fund startups, but are a bit more willing to play along for existing companies (though even then the standards are going up).

    There are some alternatives – I've seen some rather creative 'Genussscheine' being abused to raise capital that have bent most of the typical restrictions (including the 100k limit and 5 year minimum investment period). I'm not sure if this is only available after the seed phase, though.

    Reply
  2. Dirk Spannaus

    +Sophie Wrobel when you say "financial sector"… banks didn't fund startups a lot in the past. At least in the IT / High Tech environment.

    From my view related to Germany, crowdfunding due to the size of funding (at least there is a 100k€ limit here currently in terms of regulations) will add to Business Angels offerings in the seed phase. As there is less risk capital available in Germany in comparison to EU average, which is also less than US, crowdfunding in our region is probably not even eating into existing sources for funding, but adding options…

    Reply

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