Crowdfunding: The Good, the Bad & the Lionel Richie Head

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Indiegogo, one of the top crowdfunding platforms, reported on Jan. 28 that it has raised $40 million to expand its operations internationally and across mobile platforms. The company has hosted nearly 200,000 crowdfunding campaigns since its 2008 launch, including helping the Jamaican bobsleigh team raise money to get to the 2014 Winter Olympics in Sochi. Crowdfunding as an enterprise expanded by 63 percent annually from 2009 to 2012, and it is expected to be a $93 billion industry by 2025, according to the World Bank.

 

The prospect of getting just about any project funded—from a flying bicycle to an inflatable Lionel Richie head—has inspired millions of entrepreneurs to pursue their dreams. Favorable legislative initiatives along with seemingly endless success stories guarantees that crowdfunding will continue to influence the world of entrepreneurship.

 

How We Got Here

 

In the old days, entrepreneurs had two options to fund their business ventures: Get loans from banks or raise the capital themselves. The previous depended largely on credit rating and collateral. The latter entailed pooling all available assets at one’s disposal. People would borrow money from family and friends or sell future structured settlement payments to come up with the necessary cash to launch a business.

 

Companies used to raise money by selling debt and equity via public Security and Exchange Commission offerings or by private solicitation. But general solicitations were illegal pursuant to Rule 144A of the 1933 Securities Act. The JOBS Act, signed into law in April 2012, eliminated this restriction and opened the floodgates for crowdfunding initiatives. Title II of the JOBS Act took effect this past September and allows startups to raise funds via social media and other platforms.

 

Success Stories

 

Though platforms like Kickstarter, RocketHub and GoFundMe are the first stops aspiring entrepreneurs make to start their crowdfunding campaigns, none of them is necessary.

 

Case in point: Lockitron, a keyless entry app that enables the user to unlock doors from anywhere in the world via your smartphone, was denied by Kickstarter because the product was deemed a “home improvement” item. Founders Cameron Robertson and Paul Gerhardt decided to take matters into their own hands. They started taking pre-orders and raised $1.5 million in five days. Though more than 14,000 backers are still awaiting their Lockitron after the company missed shipping deadlines, it shows that persistence and favorable laws can get a project funded against difficult odds.

 

Pressure Is On

 

Crowdfunding relies heavily on trust. Backers are basically giving an entrepreneur money because they like and want the finished product or want some kind of credit in creating it. A 2012 study conducted by the University of Pennsylvania found that 75 percent of tech-related Kickstarter projects failed to fulfill their promised deadlines. A bank will simply call and harass you when you default on a loan, but backers for crowdfunded projects can get cranky. Most, however, realize the inherent risks of investing in an idea that does not yet exist.

 

Entrepreneurs today not only need to navigate the obstacles inherent with crowdfunding, but also keep their “investors” happy in much the same way publicly-traded companies do. Regardless, crowdfunding will continue to provide opportunities to turn dreams into reality.

 

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