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FEATURE

How the Crowdfunding Industry is Scrambling to Make Your Donation Pay Off

The hoopla over crowdfunding ramps up to a whole new level, as the trend turns donors into investors.

Amy Cortese
July 29 , 2012

It was the pen stroke that set off a scramble. When President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law in April, it ushered in the biggest changes to U.S. securities laws in modern history.  The centerpiece of the act is a provision that will allow crowdfunding—a method of raising funds from lots of small investors over the Internet, in exchange for a financial return. The rules that will govern crowdfunding are still being written by the Securities & Exchange Commission, and aren't expected to take effect before early next year. But that's not stopping hundreds of crowdfunding hopefuls from readying new platforms in anticipation.

There were already 191 crowdfunding platforms in North America in April, according to research by Massolution, and that number is expected to soar when the new securities rules take effect.  Globally, there are more than 450 such sites, and collectively they raised nearly $1.5 billion for more than 1 million ventures in 2011.

Most of the current crowdfunding sites operate on a donation or rewards-based model, where individuals contribute money in return for a social or nonfinancial reward. For example, on the popular Kickstarter platform, which caters to creative projects, a fan might contribute $10 to help a musician complete a new CD, in return for a free download or copy of the CD. A filmmaker might offer donors a film credit or even a walk-on role. 

Kickstarter has been phenomenally successful: in its short history, it has raised more than $240 million from 2 million people for more than 24,000 creative projects. In June, the site saw its first campaign break the million-dollar mark; since then at least six $1 million-plus fundraising campaigns have followed. Kickstarter and peers like Indiegogo have contributed to the $837 million raised through crowdfunding in North America in 2011.

From Rewards to Profits

The new crowdfunding platforms are watching with interest. If people are willing to give away that much money on Kickstarter and similar sites, what might they be willing to do when they can actually make a profit? Many of the new sites plan to take advantage of the new securities laws to let individuals make loans to small businesses or buy equity shares in startups, and share in the profits.

Despite the uncertainty surrounding the new rules, "The passing of the JOBS ACT will have a profound effect on the growth of crowdfunding in the U.S.," says Carl Esposti, CEO of Massolution and founder of Crowdsourcing.org.  "In 2013, we expect securities-based crowdfunding to bring new sources of funding to many startups and early stage businesses."

Already, there are crowdfunding sites for mobile apps, Believers Fund, for healthcare, Medstartr and for social entrepreneurs, Start Some Good.  WeFunder, a startup based in Boston, has drawn pledges from more than 6,000 people who say they will collectively invest more $16 million in startups when crowdfunding becomes legal.

LocalStake in Indianapolis has begun offering education for investors interested in crowdfunding.  And there is at least one group offering to certify crowdfunding platforms (Crowdfunding Accreditation for Platform Standards --CAPS).

That appeals to Anselm Doering, president & CEO of EcoLogic Solutions , a Brooklyn-based maker of eco-friendly commercial cleaning products. Doering believes  there is great potential in crowdfunding for small businesses like his. Crowdfunding, he says, "leverages the inexpensive power and outreach of the web and social media to get out your message, mission, and ‘ask' to a much larger audience who may be willing to invest a smaller dollar value, for smaller risk, than a large institutional funder. I love it because it  evens the playing field."

The contenders are also raising war chests that will help them compete. Indiegogo , one of the earliest rewards-based sites, recently raised $15 million from backers including Khosla Ventures for expansion and a possible move into equity crowdfunding.  Rally.org , a social fundraising platform, raised $7.9 million from a who's who of angel and venture investors. SoMoLend , a Cincinnati-based platform for small business lending, pulled in $1.7 million in seed capital in May.  Equity crowdfunding site Humanvest on the other hand, is opting to launch its own crowdfunding campaign on Indiegogo.

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