Why Crowdfund Investing Is The Path To Economic Recovery
The House did something astounding yesterday. They a) passed a bill and b) passed it with nearly full bipartisan support. This miraculous bill, called the JOBS (Jumpstart Our Business Startups) Act, is a series of 6 bills tied together designed to make it easier for startups to gain access to capital. Undoubtedly the most exciting aspect of this act is what it does for crowdfund investing.
Think of it this way: you’re in the center of a room filled with everyone who has ever known you, friended you on Facebook, followed you on Twitter or otherwise interacted with you. You stand in front of all of these people and pitch the crazy, brilliant business idea that you’ve been dreaming of. If these people like your idea, they can invest in your company, benefiting financially if you succeed or losing a few bucks if you fail. Soon, this concept of “crowdfund investing” is expected to become law.
The potential for crowdfund investing to transform that way startups access capital is staggering. Crowdfunding platforms have already gained traction in the U.S. with the success of sites like Kiva, a microfinance platform and Kickstarter, which lets people donate to fund artistic ventures. Kiva has arranged nearly $250 million in loans while Kickstarter users pledge funds to the tune of $2 million a week. The key thing to note here is that these millions are being raised strictly as donations and zero-interest loans because until yesterday U.S. securities laws forbade offering a return on investment (ROI) to non-accredited investors.
While these crowdfunding platforms have been widely successful in their niches, they fail to fill a key need: the lack of financing for startups. Current startup activity is at its lowest point on record–a point worth paying attention to since historically startups have created an average of 3 million jobs annually, while existing firms lose 1 million jobs each year. As the Kauffman Foundation report puts it, “Startups aren’t everything when it comes to job growth. They’re the only thing.”
As traditional Venture Capital firms have moved into funding later stage companies, there has been an increasing lack of early-stage funding for startups, known as Seed Capital. According to the Silicon Valley Watcher, “the latest report on trends in US Venture investments shows a massive decline of 40% in seed investments in US startups in the final quarter of 2011, and a much larger drop of 48% for the entire year.”
All it takes is a look to our neighbors across the pond to see what crowdfund investing can do to fill this gap. In Britain, Funding Circle raises more than $2.3 million each month for small businesses from individuals who earn an average yield of 8.3 percent and Crowdcube just successfully funded the first $1.75 million project.
As the Community Builder for Solar Mosaic, a crowdfunding platform for solar investments, I’ve seen what crowdfunding can do to bring people together and pool their money to fund solar projects on the roofs of important community organizations, like The Murdoch Center in Arizona. I can’t wait to see what Mosaic and other startups like us can do once we’re able to offer a return on crowdfunded investments.
This Article was posted on Forbes, 3/9/12