One
of the top complaints raised by business owners in the recent Yahoo! Small Business survey was about a lack
of access to capital. It’s tough to grow your business when the economic
climate and banking rules are standing in the way of getting loans.
Loosening rules on “crowdfunding” is one option the government is currently
considering to address this problem.
Entrepreneurs and artists have used online crowdfunding platforms for a few
years now to drum up cash from friends, family, and strangers. It’s illegal in
the U.S. to sell shares of stock to unaccredited investors this way, so people
who support startup businesses via crowdfunding are essentially donating their
money. The most they’ll get in return is a “thank you note” or a trinket
bearing the company logo.
It might sound like a quaint or even ineffective way to get cash to run your
business. But Kickstarter.com, one of the better-known
crowdfunding platforms, helped creative projects raise nearly $100 million
last year. The company says it helped more than 30 product design projects raise
six figures in 2011. And while Kickstarter is exclusive to "creative"
projects, it's just one of dozens of crowdfunding platforms. IndieGoGo, considered crowdfunding's pioneer,
enables fundraising for just about anything. And other sites serve niches such
as startup businesses, inventors, scientists, mobile apps development, social entrepreneurship, Christian-oriented ideas, and more.
Now the Federal government is considering making it possible to not just
donate, but actually invest in a company this way. The House passed a bill in
November that would let proprietors sell small stakes in their businesses
through crowdfunding. The Senate is currently considering variations on that
bill.
Testifying at a Senate hearing on “spurring job growth thorough capital
formation while protecting investors” earlier this week, Tim Rowe, who runs a
startup incubator in Cambridge, Mass., said, “We have the potential to really
radically change the system by which we create new companies in this country.”
Rowe told the Senators that crowdfunding legislation could make it legal for
neighbors to help neighbors start small, local businesses like restaurants,
plumbing, or construction. “Someone in your community will start a catering
business. They’ll go to Facebook and ask their friends, ‘Will you back me? I
need to buy an oven.’ This is where it’s really going to hit the ground
running.”
Kenneth Yancey, CEO of the business mentoring association SCORE, and Kristie Arslan, president of the National Association for the Self-Employed, are among small business leaders who would like to see crowdfunding legislation passed. Says Yancey, “You’d be shocked to know that the SEC governs who can invest and how much in terms of real dollars as well as a percentage of their own net worth. This law kind of changes those rules making it easier for qualified investors to invest in small companies.”
Arslan
points out that 78 percent of the small business population is comprised of
self-employed people. “They don’t need large sums to start or grow, but
traditional lending institutions don’t look at them as moneymakers.”
Crowdfunding, she says, is a way individuals with business ideas can “fund
their dream in an easy way.”
Crowdfunding websites can also be great motivators for
entrepreneurs. Arslan says platforms like Kickstarter that enable users to post
video pitches can inspire business owners to do their own due diligence, and
clarify their business plan. “Let’s say you’re a baker and you want to sell cupcakes online, but you need to
rent commercial kitchen space,” Arslan says. “You can send your [crowdfunding
campaign] link out to friends and family asking them to loan you money,
promising a return on that investment, but you may also be on a platform that
opens it up to a larger audience. People would make decisions based on your
business plan.”
Crowdfunding expands opportunities for the self-employed, as well as for
communities, Arslan adds. “Small infusions make such a big difference in the
growth of a business. If you’re going to take a risk, why not take a risk on a
local business to create a better economy for your neighborhood?”
If legislation legalizing investment by crowdfunding passes, just how much
money could it make available to entrepreneurs? Rowe pointed out in his
testimony that Americans put about $30 trillion each year into retirement funds
like 401ks, pensions, and IRAs. He cited an argument made by Amy Cortese,
author of the book Locavesting: “If Americans put 1 percent of
their savings in a business in their town instead of in their 401k, that would
create a pool of money that is 10 times greater than all the venture capital we
invest every year in this country—a pool of capital that is half as big as all
outstanding small business loans.”
To be sure, protecting investors from unfair practices and outright fraud is a
concern of lawmakers. How can small-stake, early stage investors be saved from
seeing their shares diluted if a company is merged or sold? Or, as Rowe asked,
“Are bad people going to take advantage of good legislation to screw us over?”
The Legislation won’t likely be passed without some measures to prevent those
problems.
But, considering the overwhelming bipartisan support in the House, chances seem
good that crowdfunding will make it through the Senate. “These initiatives will
inject capital throughout the entire geography of the country in a way we have
not seen before. This really is about Main Street,” said Senator Michael Bennet
(D-CO), coauthor with Senator Jeff Merkly (D-OR) of a crowdfunding bill. “We
have to do what we can to protect the investors that will come, but I think the
potential here is just enormous.”
What do you think about crowdfunding?
Have you used crowdfunding to support your business? Would you consider
it? Let us know in the comments or Tweet #SmallBizVote.