of the top complaints raised by business owners in the recent 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 , 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. , considered crowdfunding's pioneer, enables fundraising for just about anything. And other sites serve niches such as , inventors, , , development, , and .
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.”
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 : “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.