What is Crowdfunding and Social Funding?

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What on earth is crowdfunding, crowdsourcing , groupfunding and socialfunding?

Crowdfunding is actually a way to get small profits of money from a good number of people to create funding for a specified project . It’s existed for quite a while in the form of small donations for arts as well as community campaigns , in return for token incentives for example t-shirts or even dinner with the co-founders .

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The CROWDFUND Act , passed by the President on April 5 , 2012 and also summarized here , now makes it possible crowdfunding to be used by for-profit producers – as a result a start up that needs funds to expand its company can now turn to everyday people . The investors can collect equity , i .e . a “share” of possession in the company , or shares , i .e . offering a compact line of credit to the enterprise , according to what the start-up decides to provide you with . Large-scale crowdfunding was not formerly permitted under federal securities regulations . In wide terms , selling an interest in your business is the sale of securities , and any offer or sale of securities has to be registered with the SEC ( e .g . in an IPO ) or designed to fit one of the exemptions from registration , that are very narrow ( and primarily for certified investors , i .e . rich individuals ) .

The traditional pattern of financing for enterprisers begins with the entrepreneur maxing out her own credit card , then getting “friends and family” funding , before moving on to “angel” backing ( having a rich person support your company in return for an interest in it ) , bank loans and capital from venture capitalists ( private funds that offer money and advice to startups in exchange for some ownership in the company ) . Crowdfunding expands the “friends and family” stage . Now , along with friends and family , everyday people unknown to the entrepreneur can invest small amounts in her enterprise and receive a debt ( loan ) or equity ( ownership ) stake in the business in return .

Exactly why would entrepreneurs want to give up even a small amount of the control of the company to people they don’t know , who most likely can’t help them much with guidance and experience the way angel and VC investors can ? For some businesses , it’s the only way to get the “seed capital” to develop their idea enough to get to the stage where angels and VCs will take notice of them . Other companies may be in areas of the country where it’s hard for start-ups to stand out from the crowd . And many entrepreneurs can be found in communities that have not been well-served by traditional banking and capital markets .

This is a revolutionary and exciting form of making an investment . Nevertheless , it is also high-risk . A lot of startups don’t succeed .

So just why would anyone invest in crowdfunding ? The worst reason would be because you think you are going to make a lot of money . For a start , you can only invest a small amount of money through crowdfunding . Normal folks are limited to $2 ,000 a year . Even the richest among us can only invest $100 ,000 . Even if you think you’ve identified the next Facebook , after further rounds of financing ( and the “dilution” that entails ) and the length of time it takes to get a business to the IPO stage , a crowdfunding investment isn’t going to change your life . The best reason to make a crowdfunding investment is because you really love the idea the entrepreneur is introducing , or you’re a fan of the product or service , or you believe in the entrepreneur himself , and you want to give them a shot at making it . The best reason behind making a crowdfunding investment is to give someone else the opportunity to change their life .

Click here for an overview of tips for crowdfunding investors .

Click here for an overview of tips for crowdfunding entrepreneurs .

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