Much has been made of and discussed about the JOBS act that was signed into law back in April 2012, and the impact it will have in vitalizing the funding of start-up businesses by allowing regular Americans to directly buy equity or debt in companies that they believe in. Already the passage of the law and the pending regulations that will be released by the Security and Exchange Commission in the coming months have led to a flood of new crowdfunding sites emerging onto the scene.
Article Contributed by Dr. Soloman Nabatiyan Co-Founder & COO of Techmoola
Also emerging are self-regulatory organizations and crowdfunding associations and accreditation programs to represent these new crowdfunding firms and to protect users from platforms that may try to use the new law to fleece unwitting users of investment into bogus or fraudulent firms.
Take a step back from all the commotion and a different picture emerges.
Crowdfunding is a tool that is only a few years old... It was developed to bring democracy to the funding world. It gives ordinary people a chance to express their voice and support a cause or project that they believe in and want to be a part of and in some way help influence the direction of.
Fundamentally, it gives people a chance to explore new ideas, efforts & passions & identify with them. That communication bond between project-poster & supporter is key to crowdfunding. It is not just about asking for funding, but sharing a personal world of an experience, idea, pursuits and a dream and offering a piece of it in exchange for a contribution.
Of course individuals or teams on a journey are not the only folks in need of funding. As traditional funding mechanisms such as angel investors, venture capitalists and banks become more onerous, demanding and scarce in deal making, small and starting businesses turn to different pipelines to fuel their activities and drive their growth. Crowdfunding seems to be a natural fit; sell off shares of your company from the early stages and reward these early investors when you make it big.
Sounds appealing enough, but the situation is much more complex than that.
In order to really took foot, technological innovation needs more than start-up funds, it needs strategic painters and collaborators that will facilitate use of money in an efficient and intelligent fashion. It also requires backers that will be able to support an enterprise when hiccups are encountered, projects and development is over-budget and behind schedule. For science and technology, a linear path to market is anything but the norm. And that’s where a crowdfunding community may fall short in helping a start-up keep the course and overcome the hurdles that arise down the road. And selling too much equity early on may prove detrimental for a tech firm that may need to leverage their equity holding to secure larger and more crucial second or third rounds of funding and financing.
So for technological innovation, crowdfunding can prove a poisonous apple.
While we may get wowed by the big valuations and extraordinary enthusiasm of internet based technology firms, it is important to keep in mind that those stardust wonders are rarities, perhaps even a flash in a pan, and do not represent the solid base of national innovation that the US depends on to keep its edge and position in the global technology scape. Nor is a person with a few hundred or thousand dollars to spare able to make a reasonable assessment of a start-ups value... and whether there is enough there to invest in and secure a share that will not only yield a return but carry value in the long run.
With so much complexity involved in start-up-investments as opposed to merely making a reward-returning contribution to an inventor or passionate team, the public can expect contribution-based crowdfunding to have a future even though the current excitement over the JOBS act may suggest otherwise.
Soothsayer’s take note: utility and pragmatism are better drivers of the future than predictions alone!
Let us know what you think in the comments. Will investment based crowdfunding change the donation based landscape?