Crowdfunding is the process of raising capital by offering rewards to ‘backers’ by pre-selling your product or offering equity in exchange.
While the latter is not yet legal in the United States, the JOBS Act, which was signed into law in April 2012, mandates that the SEC makes it legal by January 1st of 2013. There will inevitably be delays as the SEC works to implement a new framework to support this legislation, but it would be wise for entrepreneurs to start comparing equity crowdfunding with their alternative options now.
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Let’s take a look at what equity crowdfunding looks like when compared to the traditional capital raising process. What I think you’ll find is that it is a great solution for the majority of entrepreneurs, especially those who have limited access to investment capital due to not being in the right industry, location or networks.
1. You still start with credit cards or savings
Just like the traditional capital raising process, entrepreneurs often still need to invest in their business before they bring it to the crowd. The crowdfunding campaigns that are most successful have had time and money invested into the business by the founders first, which usually comes from credit cards or personal savings.
This money helps them to incorporate, file the necessary paperwork and put together compelling collateral to merchandise their business opportunity.
2. You spend more time pitching
Once an entrepreneur starts a crowdfunding campaign, either with rewards or equity, they spend the next 30-90 days pitching their product to everyone they can think of. They market it on their social networks, to their friends and family, and through press outreach.
The great thing about this process is that you are forced to get out in front of potential investors or backers much quicker, at which point you get feedback more quickly. This is the best thing for an early stage company and can save an entrepreneur years of their lives and tons of money.
Whether a campaign is successful or a failure, it can greatly serve a company with important market feedback that is all to easy to ignore in the traditional capital-raising process.
3. You get more exposure through the process
The traditional capital raising process is conducted in a bubble, with limited exposure to the media, customers and investors.
Crowdfunding creates a marketing event that entrepreneurs can rally support around which tends to garner more exposure to customers and potential investors who would have had no way of knowing you were raising capital before, unless you had a pre-existing relationship.
4. You have access to more capital
According to the Center for Venture Research, angel investors and venture capitalists collectively invest approximately $40 billion per year into companies, with a primary focus in the tech sector. On top of that, friends and family contribute another $60 billion per year. Coupled with personal savings, bank loans, and credit cards, traditional small business funding taps out at about $600 billion per year.
To put that in perspective, Americans are estimated to bet $550 billion at casinos, online, and through bookies per year. And if Americans were to shift just 1 percent of their long term investments per year into small businesses, it would equate to $3 trillion in funding — nearly five times the amount currently available.
While equity crowdfunding is not yet legal, entrepreneurs can currently take advantage of reward-based crowdfunding in which they can derive many of the same benefits. If you are an entrepreneur, want to start your own business or are interested in funding small businesses, keep following the progress of the legislation — it could help revive the American economy as we know it.
Image Credit: Oli Scarff/Getty Images
Eric Corl is the co-founder of Fundable.