On February 13th, 2013 OLC attended the New York Investing Meetup's event, Crowdfunding: Raising Startup Capital for the 99%. Here's our recap:
New crowdfunding platform offers no fees for a start
“We have a broken financial system,” says Ryan Feit, the outspoken co-founder and CEO of seedinvest.com, a new equity-based crowdfunding platform, explaining how small entrepreneurs are hampered by a 10-year low in bank lending and challenged by the fact most of our savings and output go to FORTUNE 500 companies.
Crowdfunding has taken off following the passing of the JOBS (Jumpstart Our Business Startups) Act by President Obama in April 2012. This was in support of entrepreneurship and small business growth. The JOBS Act is designed to encourage small business and startup funding by easing federal regulations and allowing individuals to become investors.
As a result, crowdfunding platforms like kickstarter.com and indiegogo.com have helped fund startups, creative projects, non-profits and all types of small businesses. Kickstarter.com operates on a rewards system where a donation to a startup is just that—a donation that may result in a reward from a fundraiser, except no claim of ownership.
How successful have this been? One successful startup in Kickstarter called Pebble Watch initially requested for $10,000 but collected more than $10 million in pledges. For the most funded projects in Kickstarter can be found here: http://www.kickstarter.com/discover/most-funded?ref=sidebar
Fiet outlines why crowdfunding is a game changer: you can get more funding to launch your business; customers can become investors; you can generate a following; spend less time fundraising and get market research from the crowd, which saves you time thinking if your business idea is viable.
Under the JOBS Act, you are now able to do the following:
· Advertise your fundraiser: Either on the wall of your store or online
· Let anyone invest: Tap into millions of people as potential investors
· Allow no limits in shareholders. It means lots of people can invest small amounts
But how can one be held accountable or deemed trustworthy in a system where you don’t even meet the fundraiser personally? Feit cites the fact that in the Internet era, news travels fast, citing one case where a fraudulent fundraiser was caught having pulled images online to pitch his supposed project to the world before things got out of hand.
Some regulations have also been put in place as part of a controlling mechanism. As a backer or supporter, there is a yearly limit on the amount you may invest in a project. This is based on your net worth or yearly income. The limit ranges from 2% of people earning (or worth) up to $40,000, up to a cap of $10,000 for people earning (or worth) $100,000 or more.
But once the fundraisers get the requested funds, who’s going to make sure they keep their word and start their business? It’s a legitimate question but everyone knows people are inherently trusting, generous and supportive of another person’s dreams. Feit calls it the “wisdom of crowds” at work.
What if the amount of money targeted to be raised was not met, where does the money go? Depending on the crowdfunding site, money is supposedly returned to the investor. For investors, it is important for them to ask the site if they can get their money back before the deal closes.
Feit ended his presentation by going to his site, seedinvest.com, and said he is not charging any fee yet. With the reported backlog in other sites, it’s probably better to the 1% in all of us to have as many platforms as we can find, for the business(es) in the back of our minds.