Crowdfunding: The Train to the Future Is Leaving—Get on Board

3/12/12Follow @rowe

It has been a whirlwind last few days in the crowd-funding world. For those of you who have not yet tuned in to this, there is legislation afoot, backed by the President and (so far) the House, that would enable, in effect, mini- IPOs as a way to fund startups. Forget everything you know about the rules of equity financing for seed-stage startups.

What’s coming: So long as you raise less than $1M, and individual investors don’t put in more than a small amount (somewhere between $1,000 and $10,000, depending on whose bill you are talking about), then you are A OK to go raise the money. You can do a general solicitation (e.g. Facebook blast). AngelList could be opened up to everyone. Your local paper could publish a list of local businesses looking for capital. This is a game change.

Most proposals call for the use of an intermediary organization, which would vet the startup to mitigate the chances of fraud. The intermediary would also frame the investments and the terms, making all the paperwork turn into a literal “point and click” exercise.

Would this really work? It already does. The UK, which has more permissive laws in this area, already sports an actual crowd-funding site, Crowdcube.com, which has grown quickly over the past year. They have a great set of stats here on their success to-date.

While Crowdcube is still small (not yet a score of investments), this idea builds on the successful growth of quasi- investment sites like Kickstarter and IndieGoGo, crowd-funding sites aimed at accredited investors (people rich enough to be exempt from the protections in the current law), such as AngelList, as well as crowd-lending sites like Prosper. Collectively, these sites have raised at least a half-billion dollars so far.

Some view crowd-funding as a great alternative to angel or VC capital, at least at the start, for new high- growth tech startups. Others see this as a way for everyday new small businesses–catering companies, small construction companies, and the like–to get off the ground. Whichever way it goes, it’s an exciting development for anyone active in building new businesses.

Before this can become law, it needs support in the Senate. The House passed it 407 to 17—an almost unheard-of majority. Some members of the Senate, however, are more skeptical. To this end, you may recall reading a couple of weeks ago that I trekked down to DC and testified before the Senate Small Business and Entrepreneurship Committee about this proposed legislation. Their reception could not have been warmer, although there was recognition that to come to a full Senate vote, the bill must first make it out of the Senate Banking Committee. This meant going back to DC. Earlier last week, I was fortunate to be invited to testify before the Senate Banking committee on the same subject. For those interested, my written testimony is here, and CSPAN coverage of the hearing can be found here.

Leading up to this, a grass-roots group of crowd-funding supporters that grew out of the Cambridge Innovation Center’s C3 community, known as WeFunder.com, organized a public forum on crowd-funding last Monday at Mass Challenge. They arranged for Senator Scott Brown (R-MA, sponsor of the first of the Senate crowd-funding bills) and Congressman Patrick McHenry (R-NC, sponsor of the House bill) to address the audience. They also convened a panel that included myself, Locavesting author Amy Cortese, Harvard Business School professor Bill Sahlman, and Mass Challenge co-founder Akhil Nigam, and moderated by Wired editor and Northeastern professor Jeff Howe. I learned a ton about the topic from my co-panelists. I highly recommend that if you are ever asked to testify before Congress, organize a public gathering on the same topic the day before. It will leave you much better prepared. WBUR provided some compelling radio coverage of all this here, prompting all my wife’s friends to tell her “I heard Tim on NPR!!!” Good on the old home credibility front.

The WeFunder.com folks have attracted 2,500-plus people to commit to investing more than $6M through crowd- funding (if you want to sign it, just go to their site).

But how big could this really be? Cortese had a nice way of framing it: Americans have about $30 trillion dollars in long-term savings and investments. If they diverted just 1 percent of that money into investing in friends and neighbors’ businesses, that would be a sum that is about 10 times larger than all of the venture capital invested in the United States last year. Yup. Wowwy big.

Will it really get that big? Of course we have no way of knowing. But if we get the legislation right, it really could. And its exciting to see something this promising come out of Congress, and to see it as thoroughly supported by both parties as it has been. We’re not out of the woods yet. There are some details in the legislation that, if included, could still make crowd-funding unworkable. If you are interested in the needed tweaks, see this exchange on the Kauffman Foundation website. But we’re close.

This has been loads of fun to be involved with, and I couldn’t be happier about where this is going. Thank you to those of you who have made it possible.

Xconomist Tim Rowe is Founder and CEO of Cambridge Innovation Center. Follow @rowe

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  • http://wefunder.com Nick Plante

    Thank *you* Tim. Without your efforts, this important legislation would be far less likely to make it into law. Being involved in this process (as one of the people behind Wefunder, for full disclosure purposes) has been an incredible experience; we’ve had the good fortune to talk to so many people that are passionate about their businesses, ideas, and innovations. I feel like we’re on the verge of a whole new era here. Love that quote from Amy too. Inspiring.

  • http://www.divergent.com Rob Shurtleff

    This is an important effort. From the NYTImes on Sunday 3-11 the community has some work to do
    http://www.nytimes.com/2012/03/11/opinion/sunday/washington-has-a-very-short-memory.html

  • Claudio De-Fraja

    Great article! You, Woddie Ness and others are doing a big deal of work to convince DC about the crowdfunding industry. Hopefully, they will come up with a good enough legislation that will allow us to operate in the best way.
    About the NYTimes article, the Enron case and other more recent Ponzi schemes were built over secrecy (in the Madoff case, investors were not aware about each other investments). This is a totally different case with crowdfunding, where you operate with transparency and you build your cause through reputation. I don’t say there will be no frauds, but those scams will be spotted easily by the crowd (in Italy we are use to say “Four eyes see better than two”). Something that still upsets me is when they talk about sophisticated vs. unsophisticated investors: I have a PhD but I don’t have enough money to be considered sophisticated, even if I have all the intellectual instruments to understand an investment better than a sophisticated multi-billion baseball player with no formal education. I find this ridiculous and offensive!

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  • http://www.griffinmoor.com Mr. Day

    Crowdfunding will completely change the wealth creation model in the United States, perhaps the world. No long winded explanation, but now the “privilege” of investing in small non-public companies has been restricted to a privileged few. Crowdfunding changes that. Crowdfunding For All!

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  • Dan Sylar

    Well that seems like bad news, because currently the model is people ‘contribute’ rather than invest in the company so I do not have to give my company shares, but now I will have to give them shares? btw I just launched a campaign http://igg.me/p/73534?a=465653 , please do “contribute” :)

  • http://earlyshares.com Maurice Loprs

    Tim great article, I agree with you Crowdfunding will definitely change the way new business (small or startup) will raise capital, and we have been following the great job the guys from UK have been doing and setting a worldly precedent on how true crowdfunding can work. We have been working on our own crowdfunding platform. We are also very excited about recent DC developments. Love to see some of your companies on our platform. – Maurice Lopes – EarlyShares.com

  • http://www.canuckseo.com Jim Rudnick

    Great post here Tim! I blog about online marketing and startups up here in Canada and have been following very closely the JoBS Act and posted just last Monday on the issue that if the US allows crowdfunding for investment, then what are we Canuck startups to do? Just hope our own legislators are watching! :-)

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  • http://www.treveri.lu crowdfunding

    It’s definitely leaving. This is a very critical moment for the US economy to get on it and ride it.

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