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