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Five Things the General Public Should Know About Crowdfunding

posted Jun 9, 2014, 8:04 AM by Siamak Ebarhimi

Guest post by Cameron Cushman
Manager of Entrepreneurship, Ewing Marion Kauffman Foundation

I work with entrepreneurs on a daily basis and, by far, the main complaint they levy is that they can’t raise enough money to fund their startup company. Obviously, capital is a scarce resource and always will be, but what they really mean when they say capital is that they don’t have access or connections to the largest groups of investors, wealthy folks (e.g., angel investors) and venture capitalists.

   What if you took this need to “know” the right people with money out of the equation and allowed startup companies to raise money from the places where most startups actually receive investments – in startup culture it’s known as the three f’s — friends, family and fools. In other words, what if you allowed companies to raise money using the new tools of social media to connect to those who are most likely to fund them, those people they                                              a relationship with instead of through some high-flying rich guys in places near oceans?

This new way to fund companies, recently coined as crowdfunding, is coming to a theater near you very soon. Here are five things that those of you who don’t live in the startup world need to know about this important new tool for raising investment dollars.

1) If you don’t know what it is, you will. Trust me. It’s going to be big.  Hundreds of crowdfunding platforms are already popping up all over, some with a geographic focus, some with an industry focus and some with no focus at all.  Facebook  and some of the other popular social networking sites already have expressed interest in allowing their members to raise money for their companies using their individual social accounts. And, all of this is before the telemarketers and email spammers have figured out how to harness this potential.crowdfunding marketing

2) This ain’t your grandma’s Kickstarter. Perks-based crowdfunding sites like Kickstarter andIndiegogo have been around for years, helping artists fund their projects, allowing makers to finance their prototypes and enabling inventors to experiment. But what will be different this time is the ability to trade an equity stake (or a percentage of ownership) in exchange for an investment. Imagine the possibilities – you could own a percent of an actual company for, potentially, just a few hundred dollars. It’s a pretty cool opportunity when you really think about it.indiegogo marketing

3) You might lose your shirt.
 The MOST IMPORTANT thing the public must understand about crowdfunding is that it is very risky, and you could, very easily, lose your entire investment. Remember, this is an investment in a company that could just as easily (and more likely) go belly up than it is to become the next Facebook or Instagram. We know that more than 90 percent of startup companies fail, so the risks of investing in unproven, early-stage businesses could leave many investors disappointed or even angry. I think a good old gambling analogy is relevant here – the odds are stacked against you, but there is the chance you could hit it big. As long as potential crowdfunders understand this (and no. 4 below), then the onus to make smart investment decisions should be squarely on the shoulders of the person making the investment.
crowdfunding advertising

4) Don’t worry, there will be fraud. It is inevitable. People are going to game the system and take advantage of well-meaning investors in startup companies.  No matter how many rules and regulations the Feds put in place, some level of fraud is going to happen. Americans should just prepare for it, and journalists should fire up their laptops.kickstarter marketing

5) Watch for more Instagrams and (unfortunately) more the ability for startups to raise capital from the crowd should increase the amount of capital available for entrepreneurs. And while this, in turn, could lead to more money flowing to more high-growth, job-creating startups (e.g., Instagram, Google ), it will, without a doubt, lead to more startup disasters ( Sometimes raising money can be toxic to the culture, mission and team dynamics of an aspiring startup, particularly if too much money is infused into the business at the wrong time. But, I would argue that more startup activity (even failure) is a net gain for the economy. We should all collectively hope for many more super successful Instagrams than total disasters like, but the numbers of both outcomes will more than likely increase due to crowdfunding.kickstarter project

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