Congratulations on your exciting idea for an innovative business venture –selling “hip-widgets!” Brilliant. But we all know making “hip-widgets” isn’t cheap, so where are you going to find the funding to start production? Since the recession, conventional forms of early stage funding, such as bank loans and venture capital, have decreased drastically. A report from PricewaterhouseCoopers shows that early stage/seed capital funding for startups fell 40% in the last quarter of 2011. With large funding institutions withholding seed capital, it is becoming increasingly difficult for startups like yours to get off the ground. Instead of conventional funding, maybe you should let your idea go public and gather support through with crowd sourcing instead.
Thanks to the internet and social media, millions of people can hear about your amazing new product and even fund it if they are really impressed. When Eric Migicovsky needed $100,000 to fund his Pebble smart watch project, he turned to Kickstarter, a funding platform for creative projects. He never could have imagined the response. In 37 days he received 75,000 requests for watches and raised over $10 million (100 times his goal). That is the power of crowdfunding.
Through crowdfunding, people are essentially providing a zero-interest loan to organizations and products they support. Pretty cool right? Yes, but do you know what is even cooler than loaning money to startups? Getting a return on an investment.
When many individuals contribute money to a project, and seek a financial return from that loan, it is known as “crowdfund investing.” Thanks to the bipartisan supported JOBS Act that was signed into law by President Obama in April, it is now easier for small companies to raise money from investors and receive crowdfund investing. If you consider that most net job growth in the US comes from startups, it’s clear that legalizing crowdfund investing is a great way to create new jobs and promote economic recovery.
To see crowdfund investing in action, you can look at peer-to-peer lending communities such as Prosper and Lending Club which have facilitated over $1 billion in personal loans combined. These sites function differently than Kickstarter because lenders may see a return on their investment. Thousands of people loan a little bit of money to borrowers who are often trying to pay back debt elsewhere. Through this process, Prosper and Lending Club claim that investors get better returns and borrowers get better rates.
With return comes some risk, but these lower-risk financing and loan mechanisms are intriguing to say the least. Through crowdfund investing, investors have control over their money and can better manage their risks while aiding homegrown efforts that would not have been able to get funding otherwise. The implications for this form of investing are vast.
Imagine whole communities taking to the internet, communicating and networking with friends and colleagues to achieve funding for local projects.
Individuals can feel proud of how they invest their money, while both witnessing the impact of their dollars and limiting their contributions to projects that only match their interests.
We have seen the power of crowdfunding in local community solar projects at Solar Mosaic. In one year, we received $350,000 to finance five solar power plants through our zero-interest investment model, and the power of the crowd to facilitate positive local change is increasingly visible. As individuals, we can finally see the impact of our contributions, and together we can help change the world.
I say get out there and join the crowd!