Call it venture capitalism for the masses. The U.S.
Jumpstart Our Business Startups, or JOBS, Act is about to
inject new energy into crowdfunding, a web-based approach to
raising business capital. Through an amendment to the
Securities Act, the JOBS Act lets start-ups raise money from
the public via crowdfunding platforms like Fundable and
RocketHub, as long as those platforms register with the U.S.
Securities and Exchange Commission.
Once regulations are in place, this year or next, that
change will provide an entirely new class of capital and
open up trillions of dollars of new funding to small businesses
in the U.S., says Eric Corl, president and co-founder of
Columbus, Ohiobased Fundable.
The current crowdfunding model offers only trinkets as
payback. For example, a $10 pledge to beverage maker Homemade
Bliss on Fundable.com entitles the donor to a discount on a
six-pack. Under the new model, Fundable and other portals will
give nonaccredited investors the chance to buy equity after
scrutinizing a start-ups business and financials. But
those small-time venture capitalists shouldnt expect to
get rich or even turn a profit. The odds are not
good, warns Lewis Gersh, managing partner at Metamorphic
Ventures, a New Yorkbased venture capital firm whose
portfolio includes crowdfunding giant Indiegogo. People
who dont do this regularly have to go into it thinking,
Im going to lose it all.
Anyone hoping for outsize returns needs to understand that
the crowdfunding change is a big social and business
experiment, Gersh says. It raises many practical and regulatory
questions. Among the latter: how to establish good investor
relations practices that dont flood a start-up with
paperwork. The more investors, the more complicated things get,
Gersh notes: Its a nightmare for a public company;
how are small start-ups going to manage it?
This and other regulatory concerns could be resolved by
December 31, the SECs deadline to make its new
crowdfunding rules public under the JOBS Act. But Gersh thinks
mid- to late 2013 is a more likely time frame. Its
as if were starting a whole new investment, regulatory
and legal regime, including a market to house it, he
explains. Were starting from scratch, and
theres a lot to it.
Equity crowdfunding poses little threat to traditional
venture capital for now, anyway. Most businesses raising
venture capital do so from investors who bring expertise to the
table, says Stephan Paternot, founder and general partner at
New York venture capital shop Actarus Funds.
Still, theres a place for the gazillions of smaller
investors, he adds. They make fewer demands, and
their dollars can give entrepreneurs leverage when negotiating
with venture capital firms.
Equity offerings probably wont disrupt
perks-for-dollars crowdfunding either. Scott Steinberg, author
of The Crowdfunding Bible, believes there will be room for
everybody. Thats partly because the success of creative
project fundraiser Kickstarter and others has attracted more
backers, money and media attention, and consequently more
public interest in crowdfunding, Steinberg notes. Think
of it as a house, he says. Its going to be a
crowded space, but as the market expands and matures, everybody
in the household is going to be able to play nicely
Steinberg predicts that the floor plan will become far more
elaborate as new players appear. Therell be a
million flavors, but each portal will focus on a particular
community or industry, he says.
The equity model could give venture capitalists and angel
investors the opportunity to gauge a start-ups market
potential live on a crowdfunding platform. For now
thats definitely the exception, not the rule, but
thats changing, Actaruss Paternot says.