What is, and is not, crowdfunding

One of the challenges of crowdfunding is explaining what it is, and what it isn’t. Plenty of people get the general idea, but stumble when thinking about how it might work or which types of businesses might benefit from mass micro-investments.

Crowdfunding is not a group of gray-haired, starched-shirt guys sitting around a mahogany table saying things like, “James, this wind farm plan sounds like a splendid idea. Just splendid.” If it requires multi-millions of cap ex, needs rich stiffs to finance it, or displays some perfectly coherent investment thesis, then it might be suitable for  venture capital, banks, etc.

Crowdfunding resembles something like a bunch dreamers, tradesmen, enthusiasts, and real-estate savvy types sitting around coffee when one says to the other, “this neighborhood is growing so fast that if we gut rehab that building and get it zoned for retail on the first floor with work/live condos above it . . . where do we find co-investors to buy the property?” A few real estate businesses, such as FundRise, are already at work in this territory.

Crowdfunding is opportunistic, sometimes messy,  and not “monumental” or “world-changing” in the way the internal combustion engine or  polio vaccine was. It almost certainly won’t be used for financing anything as far-reaching as Amazon.com or as powerful as Google. Those types of businesses have little problem catching the eye of sophisticated angel and VC groups if they need outside investors.

Who has a list of the likely areas in which crowdfunding will take hold? Fire away.


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Congress Risks Snatching Crowdfunding Defeat from the Jaws of Victory

As crowdfunding supporters hold their collective breath for Congress to send a bill to the President for his signature, some are reminded of the cautious advice about second marriages representing the triumph of hope over experience.

What could go wrong? For starters, the proposed crowdfunding legislation is gestating in fear and distrust. Bernie Madoff’s massive fraud is still fresh in our minds. The reputation of Wall Street is slightly ahead of North Korea (maybe). Media reports of corporate accounting scandals and other shenanigans at shareholder expense are legion. There are no limits to the lengths our politicians will go in order to protect the public from itself–or at least appear to be protecting the little guy from market meltdowns.

The problem is that crowdfunding isn’t about fear and distrust. Startups are full of promise, a refreshing departure from the general skepticism of financial markets. Crowdfunding thrives on fundamental optimism: that a startup will one day make it big, new jobs will be created, a ground-floor investment will defy sometimes long odds, and so on. It’s the frothy Springtime to the dull Winter of big business.

Treating grownups as if they need an extra layer of protection in a crowdfunding environment is a product of fear and distrust, and one that appears to be wildly misplaced if the instances of crowdfunding fraud in the UK and elsewhere are any indication.

A second problem is that the proposed crowdfunding bills suffer from unnecessary complexity, a failure of the “simplicity test” described by Davis Wright Tremaine LLP attorney Joe Wallin. Others have commented on the messy process and potential for ineffective legislation, so we’ll have to wait and see whether the our politicians view the Internet as terra incognita that must be tamed, or another avenue for streamlined risk capital.

As Patrick Ruffini writes, “Crowdfunding shouldn’t be — and actually isn’t — controversial, yet some politicians are trying to stand in the way. For too many in Washington, the Internet is still a foreign land — one to be regulated and held at bay. Instead of the enormous potential for new small business growth, some politicians are demagoging the potential for fraud . . . ” Will fear and distrust prevail? Stay tuned.

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