Crowdfunding is a new model of business funding that has made a drastic impact in the world of business. This form of funding is as innovative as it is a vibrant new means of funding business start-ups and projects. While crowdfunding has not hit the mainstream it sure has gained some recognition from many notable investors and world class business schools, including Stanford's Graduate School of Business. Crowdfunding permits a business' start-up ambitions access to funding that is not channeled through a bank or a venture capitalist. In this sense crowdfunding allows new businesses the flexibility to obtain funding through a multiplicity of lower level sources and financial interests. Brilliantly, while entrepreneurs gain funding for business projects, investors are simultaneously able to participate in the overall creation of wealth.
Pros & Cons
Crowdfunding has evolved significantly since its officially recognized conception in the 1970's. In the wake of its spawning, this progressive form of funding has opened up new realities in recent years which may prove to be beneficial or detrimental to the funding movement, depending on what businesses perceive as important to capital production. For instance, a seemingly positive reality crowdfunding presents the entrepreneur is contributing less initial capital from themselves, family, friends, and “angel” investors to fund a start-up. Although crowdfunding minimizes the tedious process of contemporary fundraising processes, and thus maximizes the entrepreneurs time spent on working on their business, by taking less of a personal risk entrepreneurs are lessening their opportunity to effectively engage with investors on a one -to- one basis. As a result, entrepreneurs gain less constructive feedback from purely critical investors with more at stake, and inadvertently decrease their chances at honing their business early on. A more neutral reality presented by the evolution of crowdfunding pertains to the notion that more investors can participate in the early financing of a business with smaller stakes as individual investors. One of the major advantages here is that anyone who is interested and who has the capital to contribute can participate in the financing of a given start-up. Ultimately, an industry dominated by rich investors can switch to an industry dominated by a multiplicity of smaller time investors, or a “strength in numbers” approach. Here diversification of the investor base bolsters the effectiveness of management by exposing it to multiple points of view while no longer being bound by a small number of interested parties. This benefit doesn't come without its corresponding downside. Although the diversification of investors allows for a multiplicity of interests to participate, investors are essentially further removed from the entrepreneur and may have difficulty obtaining the pertinent information regarding the business. In this sense, investors are conversely put more at risk if the business is unreliable.
Legality
Until recently many people were worried that crowdfunding might violate banking laws, however as of this year there have been critical amendments made to the legislation which work to the advantage of crowdfunders’ mandates. These amendments are primarily directed under the directive of the JOBS Act, 2013. However, there are some restrictions. Crowdfunding efforts may only occur through SEC approved platforms and businesses will be unable to raise no more than 1 million dollars per year. Additionally crowdfunders will be limited in their investment based on their income, which leaves some investors unable to contribute more than $2000.
Kickstarter
In 2012, 18,109 projects were successfully funded through crowdfunding efforts. This was not accomplished without over 2million investors who pledged roughly $300million in funding. Even more outstanding is that this effort occurred in 177 countries which is basically 90% of the countries in the entire world. 17 of these projects made over 17million dollars. These figures surely indicate a large degree of success and increasing popularity of the progressive new business funding model crowdfunding has presented the world.
