By this time, most startups and entrepreneurs have probably heard about the JOBS Act and the implications for the crowdfunding industry. With the enabling legislation under the JOBS Act, startups will be able to utilize the power of the crowd to actually source investments as opposed to only soliciting donations for business ideas. Startups will be permitted to raise equity investments through online platforms that will be specifically created to help startups access this newfound pool of capital in the crowd.
How is crowdfunding going to change?
To date crowdfunding has not been an acceptable method for startup companies to raise investment capital. While you were able to ask for the support of the crowd for your endeavors and/or creative projects, the proceeds from these campaigns did not count as equity investments but rather a type of donation. The supporters were not permitted to generate an economic return even if these (often times companies and/or for-profit initiatives) campaigns were wildly successful! Basically even if you were to ‘support’ the next big startup, you weren’t able to reap the benefits when the company was bought out or went IPO.
Crowdfunding is not a free option or an endless amount of capital. There are restrictions on the amount you can raise ($1.0 MM), how much each investor can invest etc. Given the restrictions and the amount of capital that can be raised using crowdfunding there are specific startup types that will benefit the most.
Powerful ideas and intellectual property
Some startups, more so than others, exhibit particularly unique ideas and associated intellectual property that is difficult to replicate. Whether it is in the fields of high tech or clean energy, these kinds of businesses can originate from a variety of industries. However, what they have in common is the fact that early stage capital can transform an idea into a world-changing business!
Early stage capital for these types of business can be very difficult to raise from traditional funding sources due to the risk associated with the investments. However, funding from the crowd can not only provide a certain validation for the business idea, but the nominal amounts of investment made by each crowdfunder also serves as a natural weight adjusted risk mitigant for each investor.
Socially conscious business models
Venture capitalists and early stage investment firms, to no fault of their own, have to focus on the financial returns generated from the investments they make. The very life force of these types of firms is the ability to make prudent investments whereby a few investments generate huge returns that more than cover for the failed investments.
However, unless the firm is specifically created to propel social investments, low return generating social ventures will fall low on the totem pole of investment choices. Social ventures often exhibit the same business risks without the same financial reward. The crowd has spoken time and time again and even the future generation of investors are looking for businesses that not only generate profit, but do so while creating positive change in the world. Whether it is through affordable medicine or fair trade businesses, crowdfunding can become a powerful tool to find equity investors that are looking to make a triple bottom line investment.
To summarize, it’s a really exciting time for all sorts of startups, but especially those that often have a difficult time raising capital through what were the traditional sources of early stage finance. With the support of the crowd, startups will not only have new investors, but also build inherent marketers and supporters growing your business together with you! There’s a new era of startups just on the horizon.
Are you getting ready for it?
Sang Lee is the CEO & Founder of Return on Change, the next generation’s crowd-investment platform for high impact startups. Previously, he’s worked in investment banking and is now ready help revolutionary startups change the world!
