July 24, 2011
The concept behind crowd funding allows a mass amount of people to be involved pocking a financial winner. Additionally, appealing to a mass amount of people willing to make a small “wager” on a business concept may just make this a sure bet. What crowd funding does is collect all these small “wagers” on a specific business concept or product as the funding initiative for that business start-up or expansion. Crowd funding is a phenomenon becoming increasingly popular today that combines many small amounts of “contributions” to exact something – ranging from the start-up of a product-producing company to helping a worthy, charitable cause.
Crowd Funding Can be a Form of Microfinancing
Microfinancing is a method used to help finance individuals or organizations that do not typically qualify for traditional forms of funding such as bank loans. In fact, traditional banking institutions never venture into microfinancing since it is well beyond difficult managing to underwrite $50 loans. However, business entrepreneurs seeking to avoid the restrictive hassles accompanying the traditional capital raising process are turning to crowd funding as a viable source for obtaining money. Instead of depending upon one “transaction”: to find the needed business capital, entrepreneurs use crowd funding to raise money from a ton of people who contribute “painless” small amounts that once combined have great financial power. This is a form of venture capital that is becoming more widely used and its marketing targets the Internet and specifically social media channels.
Crowd Funding Includes Idea Marketing
Unlike applying for traditional bank loans where an entrepreneur must submit a detailed business plan that reveals a sound approach with all aspects of operating examined and projected carefully, crowd funding typically includes the projection of a popular idea or a charitable cause as an attraction for “investment.” If the idea or concept is not popular enough to attract the necessary amount of $5 contributors, then the project goes nowhere. Any investors have their money returned. However, if a website promotes an idea that leads to 10,000 people contributing $50 each, an entrepreneur can stand to raise $50,000 to get the project up and running. Crowd funding is actually the extension of the concept of crowd sourcing where the concept is that specific tasks can be delegated to the crowd where mass collaboration can get something done. The only real difference e in crowd funding is that the mass collaboration is raising money.
Crowd Funding as the Ideal Method for Raising Business Capital
It may be but a simple matter of time before crowd funding efforts overtake angel investing and other traditional forms of financing as the nest method for capitalizing a new business. Yet, it is not without its challenges. If these small amounts of crowd funding contributions are deemed to be equity investments, the business will run afoul of many different securities laws. Some laws dictate that if funding is raised beyond a certain number of investors than it is subject to securities laws. Therefore, entrepreneurs using crowd funding as a capital raising vehicle need to create structures that comply with the law. This is especially vital for any business seeking crowd funding as a money-raising vehicle.
Crowd Funding as a Scam
The anonymity of the Internet as a home for crowd funding efforts also allows its use as a scam. However, when a contributor receives something of greater value than their investment, it cannot be considered a scam. Many online entrepreneurs offer downloadable products in return for contributions – much like a public television station offers viewers a tote bag for a $25 donation. Yet, appealing for small contributions, such as $5, from thousands of people, often allows many clever scam artists the opportunity to “steal” from unsuspecting contributors who actually are quite willing to risk a small $5 investment in the hope for receiving a future greater gain. Crowd funding scam artists appeal to the “gambler” in people especially contributors most willing to risk a very small investment. Finding thousands willing to make such a risk is rather easy using the mass reach of the internet.
Potential is Almost Overwhelming
Eventually crowd funding has to be regulated as it becomes increasingly popular. The scams will also grow in popularity since anytime money is involved someone seeks the easy way toward getting it. Eventually, crowd funding will need to translate to liquid shares. No matter the size of a microinvestment, the investor wants to see a return on their contribution.
Imagine the day when a business funded by thousands of $5 investments sells for millions of dollars where everyone involved should get a nice return, albeit a small one, but much larger than the initial investment.
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