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The rise of crowdfunding: 10 things to know

By Lyndsey Gilpin April 30, 2014,


Crowdfunding platforms are changing the way we finance
projects and services, but the laws surrounding them are still
ambiguous. Here are 10 facts to get you up to speed.
Crowdfunding is a tool that allows anyone -- be it startup
founders, musicians, artists, students, children, or even
someone in a developing country who lacks basic electricity
-- to attract a pool of people via the internet to invest in their
business idea. A funding target is established, and rewards to backers are offered.
This new type of startup business model has the opportunity to disrupt industries and change the
way we determine success and let the best ideas flourish, rather than the best access to capital.
It's exciting, because the venture capital model that powers Silicon Valley and the global startup
scene is inherently biased based on geography and connections. According to the Small Business
Administration, about 600,000 new businesses are started in the US every year. The number of
startups funded by VCs? 300. That means 99.95% of entrepreneurs won't get funded.
To affect real change, we have to understand the basics: what defines crowdfunding, how it
works best, and how the current laws shape what's possible. We also need to look at the ways the
law is changing and what it means for the future of crowdfunding.
Here is a list of the 10 most important things to know about this important new buzzword.
SEE: Photos: Crowdfunded tech projects that are changing the world
1. There are several different types of crowdfunding
Equity crowdfunding - Investors receive a stake in the company with this model. At the
moment, equity crowdfunding is the least developed because of regulations about liability of
equity.
Donation-based crowdfunding - Backers come together to donate to support a cause, and may
receive a thank-you or shout out.
Reward-based crowdfunding - In exchange for a pledge, a backer receives a gift or other
reward (like the product when it is released) instead of money or a share in the company.
2. Niche platforms are popping up everywhere
Most have heard of Kickstarter and Indiegogo when someone says "crowdfunding platforms,"
but in reality, there are many types of crowdfunding platforms, and more are added to the list
every day. Here are a few examples:
Renewable energy - Several platforms, including Mosaic, crowdfund solar power and other
renewable energy projects in the US and abroad.
Medical services - Watsi is probably the most notable example in health care. The platform
connects people with those in need of medical treatment. The lenders are updated on the status of
the patient throughout the process.
Artists - Patreon launched in 2013 as a crowdfunding site for indie artists and creators. People
who want to get started in music, the arts, media, and television pitch their ideas to the world in
short videos.
Investors - AngelList and others connects angel investors with tech startups around the world.
Inventions - Quirky crowdsources for invention ideas. People pitch the ideas and the crowd
votes on their favorites. The best ones are manufactured by the company or one of its industry
partners such as GE.
3. Crowdfunding is set for a boom
Recent research from TABB Group shows that the crowdfunding market could reach $17 billion
globally by 2015, with more than 1,000 funding organizations formed to raise money. The firm
said angel investments should grow to between $28 billion and $50 billion by 2015. That's an
88% increase in lending venues around the world. There is a definite void left by traditional
vendors, as small business loans from banks have dropped 32% since 2008. This is an
opportunity for the crowdfunding market, and TABB research said that if the SEC gets it right,
crowdfunding will have a real chance to compete as an alternative option.
4. Equity crowdfunding is limited to accredited investors
In 2012, President Obama passed the Jumpstart our Businesses Startups (JOBS) Act. It set the
stage for the public to receive company equity in exchange for funding a business. Until then, the
Securities Act of 1933 stated that that entities could not sell securities until the offering was
registered with the Security Exchange Commission (SEC) or there was an available exemption
from the registration. The crowdfunding exemption introduced by the JOBS Act won't be put in
place until the SEC changes its regulations, which is expected to happen in 2014. Legal equity
crowdfunding itself has limits. Individuals with an income less than $100,000 can invest up to
5%, and those who make over $100,000 can invest up to 10%.
5. Laws are changing
These updated regulations would be a big step for the world of crowdfunding because lower net
worth individuals could invest in these projects. The JOBS Act Titles II and III should be passed
by third quarter of this year. These regulations would allow people to invest through registered
brokers or lending portals, but there will be limitations on how much money could be invested.
6. Crowdfunding brings more diversity to business
Crowdfunding gives more women and minorities opportunities to see their business ideas
succeed. Investors in all industries have become risk-averse. They often rely on networking and
precedent to decide who wins in the business world, and that usually leaves women and
minorities hanging. According the the Center for Venture Research, in 2012, only 16% of
startups pitching to angels were women-led and only 6% were minority-led. Of the 16%, only
25% actually secure funding.
About 42% of Indiegogo's successful campaigns are run by women. The site also promoted
International Women's Day very heavily, and co-founder Danae Ringelmann is trying to make
sure women's success in business one of her biggest platforms. Abroad, female entrepreneurs
who would never get the chance to promote their business are now being given the opportunity
through microlending and crowdfunding platforms.
7. Crowdfunding's big promise to democratize finance
It's the reason Danae Ringelmann started Indiegogo: to democratize finance. Crowdfunding is
reshaping the way we invest in businesses, and reorganizing the way we see businesses succeed.
Up until now, relationships between angel investors, banks, and startup founders determined
which ideas succeeded in the corporate world. With crowdfunding, this is turned upside down,
and the public decides when and which ideas succeed based instead on their merit.
8. Crowdfunding promotes globalization
Because crowdfunding platforms allow people from anywhere in the world to start a campaign, it
opens up a whole new realm of possibilities for global businesses. Entrepreneurs in developing
countries, in particular, who would never have otherwise gotten the chance to propose a business
or market a product (especially to people in the Western world), are now on a more level playing
field. In addition, crowdfunding platforms for civic projects, environmental projects, and social
justice issues provide an opportunity for people to fund projects that can truly have an impact on
the world, like bringing clean water, helping start local textile businesses and restaurants, and
promoting equal opportunities for all.
9. Microfinancing is not the same as crowdfunding
Microfinancing and microlending are both sometimes considered crowdfunding, but they are
quite different. Backers or loaners are paid back over a period of time determined by them and
the borrower. The most famous example of microfinancing is Kiva, which matches lenders and
borrowers from all over the world and has an exceptionally high payback rate. Another peer-to-
peer lending site is Zidisha, which offers a more direct connection and removes the middle man,
which are the microfinance institutions (MFIs).
10. Crowdfunding helps promote the triple bottom line
You may have heard that phrase before, and it refers to the triple bottom line of sustainability in
business operations -- that is, people, profits, and the planet. The phrase was coined by John
Elkington in 1997 in his book, Cannibals with Forks: the Triple Bottom Line of 21st Century
Business. The basic concept is the company's responsibilities lie with its stakeholders rather than
its shareholders. That means anyone who has an interest or is somehow impacted by the actions
of the company.
The triple bottom line has been adopted recently by for-profits, non-profits, and government
agencies to show the company has a broader spectrum of determining success. This idea is also
very similar to the standards of benefit corporations, who promote business as a power for good.

About Lyndsey Gilpin
Lyndsey Gilpin is a Staff Writer for TechRepublic. She writes about the people behind some of
tech's most creative innovations and in-depth features on innovation and sustainability.