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Crowdfunding, and do Online Investor Portals Work?

October 12th, 2011 · 3 Comments

Karen Rands

Money doesn't just come from a piggy bank

Since the advent of online match making for couples, there have been sites that claim to match entrepreneurs with investors.  They started back in the early dot.com days and the SEC didn’t know what to make of these companies.  On one hand they were clear violation of one of the most significant rules for keeping an offering private and unregistered- NO public solicitation.  Now most entrepreneurs that are making the venture capital conference circuit routinely violate this rule, but for the most part everyone looks the other way.  But what about the site where an entrepreneur can pay a fee, upload a business plan, and expect dozens if not hundreds of potential investors to look at it and maybe even invest?

This topic was covered in the Compassionate Capitalist Radio Show recently:

PODCAST LINK TO RADIO SHOW BROADCAST

(sorry, not to post the badge here, but it auto-plays and kicks off with an unrelated advertisement, so click through to the segment and wait 30 seconds for the ad to end, thank)

We have known entrepreneurs who have used these online posting sites to vette their messaging and to identify potential investors, and then use outside networks to actually connect with those investors successfully.  But for the volume of companies that go through their machine, even less get funded than the alarming statistics of the number of companies that pitch to investor groups to get funding.   Recent stats show that less than 12% of the companies that pitch to angel investor groups get all the funding they seek.  Of the ones that post on the online investor websites, it is estimated that less than 7% get any funding at all and NONE (oh, maybe that is too harsh… less than 1%) get all their funding that way.  BUT, they work because they are great at selling HOPE and the cost of entry is low, usually less than $500.   It is like the scratch and win lottery ticket.   Americans are a hopeful lot of people.  Entrepreneurs are even worse at believing there can be an easy route to fame and fortune.

Forget whether they actually work to get capital.  The real danger beside creating false hope, is that these sites have potential to position an entrepreneur, whom has real potential to create a market shift and build a multimillion dollar company, to FAIL. In an nutshell, these sites can set an entrepreneur up for failure in two ways:

  1. if they do not have control over the release of their information to investors that have been screened and at least an electronic acknowledgement and approval is made before providing that potential investor with their docs.
  2. if the entrepreneur ends up bringing in a LOT of small investors as a result that are not sophisticated, much less accredited.   Follow on financing sources like venture capital will not even touch a deal like that because it is simply too messy and potentially fraught with shareholder lawsuits.

Enter CrowdFunding….

It is all the buzz and so perfect for the ubiquitous world of the Internet….It is the like the American Idol of capital raising.  If enough people like you and vote for you (with $$) then you WIN!

It is only a matter of time before the SEC comes down on some of these companies with a hammer, much as they have in the past with some of the group loan sites or early funding posting sites.

CrowdFunding works great for non-profits and for novel, inspirational type endeavors that better humanity and the world we live in.  It is also something that you, the entrepreneur  should give the financier something of value, not stock in your company.  That way it can be construed as a really expensive transaction that has ulterior motives, but doesn’t set the stage for the entrepreneur to have violated an SEC law or limit the potential of how they get funded in the future.

Case in Point: At a recent capital event for the entertainment industry, an inventor showed me his product and said he was raising $5000 to build his prototype…wearable clothes with LED sewn in for effect.  He had a hightop tennis shoe as his first product.   He was raising his funding through crowdfunding and would “break escrow” at $1800.  He was raising the $ in $18 increments.  People that gave him their credit/debit info would get a t-shirt and a custom song for their $18.  When he had a 100 commitments, he would charge/debit the accounts.   Kind of Clever…. didn’t violate any rules.  He had started the day before and already had 38 commitments.     Would I or any other investor I know do this, probably not, but there were kids, college kids, many others that thought his idea was cool enough to go for it.

Two websites list the most current sources of Crowdfunding and describes their differences.   There is some overlap but different ones on each list.  Looks to be about 15 sources for CrowdFunding in the market right now.

Business Insider – 8 CrowdFunding Sites

Web Distortion – 9 CrowdFunding Sites

Tell us if you have tried any online posting sites (GoBigNetwork, VFinance, BreadStreet, Funding Post, Next Capital) or any of these CrowdFunding Sites (RocketHub, FundBreak, Fans Next Door, CoFundos, KickStarter, MicroVentures, Quirky, Pozible, IndieGOGO) and what was your experience like.

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Tags: Current Financing Trends · Entrepreneur Biz-Buzz · Entrepreneurs Seeking Capital Corner

3 responses so far ↓

  • 1 Sally Outlaw // Oct 12, 2011 at 1:40 pm

    As one of the leading crowdfunding sites for entrepreneurs – http://peerbackers.com -we are big fans of crowdfunding and see it succeed regularly (my favorite part of my job with peerbackers is writing the checks to those who successfuly raise money via our site!). Also the SEC is now considering changing the regulations to ALLOW for investment/equity to be offered via this method so stay tuned for some terrific capital raising opportunities if this happens. Thanks for the post!

  • 2 ebsblog // Dec 9, 2011 at 11:47 am

    Thanks for the added info. We should probably do a follow up podcast and have you on the show.

  • 3 Frankie // Oct 14, 2011 at 2:30 am

    Another cool website for crowdfunding your ideas is Grow VC !

    Here the link http://www.growvc.com/

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