Due to the rising costs of obtaining a college and post-graduate degree, entrepreneurs and business-minded individuals have started to suggest that younger people may be better off spending their education dollars on starting a new business. With the total cost of a four-year college degree (including tuition and lodging) sometimes surpassing $100,000, and a graduate program costing about the same, that amount of money could be an incredible launching pad to open a franchise or other start-up. (To learn more, read The Small Business Jobs Act: Make It Work For You.)
The need for creative ways to raise capital has become even more important these days. An anemic economy struggling to return to growth following the credit crisis has meant that credit is tight and that traditional avenues to raise funds, be it bank loans or government programs to fund small businesses, have limited resources. Lately, the entrepreneurial community has started clamoring for additional means to raise capital as an alternative to more traditional channels. Additionally, the recent crisis has sent unemployment skyrocketing. As a result, politicians are eager to find ways to create job growth.
The down economy and the rise in social networking have given movement to the concept of crowdfunding (the term crowdsourcing has also been used interchangeably), which combines the resources of a large number of individuals to fund a single business concept. Traditionally, an entrepreneur has sought to scrape together enough seed capital by combining his or her own (usually modest) wealth with that of a small, close-knit network of friends and family to get a business venture off the ground. The advent of social media on the Internet has made it possible to scale business relationships even more. These days, it is common for an individual to have hundreds of relationships across a wide array of social media platforms, be it Facebook, Twitter or LinkedIn.
With the networking means largely already established by savvy social networking sites, the only thing holding back the widespread adoption of the crowdfunding concept has been uncertainty regarding restrictions on who can commit capital to a new business venture. Many state requirements stipulate that only accredited, or wealthy investors can contribute funds to such business startups. The thinking is that these investors have the experience and deep enough pockets to withstand losses, given that start-ups have a high failure rate.
This more limited mindset to entrepreneurism is slowly crumbling in the current economic environment. Right now, bills are being discussed and working their way through Congress that would clarify the uncertainty over who can fund a business venture. It is paving the way for smaller and non-accredited investors to contribute their hard-earned capital to entrepreneurs. The ability for a business to raise up to $1 million through a crowdfunding network has been discussed, as have restrictions that limit individual commitments to below $10,000 or 10% of one's annual income, whichever is less. (For help on how you can fund your small business, see How To Attract Investors For Your Small Business.)
To further validate the use of online means to create businesses, last year an estimated $280 million was invested toward the creation of more than 30 sites dedicated to crowdfunding. More than $50 million is reported to have been committed to business ventures on sites that include Second Market on a national scale, as well as more local initiatives, such as local stake.com in the Indianapolis, Ind. marketplace.
The website initiatives require the establishment of a community of individuals willing to commit capital to new (as well as existing) business ventures. Additionally, entrepreneurs must present their vision for new businesses, including company descriptions, the market potential for proposed products and services, and potentially financial projections and milestones. In this regard, the creation of standard business plans is important so that individuals can be as fully informed as possible when deciding where to commit their capital.
The Bottom Line
A low percentage of new business ventures end up being successful, but every business must be started from the ground up in order for it to have a chance to succeed. Those that do become successful can more than make up for the losses from failed business ventures. Venture capitalists (VCs), which usually only invest in start-ups that require millions in seed capital, must invest in many different start-ups and the few successful ones can easily cover those that fail. It can certainly be risky, but crowdfunding offers the potential for individual investors to pursue a similar model, In other words, individuals looking at crowdfunding as a source to make money may have to spread their bets across dozens of business ventures.
From the perspective of the entrepreneur or budding business owner, crowdfunding represents a new and creative way for them to raise capital. It also puts the traditional VC model in the hands of a wider and more diverse mix of businesses. (For more help with your small business, check out Streamlining Tips For Small Business Owners.)