Tag Archives: Crowdfunding

Reality Check on Crowdfunding

Angel investment, Crowdfunding, ,

I’m seeing more and more marketing showing up about so-called crowd funding these days. Sorry, but no. Not yet. Reports of crowdfunding in the U.S. are, as of today, just wishful thinking.

That is, to be sure, unless you play with definitions. For example, if you call KickStarter crowdfunding, then yes, Kickstarter is a great source of prepaid sales and donations, great to validate sales, and it’s healthy and growing. And Kiva too, is an excellent source of small loans for startups. However, much as I like both, neither of those is crowdfunding. Crowdfunding is supposed to mean lots of people each buying small shares of a startup or small business to fund it. Crowdfunding is about equity. People who contribute their money in crowdfunding get ownership in the business. Wikipedia Crowdfunding

And that, sadly, is not happening in the U.S. today. Yes, as the Wikipedia definition here suggests, the JOBS act of 2012 was supposed to open the door to crowdfunding; but it didn’t. What was supposed to happen was the Securities and Exchange Commission (SEC) was supposed to publish regulations to open up startup investing to more people investing smaller amounts without as many restrictions as before. And it didn’t.

The angel investment group I’m a member of, the Willamette Angel Conference in Eugene and Corvallis, OR, just finished its 2014 investment in a startup. Despite the promise of the 2012 law and the celebrations that followed, angel investing is now regulated and restricted even tighter than it was before. Our group joined six other angel investment groups in our state to figure out how to implement the regulations published last year. And the result: tighter controls, not looser.

Since our group started in 2009, we were always limited to was the SEC calls accredited investors. We always had to be careful not to advertise our meetings or recruit members openly, meaning that we could only recruit specific people who we had good reason to believe met the SEC qualifications.

Specifically, how is it tighter? This year, despite the myth of crowdfunding, we had to be much more careful than before. Our investment is coordinated with a local event to highlight the availability of angel investment in our region. In all past years, we had five finalist startups presenting their pitch to an audience of 200 or so local people interested in startups. The audience included the 35 or so member angel investors, of course. This year, however, we couldn’t have our finalist startups share their full pitch with the audience because the vague SEC regulations led some attorneys to worry that we’d be hurting the startups by making them guilty of a general solicitation.

To be honest, I’m not that anxious to see real crowdfunding happening. I’m not at all sure it will be the boon to startups we all think. Given that spammers are still making money by promising to enlarge body parts, people are still making some dumb choices on how they spend their money over the web. All we need is a well-publicized fraud to lead public opinion on crowdfunding, and step by step things will get worse, not better. Or so I fear.

But for now, at least: No, there is no crowdfunding going on in the U.S. Angel investment is still restricted to accredited investors only.

 

Crowdfunding is Being Oversold

Business Financing, Starting a Business, ,

I think so-called “crowdfunding” is being oversold. Many people seem to think it’s going to mean a lot new investment money for U.S. startups. I don’t think so. Not yet. Maybe never. 

crowdfunding Google search

Crowdfunding, unfortunately, has become one of those bucket terms, that mean different things to different people. I use the term for ease of restrictions on small business and startup investments so more people can invest smaller amounts. And invest means buy shares of ownership. It’s risk investment. I really like KickStarter and the like, platforms startups can use to get financing help in return for prizes, advance purchases, and donations. But that’s not what I’m writing about here. It’s not risk investment. 

Maybe that’s why there is so much action on the web. Lots of offers. A google search (my illustration here) would indicate crowdfunding is everywhere. Half a million hits. 

The JOBs act of 2012 talked about it. Crowdfunding advocates celebrated., but hasn’t changed much. According to reports in VentureBeat and elsewhere, the most recent SEC ruling has as much bad news as good news for startups and angel investors. And some say the latest regulations make things worse, not better. The best summary I’ve seen of that negative view is Naval Ravikant’s letter to the SEC last month. Naval is the founder of Angellist. I posted my view on that a few weeks ago on Huffington Post, talking about some good news and some bad. And Alan McGlade has a good analysis posted as Crowdfunding will Flourish Regardless of What the SEC Does in Forbes.com yesterday. 

Action point? Conclusion? If you’re one of those people thinking crowdfunding is coming soon, don’t hold your breath. 

The New JOBS Act, Crowdfunding, and Shoes Waiting to Drop

Blogs and blogging, Weblogs, , , , , , , , , , ,

It’s less than three weeks since the new JOBS act opened the door to exciting new crowdfunding initiatives. This could be a sweeping change, an end to antiquated laws requiring startups to get investment mainly from so-called accredited investors. And it could be another deregulation causing a lot more problems than it solves. 

For the curious, here’s a quick reading list I’ve compiled, full of excitement, eager anticipation, fears, contradictions, and contention.  

  1. Gene Marks has a good summary in Drilling Down: What Small Business Should Know About Crowdfunding on the New York Times. This one is positive and optimistic. 
  2. For a scathing indictment of the whole idea, how it’s actually more of the deregulation that caused the great recession, try Why Obama’s JOBS Act Couldn’t Suck Worse, by Matt Taibbi on Rolling Stone. (Don’t you love the title? Nothing ambiguous about that.)
  3. For a more long-term academic/intellectual view, try Yale Professor Robert Shiller’s Democratize Wall Street, for Social Good, also on the New York Times. 
  4. Jason Calacanis, founder of Mahalo.com and a very well-known and vocal successful entrepreneur, raves about the underlying idea of crowdfunding in The Two Most Important Startups in the World, posted a couple of months ago, before the new bill passed. 
  5. Bob Rice, New York venture capitalist, posted Forget Crowdfunding: Why JOBS Matters on the gust.com blog. A couple other posts on the subject on that blog — which is the major platform for angel investment — are Antone Johnson’s train wreck post, in which he fears the worst from crowdfunding before the bill passed;  and then his somewhat-relieved revision in his back on track post a week later. 
  6. Last but not least (since we’re on my blog at the moment) is my What Worries Me About Crowdfunding on the Huffington Post. What worried me then, before the bill passed, still worries me now. 

I could go on with the reading list, but it’s already too long. 

So which is it? All hail the new era of startups let loose from the nasty bureaucratic constraints? Or the opposite, run for the hills because chaos is coming? Obviously somewhere in between the two. Also obviously, a lot will depend on who does what in crowdfunding, and how quickly, and how well. If this new world starts with some very visible unsuccessful but popular deals, for which a lot of people lose money, that’s one scenario. If the regulations manage to control the scams and somebody builds a good crowdfunding site with some reasonable precautions, then that’s another scenario. 

So I’m waiting for that the shoe to drop. 

Can’t Get Funded? Maybe There Are Better Ways

Bootstrapping, Business Financing, , , , ,

Today I joined Ian Sigalow, Jim Estill, and Mike Edelhart on a free webinar titled “Revolution in Venture Funding.” If you’re interested, here is the link to the permanent archive: http://myventurepad.com/93875/audio-archive-revolution-venture-funding.venture-funding-revolution

The sizzle in this one is the idea of crowd funding: specifically, there’s a bill in congress that would loosen up restrictions on small-time investments in startups, relaxing the constraint related to “accredited investors.” A lot of people are excited about that. Me too, but I’m also worried about opening up a floodgate of spams and scams. I have mixed feelings.

I’ll be adding in some suggestions for alternative funding and bootstrapping, including my own experience of funding a new product by giving a professional programming shop a percent of future revenue rather than percentage ownership in the company, and of getting a big company promising to purchase a product to fund the development. And, in the end, my experience of bootstrapping Palo Alto Software so that as it stands now, we own it outright, with no outside investors.

In that vein, I was searching the web and came up with this Smoothspan: Directory of Bootstrapped Companies listing some very well-known companies (37 Signals, WordPress, Zoho, and several others) that were bootstrapped. And you can add Palo Alto Software to that list.

And I want to add that Ian and Jim are world-renown pros in venture capital investment, and Mike is a smooth moderator, so the discussion will also get into a lot of other angles on the main theme, revolution in funding. I hope you join us.