The Los Angeles Chamber of Commerce held a unique event for entrepreneurs and business owners last week. The topic was not new, but relatively unheard of. Those in attendance were seeking an innovative solution to a common problem – raising capital to fund a cause, a project or business idea. Crowdfunding, as it has come to be known, is a concept that allows individuals or start-ups to obtain precious cash to bring a project to fruition or simply get started. It’s sort of like borrowing money from your grandparents, aunts and uncles and perhaps even thousands of your closest “friends” around the world to help produce a gadget you know everyone will want. Oh, and by the way, you don’t have to put on a suit and tie to pay your local loan officer a visit. The banks are completely removed from this process.
According to Chance Barnett, CEO of Crowdfunder, Legislation related to the JOBS Act signed in April 2012 is the catalyst making this possible. Currently, the equity-based crowdfunding (the kind where Aunt Suzie can invest $10 and make $12) is reserved only for those single registered investors making over $200,000 per year ($300,000 per couple). The SEC is formulating the rules and regulations, however, to protect the system from abuse when this model goes live to lower-income earners. They are expected to have a plan put together by the end of this year that will open it up to others. It’s definitely reminiscent of the time when brokerages like E*TRADE made it possible for people to buy and sell stocks on their own. When this thing launches for regular investors, some expect it to be the next big thing. Fred Wilson, co-founder of venture capital firm Union Square Ventures (backing many popular social media sites), predicts this market to swell to $300 billion. So far, in 2011, it had reached $1.5 billion. When the JOBS act legislation is complete later this year, there’s going to be lots of people showing up to this party. Look for it to become very crowded.
For now, rewards-based crowdfunding is alive and well at sites like Crowdfunder, Indiegogo and Kickstarter. Instead of being provided with a monetary return, you might be granted a ticket to be the first in line for your gadget. How about a t-shirt with the company logo on it? As an investor, those are the sorts of ROI you can expect from the current iteration of crowdfunding. As an entrepreneur, you’ll typically relinquish around 4% of your fundraising to the company hosting your campaign. You also determine how you say thank you, or what rewards you give, to your investors. Unless someone has some familiarity with an entrepreneur, they tend to be skeptical about the success of a venture usually only giving to it once the funding has reached 10-15 % of the goal.
Adam Chapnick from IndieGoGo shared one success story of a local LA brewpub by the name of Beer Belly. After one failed attempt, they used his company’s crowdfunding platform, IndieGoGo, to launch a campaign to raise capital for a patio expansion. The campaign was wildly successful yielding nearly double their initial goal. Savvy philanthropists (ok, beer lovers) were rewarded with free pints, brew house swag and even invitations to an “Epic Beer Night”.
DeKoven Ashley, COO of thrdPlace, and James Siminoff, CEO of Edison Jr., joined in the lively panel discussion and took questions from the eager business owners. It was fun and interesting to see, on the screens, the various tweets and real-time discussions aggregated by a unique service provided by PulsoViral.
With each person in the room formally introducing themselves and their company one by one, it was fascinating to see the diversity in industry present. The heavy tech/entertainment industry representation could have been due, in part, to the venue chosen for the event – the Los Angeles Center Studios. Early attendees were treated to a tour of this premier movie studio that has had a part in many successful blockbuster movies.
Early on in the panel discussion, the question was posed: “would anyone here like to learn how to get more money?” The answer was a resounding “YES!”
Thanks to the LA Chamber of Commerce and the featured speakers, many were introduced to a new way to realize their dreams in a crowded marketplace.