Showing 5 posts from May 2013.
A recent study, Swept Away by the Crowd? Crowdfunding, Venture Capital, and the Selection of Entrepreneurs, claims that investors on popular crowdfunding websites focus on many of the same qualities and indicia of potential success as venture capitalists.
According to an analysis published by the CrowdFund Intermediary Regulatory Advocates (cfira.org) this study "casts doubt [on the claims of critics] that crowdfund donors are an unsophisticated lot."
The study, led by Wharton School of Business Professor Ethan R. Mollick, reviewed 2,101 crowdfunded projects on Kickstarter. The study reviewed the history of success of a project, the influence of endorsements on a crowdfund project, the level of preparation demonstrated by an entrepreneur, quality, social networks, geographic outcomes and gender. The study concluded that crowdfunders act much like venture capitalists in making predictions on the success of a project, focusing on factors like the quality of the product, the resume of the team members and the likelihood of success.
According to Professor Mollick, "the signals of quality that are used by VCs to assess the viability of new ventures are also used by crowdfunders. This bolsters the validity of these signals as indicators of start-up potential, but also suggests that crowdfunding has the ability to distinguish quality potential projects from less promising ones."
This is an important conclusion: Critics of the crowdfunding provisions of the 2012 JOBS Act claim that it is likely to increase levels of fraud, by permitting business promoters to pitch investment opportunities directly to non-accredited investors. If, as Professor Mollick's study suggests, crowdfund investors consider the same signals of quality as professional venture capitalists, the potential for fraud seems overblown.
Business guru and media personality Donald Trump announced that he is getting into crowdfunding by investing in upstart platform FundAnything and that he will promote the platform through his Twitter feed by unveiling his investments through FundAnything.
I'm not sure if this is a sign that crowdfunding is entering into the mainstream or a sign that Donald Trump is taking crowdfunding with him in another jump "over the shark".
The Donald is not know for his shyness, however, and his dalliance with crowdfunding seems likely to bring more attention to the space.
The FundAnything platform is currently only able to handle rewards-based and charitable crowdfunding. Securities-based crowdfunding is still awaiting regulations from the SEC to implement the Congressional intent expressed in the 2012 JOBS Act.
My friend Dara Albright sums up the importance of Google's investment in Lending Club (prior post):
Although momentous for the consumer credit sector, many have been wondering how P2P's triumphs relate to securities-based crowdfunding. The fact is, because P2P lending is the precursor to securities-based crowdfunding, its achievements are not only dramatically impacting the emerging crowdfunding industry, they are helping shape it. Securities-based crowdfunding or "Peer-to-Business (P2B)" is simply the next iteration of P2P. However, instead of peers providing personal loans to its peers, securities-based crowdfunding will allow peers to invest in the businesses of its fellow peers in exchange for equity or debt. By demonstrating that people are more efficient at financing each other through the use of social media than with conventional banking intermediaries, P2P has effectively validated the "crowdfinance" model for the entire industry, even compelling the financial establishment to enter the fray.
Please join me if you can at the Solo / Small Practice Section breakfast meeting of the Atlanta Bar Association on May 16, 2013 where I will be presenting, " Crowdfunding 101: A New Form of Fundraising for Start-ups and Small Business."
My friend David Lilenfeld of SterlingFunder arranged for the invitation.
I'll be talking about crowdfunding in general and the Invest Georgia Exemption in particular. The Invest Georgia Exemption allows Georgia residents to invest in Georgia-based companies through crowdfund offerings of securities.
The Invest Georgia Exemption is particularly important now that nationwide crowdfunding through the JOBS Act has been stalled by SEC inaction. Georgia is one of only two states that has adopted a form of intrastate crowdfunding.
I had a great time recording this Internet radio interview with Mitch Schlimer from the Entrepreneurship Hall of Fame.
We talk about crowdfunding, the Invest Georgia Exemption and some of the ways we work with start-ups and entrepreneurs at Taylor English.
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