As the Internet continues to streamline the process of starting a business, opportunities for new entrepreneurs have multiplied. Of course, the rate of failure remains high, but the risks associated with financing a new business can now be spread out among an ever greater number of investors. This is accomplished through crowdfunding, the Internet-based method of raising funds in smaller, consumer-friendly increments from a much larger number of contributors than traditional venture capital funding.
Crowdfunding has gained attention as a 21st-century source of capital in entertainment, community-based projects, even healthcare. This platform allows for connections (of varying strength) to be made between entrepreneurs and funders from any corner of the world. While this may not mean the immediate death of venture capital, the potential for rapid change means every VC firm, large and small, needs to take notice.
The field has gone into high gear since President Obama signed the JOBS (Jumpstart Our Business Startups) Act into law in 2012. The legislation, designed to spur business growth in the wake of the 2008 financial crisis, legalized many core tenets of equity crowdfunding. Though it placed caps on the amount of funding that could be raised this way ($1 million, doubled to $2 million if they agree to a SEC audit), as well as financial limits on who could invest in such ventures, the act opened up crucial new doors for growing businesses and those who seek to profit from them.
The legislation has developed into something resembling true open sourcing of seed funding for all levels of investors. 2016 saw Title III of the JOBS Act come into effect, shaking loose the limits on investors and allowing true equity in investment for all, regardless of net worth. Just as Kickstarter allows anyone with a credit card to donate to various causes and projects, many platforms have arisen to allow amateur investors the chance to buy into new and rising companies.
Although there are some obstacles for businesses seeking to crowdfund under Title III, the VC world has offered a multitude of responses to these changes. Some voices choose to see the good in this new development, saying that by democratizing the fundraising process, crowdfunding can break down the walls between established VC firms and everyday investors. This, they say, is a net benefit for business owners who previously needed to appeal to a limited number of powerful firms or risk not getting the funding they needed to survive.
Others haven’t been so positive about the new potential landscape. Detractors say that the costs of compliance (filing with the SEC, legal disclosures, etc.) outweigh the benefits of a more open funding process. An increase in red tape, a common complaint from new business owners, could prove a massive deterrent for entrepreneurs looking to get their ideas off the ground.
Crowdfunding can also fall short when it comes to putting together substantial amounts of capital. At this point, there is a limited number of potential funders, so a venture requiring more than $1 million without existing name recognition is highly unlikely to attract money from the public to meet their needs.
Because of this, some experienced financial minds see the future somewhere between the two methods. AOL Founder Steve Case has stated his belief that crowdfunding will enhance and support VC, not supplant it. In this line of thinking, crowdfunding can help small businesses go from great idea to functioning company, then take the next step to large-scale growth through VC funding. This way, the challenges of growing larger amounts of money are met by VC firms, but only once the fledgling company has proven that is worth the attention.
This legislation has marked the beginning of an exciting new phase not just for the VC sphere, but for anyone who has considered starting a business. At this stage, there’s still a mountain of potential but many obstacles to climbing it. But at a time when even major international banks are getting in on the action, it’s grown impossible to ignore. The debate will continue, but as long as there are entrepreneurs with ideas, the options for getting them off the ground are greater than ever.
