Top 5 Benefits of Crowd Funding
By Peter H. Diamandis M.D. on August 07, 2013
In this blog, I'm continuing my conversation with Chance Barnett, founder of Crowdfunder. Here, he outlines the top five major benefits that he expects from the JOBS Act and the crowd funding industry.
I've been massively impressed by crowd funding's exponential growth. Crowd funding sites generated some $2.8 billion last year, a figure that will soar to $15 billion by 2015. This extraordinary liberation of capital will dramatically accelerate the rate at which entrepreneurs finance their bold ideas.
Chance Barnett gave me an overview of the potential of crowd funding through the prism of the company he founded, Crowdfunder, and how this strategy can drive economic growth. Crowd funding won't just influence how entrepreneurs raise money and grow their businesses -- as I learned, the passing of the JOBS Act means that it will soon also impact the equity side of entrepreneurs.
"Collaborative finance is not weird, nascent or in the future," Barnett said. "People are participating in it now in a pretty significant way. People love the idea of tying themselves to something they care about and can wed that with financial return."
In that respect, as Barnett pointed out, Crowdfunder is a great social enterprise. "If I said, 'Peter, I want you to pay me $500 because I'm doing something really fascinating and you'll be a part of something very large that is mission-aligned and value-aligned for you,'" he mused, "you might be more likely to pay me $500 than me paying you $500 for an hour of your time."
Crowdfunder, Barnett explained, facilitates this storytelling and outreach process. After introducing their business as they might on other crowd funding sites, the site's users can take things a step further. "[They can] go out to a community, whether it's local or global, and say, 'Here's an offering. We want you to help the long-term opportunity of what this company is and what its impact is.'"
The Crowdfunder process makes it easy for investors to parse potential opportunities and for entrepreneurs to securely share their data. "We allow companies to upload their documents and we standardize that set of documents to say what this offering looks like for investors," Barnett explained. "We do that behind a private wall so that your business plan and your financials aren't out there for any competitor to grab. You have the control as a founder of a company to say, 'I want give access to this person but I don't want to give access to another person because I think they're not trustworthy' or 'I just don't know them.'"
At the time of our conversation, Crowdfunder was waiting for crowd funding rulings from the Securities and Exchange Commission. Since then, the SEC has ruled that hedge funds, startups and venture capitalists can openly announce private fundraising campaigns. (More on that here.)
I asked Barnett whose business Crowdfunder was replacing. Was it investment banks, with their expensive and laborious procedures? "I'm not looking to break apart what angel investors do well, which is bring mentorship and experience and decision making and often times drive valuation in other strategic initiatives within a company with their money," he replied.
Instead, Barnett views Crowdfunder as an accelerator of online social interaction. "You will see VCs in the future doing these deals. This is an acceleration of social interaction. It's acceleration of efficiency in fundraising in the market both on the capital side and on the structural side. I think we'll see big gains."
Barnett outlined the following five benefits that entrepreneurs of all types can realize from crowd funding:
1. Crowd funding can validate an existing prototype that's working. "This is where it fits as a place in the investment ecosystem or the life cycle of a business," Barnett said. "A small business that has great customers but for some reason not enough cash on hand to want a loan can use it. The community can come in and fund that small business to help it buy the additional inventory it needs. There will be a large market and debt based investment in crowd funding."
2. Big brands will use it as a means of getting capital. "You don't have to be a small business to do this," Barnett said. Big brands, for example, might want to use crowd funding to pre-sell some of their products. "They could also capitalize either their own initiatives or partner initiatives using this more donation model of crowd funding."
3. Crowd funding will enable a new set of relationships to form around companies. "Crowd funding is inherently social," Barnett said. "It is a shortcut to getting customers and merging that with the process of financing or pre-selling what you're doing. That's a shift in the way business has been done."
Financing a company and building a brand might soon become one and the same, believes Barnett. "In my utopian long-term ideal, we're starting to see a new set of relationships form around companies, whether they're corporations or nonprofits, where people are able to align around that company and contribute or support," he explained. "Whether it's through money, time or talent, they choose to be a part of it. That blurs the line between investor and participant or employee. If I give a company — a brand that I love — $500 or $1,000, I become a very small potential investor. But I'm probably going to do that more often because I really love that brand and the team. There's something that I really identify with personally and I want to contribute more than just get a return on that money."
4. Crowd funding will enable the birth of new small-business investments. "What we're seeing is technology, the social web and the right economic time creating this new marketplace of early-stage investing online," Barnett explained. "There's already great angels, and angels can be complemented by capitalization from the crowd. But you're also going to see a birth of a new small business investment world in the capital market. I think the public and our regulators will start to develop an appetite when they witness the economic development potential that this has."
5. Ultimately, crowd funding leads to job creation from the ground up. Job creation isn't about transferring workers from one position to another -- it's about creating jobs that didn't exist. "If you can find someone who has been out of work starting a business, or someone who is going to hire veterans that have been out of work, you are starting to move the needle potentially to get people back in the workforce," Barnett explained.
"I think what most people are most excited about — and the reason this JOBS Act bill passed in the first place — is that people understand that access to capital is important from a development standpoint," Barnett added. "If you look at it from a macro perspective, what we've had for a long time is a top-down effort to provide solutions. Crowd funding is essentially a bottom-up approach that says, 'We don't need centralization. We need platforms to allow people to aggregate around the things that might be working and help fund that development.'"
To that end, Crowdfunder aims to connect people to the companies where their passions align. "When you sign up for Crowdfunder, I want you to tell me as an investor or as an advisor what you're interested in, who you are," Barnett explained. "We get you to connect your LinkedIn and Facebook and we extrapolate as much as we can out of that and say, 'Okay, you live in Los Angeles. You're interested in social enterprise and innovation. Great. Here are opportunities in your area and your interests that we think you're going to be interested in. Now, are you interested in contributing, in investing? Do you like equity deals or do you like debt deals?' That is more of a pull mechanism. We don't want to be constantly trying to push."
"We're creating a platform where people can engage on that more personal level," he said.
In my next blog, I will introduce you to Matt Barrie, who is the CEO of Freelancer.com, the world's largest freelance marketplace.
NOTE: Over the next year, I'm embarking on a BOLD mission -- to speak to top CEOs and entrepreneurs to find out their secrets to success. My last book Abundance, which hit No. 1 on Amazon, No. 2 on the New York Times and was at the top of Bill Gates' personal reading list, shows us the technologies that empower us to create a world of Abundance over the next 20 to 30 years. BOLD, my next book, will provide you with tools you can use to make your dreams come true and help you solve the world's grand challenges to create a world of Abundance. I'm going to write this book and share it with you every week through a series of blog posts. Each step of the way, I'll ask for your input and feedback. Top contributors will be credited within the book as a special "thank you," and all contributors will be recognized on the forthcoming BOLD book website. To ensure you never miss a message, sign up for my newsletter here.