The Rise of Small Business Crowdfunding

I had the opportunity to moderate a panel on alternative financing methods at the Global Coworking Conference. While we covered a lot of topics, the audience was clearly most interested in crowdfunding.

Crowdfunding, which is raising money by getting getting small donations of money from a large group of people, is hot.

Kickstarter, the best known of the crowdfunding site, has raised over $500 million for a wide variety of projects.  

While crowdfunding is best known for raising money for non-profits, a growing share of crowdfunding money is going to small businesses and startups.

Games and gadgets are the most common type of business funded. The best known of these is Pebble, a maker of smart watches that raised over $10 million on Kickstarter.  

More broadly, gadgets have taken close to $50 million in Kickstarter funding and games over $100 million. 

The CEO of RocketHub was on my panel. He did a great job of explaining crowdfunding and how it's spreading across many small business segments.

One really interesting example is RocketHub's project to fund the commercialization of academic research. We've worked with companies attempting to commercialize academic research. It's not easy and having a alternative to traditional financing will be a big help.

In addition to funding projects and products, lending is also being crowdfunded.

SoMoLend, for example, matches businesses that want to borrow with investors who want to lend. 

It's also likely that small businesses will be able to crowdfund equity investments starting later this year. The Jobs Act, which was signed into law last year, legalizes equity crowdfunding.  The SEC and other agencies are currently working on the rules, but expect to see equity crowdfunding in the coming months.

We think the crowdfunding of loans and equity will work best for "friends and family rounds". Using crowdfunding platforms will cut the legal costs of early stage rounds and formalize them.  This will be a big improvement over the "hand shake" agreements we often see in the small business funding arena.

Despite crowdfunding being a hot trend, few small businesses consider it a potential source of capital. According to a recent survey, only 3% of small business owners thought they would benefit from it.  

Our advice to small businesses is to familiarize yourself with crowdfunding and evaluate it's use as a capital source for your business. It's quickly becoming an important source of small business capital.

Comments

[Steve King]

Michael: We did talk about funding size and yes, it's relatively small for most.

For coworking spaces (the topic of the conference), the size of the crowdfunded projects were in the $10k to $20k range.

The amounts for small businesses in general look to be a bit lower.

I agree crowdfunding won't replace traditional smallbiz loans anytime soon. But for the right product - or for folks raising seed or early stage funding - it's starting to be a viable alternative.

[michael webster]

Steve, was there discussion about the mean and median averages of the projects funded?

I don't see crowd sourcing displacing the traditional SBA loans for small businesses any time soon.