Crowdfunding: it’s not just for kids, anymore. Those of us scratching our heads at the phenomenal $20 million raised by the upcoming Pebble Time smartwatch on Kickstarter, should recognize that not only is crowdfunding here to stay, it is also an important methodology to consider for Boomers looking to launch their own businesses. While for the moment, businesses that are selling a tangible physical product seem to be garnering most of the attention and most of the traffic, as the process evolves, some experts believe that service businesses will also be able to raise money in this manner.
Starting a business is a risk at any age, to be sure. But older entrepreneurs are launching businesses at an ever-increasing rate. The Ewing Marion Kauffman Foundation’s annual Entrepreneurial Activity Index report for 2013 reported that 55-64 year olds make up 23.4% of new entrepreneurs in 2012, up from 14.3% in 1996. However, Boomer entrepreneurs who may be looking at raising capital from a 20th century mindset might not be seriously considering crowdfunding as an option to get their businesses launched. They should not make this mistake.
Crowdfunding adds an entirely new dimension to the prospect of starting your own business. In the words of Eze Vidra, head of Google Campus(Google’s startup space in London) it is the “democratization of innovation.” For those in our generation who are only slightly aware of this phenomenon, crowdfunding has been popularized through the success of sites such as Kickstarter and IndieGoGo, that were set up for creative entrepreneurs to fund independent arts and media projects. This has led to fundraising for feature films (e.g. 2013’s Veronica Mars movie), video games and gadgets. On most of these sites, individuals pledge at certain set levels – from, say $5 to $1,000, and receive gifts or “premiums” appropriate to each level if (and only if) the project’s funding goal is met. If the goal is not met within the allotted time window, the project does not get funded, and all the pledges are returned to the sponsors.
Donation -based crowdfunding sites like Kickstarter or IndieGoGo fall outside of the SEC’s jurisdiction requiring that investors be “qualified” in order to invest – meeting criteria for annual income and overall net worth. In 2012, however, Congress passed the JOBS Act (Jumpstart our Business Startups), which asks the SEC to broaden its guidelines to make startup investing more accessible on a number of levels. Title II of the JOBS Act is in effect, allowing entrepreneurs to advertise their business plans to qualified investors, thus significantly opening up the marketplace to take advantage of the Internet. Equity crowdfunding firms like AngelList, CircleUp, EquityNet and Funders Club are geared to match startups to qualified investors across many business sectors.
Title II is an incremental expansion of traditional investing, but Title III could be far more revolutionary. The SEC says it will clarify its guidelines on this provision by October 2015. Title III is meant to allow everyday citizens to make actual equity investments in startups. The rationale has a lot to do with the digital age, and the “social capital” of entrepreneurs. Today’s business climate is a lot more transparent than it was in the 1930s when the SEC’s investment guidelines were originally drawn up. Coming on the heels of the stock market crash of 1929, when millions of people who couldn’t afford to invest in stocks were lured into buying on margin (i.e. borrowing), the government wanted to prevent fraud, and protect ordinary people from losing their shirts. Today, however, it is easier for potential investors to cross-check the background and reputation of a given entrepreneur, the venture, the team and the market. Managing and communicating with hundreds, or thousands of investors is also a lot more achievable and affordable today thanks to digital tools. Some experts are concerned that while Title III could make investing easier for individuals, it will create insurmountable headaches for entrepreneurs. Stay tuned.
While crowdfunding is proving to be a viable avenue for raising capital, it is tricky to pull off, particularly during this period of growth and change. Sites like Crowdfunding Academy and RocketHub have been set up to help walk business owners through the potential pitfalls of launching a crowdfunding campaign. Entrepreneurs should be very careful and get all the advice they need before jumping in.
Though crowdfunding is a paradigm that is arguably still in its infancy, its potential is clear. Boomer business owners should make investigating this resource a priority to find out whether it makes sense for their particular venture – not as an alternative to traditional funding, but as an additional resource. Jeff Lynn, CEO of European crowdfunding service Seedrs, believes that crowdfunding is going to evolve into an accepted part of the existing global equity financing ecosystem, providing an additional method for investors and entrepreneurs to drive growth and innovation.