Crowdfunding: The Disruptor's Disruptor

By Kahtan, Meir | Ivey Business Journal Online, July/August 2013 | Go to article overview

Crowdfunding: The Disruptor's Disruptor


Kahtan, Meir, Ivey Business Journal Online


While start-ups conceived in the garage or kitchen may have no shortage of good ideas they definitely - and usually - lack for small investors. But the emergence and success of crowdfunding has widened the pool of potential investors immensely. Raising small donations on the Internet does work, and start up hopefuls who have always wondered just how they can use crowdsourcing will learn how to do it in this article.

Neither a borrower nor a lender be;

For loan oftloses both itself and friend,

And borrowing dulls the edge of husbandry.

- Polonius, in Hamlet

If Polonius were around these days, he wouldn't be getting much sleep. Particularly if you think of crowdfunding as borrowing from folks you've "friended." Hundreds of thousands of loans have been made through crowdfunding. That's hundreds of thousands of friends. Or ex-friends, as the case may be. In the U.S., with the rollout of the JOBS Act, wherein the need to register certain securities including fundraisings of less than $1 million is no longer necessary, and with similar legislation being considered in Canada, we'll only see more of this kind of borrowing.

While the Internet takes the lion's share of the credit for enabling crowdfunding, there's a countervailing trend driving its growth. Bank lending for the types of entrepreneurial activities that crowdfunding is helping to finance has virtually dried up. Post-crash, the pendulum swing has found banks erring on the side of hypercaution, and crowdfunding is fast becoming the new disruptor in the world of finance. If startups are disruptors of established businesses, that makes crowdfunding the disruptor's disruptor. Direct finance relationships are taking the place of traditional sources of borrowing - ultimately a side effect of the trend could be the death of a once profitable category of bank lending.

The definition of crowdfunding includes, these days, the use of web-based outreach and interaction, such as Facebook or other social media to raise funds. While all crowdfunding models involve the reaching of a capital goal through small contributions from many people, there are two basic approaches. Doing it yourself, or having it done for you by the crowdfunding equivalent of an investment bank. More on that, later.

The concept of funding a project by convincing a large number of people to contribute a small amount isn't new. However, the Internet has taken the prospect up to new heights as well as down to the grassroots level. Now it's possible for virtually anyone with a business idea, project, or cause to be crowdfunded, or to engage in crowdsourcing (an umbrella term for any "online, distributed problem-solving and production model"[1]) - that is, anyone willing to think broadly about the use of social media or other online means to reach a large, and largely unscreened audience.

The idea is that there are a lot of bright, creative people - and investors who would support interesting new ideas - out there looking to be a part of something. And if you can figure out how to reach these people, it could be the answer to how you can get your business offthe ground.

Many hands make light work. And for a tech-savvy entrepreneur looking to start up a business, get some help on a project that's too big for a few people to handle, or merely bat around some ideas, crowdfunding can be just the ticket to liftsome of the burden. Crowdfunding has been getting more media attention lately, bringing it out of the realm of word-of-mouth projects you hear about - like your former babysitter using it to start her own modern dance company. Now we're talking about real companies sourcing millions, one contribution at a time. This approach helps support out-of-the-box ideas and thinking, particularly those that might not meet the underwriting standards of conventional financiers. Instead, they are making their appeal to the "wisdom of the crowd."

HOW CROWDFUNDING WORKS: IT STARTS WITH CROWDSOURCING

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