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The Latest on Crowdfunding

The Latest on Crowdfunding

Of all the advances in wireless devices, battery life hasn’t kept up. Most of the available chargers are clunky, inconvenient or keep you tethered to the power source. But three Northwestern University engineering Ph.D. candidates have a new solution. It’s a palm-sized kinetic charger called Ampy which drew $309,323 in a Kickstarter campaign.  Chief product officer Alex Smith explains they formed as a team in an entrepreneurship class. We were trying to tackle the problem of our phones dying before the end of the day. We’re all reasonably active guys. We said, “Why can’t we use some of this energy that we burn throughout the day and turn that into power for our phones?” We spent the last year and a half developing the technology to make Ampy fit into a compact form while still generating considerable energy. It fits to the contours of your body and can easily be slipped into your pocket or purse.  The more you  move, the more power you’re going to get. You can store up to 1,000 milliamp hours.

On November 11th BizStarts featured a workshop conducted by Kate Bechen a lawyer with expertise in crowdfunding and her partner Michael Dahm from the law firm of Whyte Hirschboeck Dudek, S.C.

Their basic point was that all that glitters is not gold.  The path to getting an offering qualified in Wisconsin under the Blue Sky Laws can be very complicated and daunting. It will be another tool to use as an alternative to angel and venture capital, but it faces a lot of headwinds until all of the rules can be worked out.

They did point out that crowdfunding can now be used for profit corporations, as long as users are not selling securities as an investment in their startup.

David Drake founder and chairman of LBJ capital shared his thoughts about the future of crowdfunding.

He argues that crowdfunding is increasingly giving investors a run for their money. Crowdfunding is “competition” for the Y Combinator model.  A startup can raise money on a crowdfunding platform and bypass traditional funding altogether.

He argues that some players have been around since 2008, the huge crowdfunding wave crashed into the market between 2012 and 2013, particularly in Europe and the U.S.  As of April 2012, there were more than 450 crowdfunding websites worldwide.

He documents his position with six waves occurring in the crowdfunding space:

1.  Crowdfunding will continue to grow.   Online crowdfunding platforms raised $2.7 billion in capital in 2012 with expectations that the number would reach $5 billion by 2013, according to a study from crowdfunding-focused research firm Massolution. And these figures will likely continue to rise.

The World Bank commissioned a study and estimated that by 2025, the global crowdfunding market potential could be between $90 billion and $96 billion.

This reveals that more entrepreneurs are turning to crowdfunding as a low pressure route for raising startup capital for their businesses.

2.  More industries will cut out the middle. Crowdfunding allows startup companies to connect easily with investors without going through a costly middle man. This trend is fast gaining traction in industries like real estate where there are many middlemen between entrepreneurs and prospective investors.

For instance, real-estate agents, brokers and other intermediaries can significantly escalate the cost of executing projects. Some real estate development firms have decided to raise capital through crowdfunding to save on the cost of agent and broker fees. CEO Zeke Turner of Mainstreet Property Group raised about $1.8 million from accredited investors through its partnership with CrowdStreet, a crowdfunding platform.

3.  Larger emphasis on social-media driven marketing. Because entrepreneurs are reaching out to people beyond their network, crowdfunding relies heavily on its “social edge” over more traditional marketing methods that cater to smaller group of investors. And startups are taking note, providing easier ways to engage with an expanded audience.

New platforms, such as FundRazr, a social-media crowdfunding website has emerged to help generate traffic for an entrepreneur’s crowdfunding campaign. Among other features, FundRazr helps generate awareness for a crowdfunding campaign through a user’s social-media networks on sites like Facebook and Twitter.

4. More money will be invested in crowdfunding opportunities. Many large financial institutions, VCs and angel investors are  moving assets into the equity crowdfunding wave. Some of them are even using their brokerages to advertise about crowdfunding opportunities to their investors, hoping to make money as advisors to those seeking investment counsel. The participation of these large brokerage firms in crowdfunding helps validate it as a new financial model.

A recent study by crowdfunding platform ourcrowd reveals that of the 500,000 active angel investors in the world, 50,000 have invested through equity crowdfunding platforms.

This trend helps entrepreneur gain access to big capital from top-notch investors they normally wouldn’t have been able to connect easily with.

5. Niche platforms will increase. While there are major crowdfunding platforms like Kickstarter and Indiegogo that cover various markets, there are niche platforms popping up for specific areas. By utilizing these platforms, startups now have a better chance at reaching their targeted audience.

For instance, there are new platforms that specialize in areas like book publishing. Examples include Pentian and Pubslush that connect self-publishing authors with investors. Pentian affords average investors, who put in as low as $10, the opportunity to fund a book publishing project. In return, early supporters receive a signed copy and a share of the author’s royalty in the future.

6.  Regulation A will become a bigger deal. Regulation A may serve as an alternative to equity crowdfunding provisions in 2014 and beyond. Regulation A allows smaller ventures (under $5 million) to avoid some of the more onerous financial reporting requirements until they amass greater profits. Already, Fundrise, a real-estate crowdfunding platform, is leading the way by leveraging on state laws which enables it to afford non-accredited investors the opportunity of investing as little as $100 into projects listed on its platform. This is good news for entrepreneurs interested in impact investment activities in specific communities of interest.

Also, startup entrepreneurs who haven’t been able to raise capital for their businesses from high profile investors can now also do so easily from retail investors in their neighborhood.

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