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The Case for Crowdfunding

What does the JOBS Act have to do with the Statue of Liberty? The founder of Indiegogo breaks down the uniquely American benefits to new crowdfunding legislation.
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With the economic growth lagging behind historical patterns, the American economy sorely needs the boost that crowdfunding can provide by making small investments in start-ups easily accessible to all Americans through online portals.

I created one of those portals. It's called Indiegogo.

Until now, crowdfunding efforts could only thank funders with products, gifts, or other token appreciation of support. Thanks to the JOBS Act, new ventures can actually provide small funders a piece of the action—so all of us can be investors in new ideas we believe in.

President Obama last week sent a strong message by signing the JOBS Act: The government is actively participating in job creation, reviving the American entrepreneurial spirit, and maximizing the opportunities that modern technology can offer small business owners. 

And this doesn't cost taxpayers a dime. Simply by cutting regulations, the JOBS Act energizes and modernizes an age-old formula. It's simple: More funding for start-ups = more jobs. We know from the Kauffman Foundation's research that all net new jobs in the last 30 years come from businesses fewer than five years old. Enabling start-ups is the key to stimulating the job market. 

Although the JOBS Act is new, the concept of crowdfunding and the "do it with others" spirit is not. When America received the Statue of Liberty in 1884, Joseph Pulitzer ran a newspaper campaign to raise money for the base of the statue and enlisted more than 120,000 individuals to contribute on average $0.83. Americans stepped up to the challenge then, and are now stepping up to solve the problem of unemployment and economic downturn. Sometimes it really does take village.

Raising the funds required to start a business remains difficult, which slows growth by interfering with the normal patterns for starting new businesses. We've all seen the headlines: bank lending is tight, credit card rates are high, and government grants are hard to come by. 

More than 90% of Indiegogo campaigns that meet their target funding goals offer a product, service, or experience as a sort of reward or "thank you" for funders—some sort of recognition. The next step to thanking a funder is to treat that funder like an investor. The JOBS Act now does that, allowing all of us to fund our neighbors, or even strangers, when we like their ideas and want to invest a few dollars. There are five reasons this is important:

1. Projects that begin through online crowdfunding have built-in risk mitigation. That's because the public nature of the solicitations forces transparency regarding demand of the product or service.

2. The crowdfunding process facilitates marketing efforts even before a new company is operational. It provides an opportunity to test the message—after all, the whole process of securing funding involves social media networking, marketing, and brand-positioning.

3. The very nature of starting a business through online exposure provides exposure to potential customers that a bank loan doesn't. It provides accessible to anyone, anywhere, and shared with like-minded friends through social media. (I mean, come on: Have you ever seen a bank even put a poster in its window promoting a local business that just received a loan?)

4. The data-collection inherent to online activity provides new businesses with critical information. Existing businesses struggle to obtain data about even existing customers—let alone prospects.

5. Crowdfunding provides young businesses with money, plain and simple.

As a society, we have grown dramatically since the The Securities Act of 1933, which prohibited the average person (specifically, those with a net worth of less than $1,000,000) from investing in private companies. This limitation on the general public's access to investment was important when potential investors lacked what the Internet makes easy—direct access to data and the larger community of investors. 

Today, social networking has accelerated the sharing of ideas and the requirement for authenticity. The JOBS Act is an acknowledgement of these changes. To put it simply, the new law reflects today's reality.

Opponents to the JOBs Act fear the floodgates will open to unbridled fraud. We know from our experience that, to the contrary, crowdfunding is a modern protection against fraud. We know that because fraud protection has been of utmost importance since Indiegogo was founded. Indeed, Indiegogo distributes millions of dollars every month—and loses less than 1% to fraud.

This tiny fraud rate is not mere coincidence. Rather, it's based on very specific efforts. From the very start of a campaign, crowdfunding captures relevant information from both campaign owners and campaign funders. Online tools constantly screen funding campaigns using a fraud algorithm built on hundreds of thousands of transactions (similar to PayPal, Mastercard, and eBay). 

The realities of crowdfunding limit fraud as well—as typically the first 30-40% of funds contributed are from friends and family, providing social proof before newbies come on board. Quite understandably, strangers are reticent to fund empty campaigns. And beyond fraud, there are additional information rights and investor protections written into the JOBS Act. In the next nine months, the SEC will work with crowdfunding platforms to lock down the specific rules. 

The JOBS Act is a natural evolution of President Obama's Startup America agenda. And perhaps nothing speaks to the value of crowdfunding better than the successful businesses—and jobs they created—that owe their existence to crowdfunding.

President Obama cited Indiegogo success story Emmys Organics in Ithaca, New York, as a prime example of new business growth. The founders of that gluten-free dessert company were initially turned down by local banks before they raised $15,000 to update their packaging and expand distribution to 26 states on Indiegogo.

Other examples include:

The creators of the Satarii Swivl. They were turned down by 30 venture capital funds before their successful Indiegogo campaign proved there was a market for a wireless tracking device which allows any camera to follow your every move by raising $24,000—which led these Bay-area engineers to nearly $1 million in follow-up "offline" investments.

The LuminAID inflatable solar light. It began as a student project at Columbia University but went on to raise $50,000 and is now being distributed in 25 countries.

Walk in Love. This company was able to use the $30,000 raised on Indiegogo to transform their t-shirt holiday kiosk into a permanent retail store-front with more than 15 employees in Lancaster, Pennsylvania.

At the end of the day, the reason why the JOBS Act has bipartisan support is because this is about jobs. The entrepreneurial spirit that is inherently American should expand to include the idea of open investment opportunity for all. 

Run a Successful Crowdfunding Campaign

What does the JOBS Act have to do with the Statue of Liberty? The founder of Indiegogo breaks down the uniquely American benefits to new crowdfunding legislation.

Run a Successful Crowdfunding Campaign

What does the JOBS Act have to do with the Statue of Liberty? The founder of Indiegogo breaks down the uniquely American benefits to new crowdfunding legislation.

IMAGE: Flickr
Last updated: Apr 17, 2012

SLAVA RUBIN | Columnist | CEO, IndieGoGo

Slava Rubin is CEO and co-founder of IndieGoGo, a funding platform that offers anyone with an idea?creative, cause-related, or entrepreneurial?the tools to raise money.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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