Congress approves of crowdfunding; do you?
On Nov. 3, 2011 Congress moved the economically disconnected sectors of society a bit closer to the American Entrepreneurial Dream of owning a business by expanding the landscape of angel investing, which is unfortunately still a foreign concept to the vast majority of Americans who are disconnected from knowledge of the job growth and wealth creation processes across the fruited plains.
Paul Allen is a well known investor. He has written a very good blog post in response to the congressional act. At the bottom are links we posted to other articles that offer insight, information and opinions about the idea of crowdfunding.
Crowdfunding Bill Passes House, 407-17
By Paul Allen
Nov. 4, 2011
Yesterday, the U.S. House of Representatives voted 407-17 to pass HR 2930, the Entrepreneur’s Access to Capital Act. The White House has expressed support for this legislation. It is possible the same bill will be introduced in the Senate as early as next week.
If this is enacted, it will soon be legal for entrepreneurs to raise capital for their business ideas over the internet. There are already many crowdfunding sites that allow thousands of people to pool small donations towards various projects. More than a million dollars is raised every week on just one site, Kickstarter. Projects such as Indie films or documentaries, mobile apps, and even a newspaper for the Occupy Wall Street movement have quickly raised tens of thousands of dollars each.
But in addition to feeling of satisfaction that crowdfunders get (I’m one of them) for helping a project get off the ground, soon the crowdfunders may also be able to owns shares in the companies behind the projects.
Some oppose crowdfunding and argue that “crooks are licking their chops” at the potential for fraud. As a technology entrepreneur, I have faith that technology combined with the wisdom of the crowd will soon invent self-regulation mechanisms to protect small investors that will work better than heavy-handed government oversight or restrictions on capital formation. Think, for example, how eBay’s seller ratings protect buyers against fraud. Remember how quickly graffiti posts to Wikipedia articles get removed by the crowd of Wikipedia contributors and editors.
If crowdfunding sites are transparent and allow comments and votes and feedback, then before investors make a decision to plunk down $100 to help fund a cool new idea, they’ll be able to see what other people think about the idea, and what red flags other people have seen. Crowdfunding sites could also tap into social reputation scoring systems to validate the team behind the startup; they could also leverage projects such as the Startup Genome Project which could rate the likelihood of a startup succeeding, based on the traction it has achieved and the lean startup methodologies it has embraced. And of course, it would be easy to use online analytics to measure the traction that the startups’ competitors have already achieved.
With a little experience and knowledge-sharing among family and friends, it has become easy for most internet users to avoid scams and fraud. Not many people fall for the Nigerian “there’s money waiting for you” email scam anymore. Certainly there will be some abuses of the new crowdfunding mechanism, but hopefully we will collectively learn quickly how to spot fraudulent offers and bogus startups, and help others avoid such scams.
On the positive side, crowdfunding will become for many entrepreneurs the fastest way to raise the seed capital they need to launch their product. I think it will prove to be a major economic boost and job creation engine.
Ron Conway, the most active angel investor in Silicon Valley history, has funded more than 500 startups in the traditional angel investor way. I bet it won’t be long before some crowdfunding-focused angels can claim they have invested small amounts of capital in a thousand or two thousand startup ideas.
In fact, I wouldn’t be surprised to see some angel groups or open-minded venture capital firms devoting a small portion of their funds to investing in early stage crowdfunded startups. Like investors who buy a single share of hundreds of public comapnies so they can receive those companies quarterly and annual reports. So too could funds invest in hundreds of crowdfunded startups so that they can receive reports from the companies, watch them grow and get traction, and be in the running when those startups are ready for professional scale funding rounds.
Personally, I can’t wait to see the first legitimate Y Combinator startup raise a million dollars from the crowd, or the first crowdfunded startup that sees meteoric growth the way Zynga, Groupon, and Facebook
It’s the democratization of capital formation for startups. It’s historic. This is going to be very, very big – a boon to entrepreneurs and small investors alike.
I once drafted a list of about 15 priorities I would have if I decided to run for Congress. The #1 item on that list was Crowdfunding. Soon, I’ll hopefully be able to say, one down, 14 to go.
Govtrack has a breakdown of yesterday’s vote: http://www.govtrack.us/congress/vote.xpd?vote=h201
Paul Allen’s original post: https://plus.google.com/117388252776312694644/posts/jN7KBDhVw8n
More crowd-funding responses:
American Public Media buys crowdfunding news site Spot.us (Nov. 30, 2011)
San Francisco Chronicle: Let’s allow crowd-funding to help entrepreneurs (Nov. 30, 2011)
The Economist: Many Scrappy Returns (Nov. 19, 2011)
New Hampshire Business Review: Crowdfunding gets big boost in Congress (Nov. 10, 2011)
Silicon Valley Business Journal: Crowdfunding investment bill passes House (Nov. 3, 2011)
Small Business Trends: Is crowdfunding the next big financing thing? (Jan. 5, 2011)