SlideShare une entreprise Scribd logo
1  sur  14
Télécharger pour lire hors ligne
DEBUNKING THE 5 LEADING MYTHS
ABOUT CROWDFUNDING
Wall&Main Knowledge Exchange Whitepapers
November 7, 2013
I NTRODUCTION
Reading articles in the news and on crowdfunding forums can seem like sifting through advertisements and scary stories. A lot of content
is either announcements of new crowdfunding campaigns or interviews with traditional investment organizations arguing that it is too
scary to invest in private companies without an investment manager by your side. Much of this content has recently resurfaced with the
release of the Securities and Exchange Commission’s proposed rules for implementing Title III of the Jumpstart Our Business Startups Act
(JOBS Act) and regulating public crowdfunding in the United States. The scary stories are just that – “stories” – but when they are repeated
often enough they become the stuff of myth.
The website of the National Crowdfunding Association of Canada (NCFA) is running a series of articles to address the most common myths
being perpetrated against the crowdfunding industry. We recommend that you read this excellent series in its entirety. We have
shortened and summarized some of the myths discussed in the NCFA series for use here:
1. T H E C R O W D I S M A D E O U T O F D A N G E R O U S F O O L S
2. C R O W D F U N D I N G C A N N O T P O S S I B L Y W O R K
3. T R A D I T I O N A L F U N D I N G S O U R C E S W I L L N O T T O U C H C R O W D F U N D E D C O M P A N I E S F O R S U B S E Q U E N T R O U N D S
4. D E N O F T H I E V E S ( F R A U D A N D F A I L U R E )
5. T H E R E I S N O R E A S O N T O M A K E E Q U I T Y C R O W D F U N D I N G A V A I L A B L E T O T H E G E N E R A L P U B L I C

These “myths” make for harrowing headlines and great talking points, but none of them hold up to much scrutiny. We have addressed
each of them in turn, providing analysis and examples. Read on to learn more.

1|P a g e
M YTH 1: T HE CROWD IS MADE OF DAN GEROUS FOOLS
There are two roots to this myth. First, in order to believe this myth, you have to fundamentally believe that people will always do
incredibly stupid, self-destructive and dangerous things when left to their own devices. Second, you also have to believe that there is
special knowledge possessed by investment professionals that cannot be transmitted to, or
understood by, the general public.
To be sure, large groups of people have done some incredibly destructive things. Then
again, large groups of people have done incredibly noble and beneficial things. People
arguing that the crowd is inherently dangerous will offer cherry-picked examples of crowds
becoming violent or acting against their own interests. For every Nazi Germany example,
there is an Allied Forces example to offer a counterpoint. For every witch-hunt, there is a
community rallying around a barn-raising.
Rather than rely

“The crowd, as it turns
out, is not a gigantic
teeming mass. It is
made out of people”

on such anecdotes, let us determine a relevant path to
answering this myth.

C RO W DF UN D IN G

E NA B LE S A DI VE RS I TY O F VI E W S TO W O RK TO G E THE R

The crowd, as it turns out, is not a gigantic teeming mass. It is made out of people. The crowd is comprised
of separate individuals who each have the ability to quickly adapt to changing market conditions.
Individuals also have the ability to fuel innovation and creativity through the cross pollination of ideas.
Moreover, the crowd can learn from and evaluate the views of experts, benefitting the crowd and
furthering market knowledge. The SEC proposed rules for the JOBS Act includes specific analysis and
acknowledgement of the crowd’s wisdom and evaluative capabilities.
DIVERSITY BREEDS ADVANCEMENT
A crowd of people, drawing on the breadth and depth of their collective experiences and backgrounds, has
deeper and broader industry and market knowledge than any single expert.

2|P a g e
Crowds enable risk to be spread in small amounts across the entire population, reducing risk to any single individual. Moreover, the crowd
also tends to be leery of outlandish offers and, when coupled with excellent fraud detection tools, can help to identify and isolate
fraudsters.
Crowds are more than just a class of investors, as they provide some specific long-term advantages for entrepreneurs. While large-scale
investors make great board members, crowd investors are a word-of-mouth channel capable of magnifying any fundraising effort. Crowd
investors, when convinced, can be enlisted to increase the reach and strength of a company’s message and rally other supporters to
spread the word about that company’s mission, products and crowdfunding campaign. In addition to being instrumental in successful fund
raising, crowds have a tendency to become an installed user based for companies seeking to offer goods and services to the public.
Because of the feedback and insight from the members of crowd, the crowd can be instrumental in the period between the funding stage
and full operation. As they process and respond to product and marketing information, the crowd can help refine messaging and product
design to ensure the best possible product and communications for bringing in new customers.

E N R I C H M EN T

BY P A RT I CI P AT I O N I S N O T ABO U T P RI Z ES

Crowdfunding rebalances the funding landscape by distributing negotiating power and knowledge away from entrenched traditional
funding organizations. When companies can crowdfund themselves, they have more power over their capitalization process and the
destiny of their company.
DISTRIBUTION ENHANCES KNOWLEDGE
What happens when investment knowledge and power are distributed to the public? For starters, public participation in entrepreneurship
and investment will give the general public direct insight into the process of building companies and more generally into the underlying
dynamic process of market capitalism. Engagement between the general public and the entrepreneur community will also provide
entrepreneurs with greater visibility, helping great ideas spread faster than ever before.
Crowdfunding makes it possible for governmental entities, companies and universities to work together to strengthen community,
regional, and national economic goals. Crowdfunding also allows individuals to invest in their local or regional community.

3|P a g e
On a societal level, widespread participation in crowdfunding will lead to greater transparency into (that is, understanding of) private
companies because such widespread participation will require the standardization of collecting and disseminating financial information,
like reporting and valuations.
On an individual level, people will have access to a broader and more diverse range of potential investments to include in their portfolios.
For individuals with investment strategies that include high risk and high reward investments, early-stage private companies (like those on
crowdfunding portals) are an attractive option.
Finally, access to a broader funding pool lowers the funding entry barrier for disruptive companies that need to be able to scale quickly to
the point where they can sustain themselves on narrow margin, technology-leveraging business models.

4|P a g e
M YTH 2: C ROWDFUNDING CANNOT POSSIBLY WORK
As with any innovation, some people simply cannot accept that a different way of doing
something might be feasible, functional or useful. The “crowdfunding can’t work” myth can
be tricky to overcome because you first have to get the critic to define what he or she means
by “work” – that is, you have to get the critic to offer his or her metrics for crowdfunding
success. There are three ways to consider whether or not crowdfunding “works” or is

“In the United States
alone, crowdfunding
is a $3 billion

successful. Are crowdfunding portals sustainable? Are people able to use crowdfunding
portals to start sustainable businesses? Are there measurable ways to determine what makes
a campaign successful?

business. Billion.”

The answer to all three questions is “yes.”

C RO W DF UN D I N G

W O R K S W E L L E NO U GH F O R PO R T A L S T O B E S US TA I NA BL E

The presence of myriad thriving crowdfunding portals – with many different funding models like debt, equity, rewards-based and
donation-based – indicates that this is an industry sustaining viable, stable and sound companies. In the United States alone, crowdfunding
is a $3 billion business. Billion.

C RO W DF UN D I N G

S U PP O R TS TH E C RE A T IO N O F VIA B LE BU S I NE S S E S

If crowdfunding does not work, there should not be any examples of portals
that have successfully raised funds for entrepreneurs and then watched (or
helped) as those entrepreneurs ran successful businesses. But there are plenty
of examples of successful crowdfunding campaigns. (Because equity-based
crowdfunding from the general pubic is not yet permitted in the U.S., many
examples are from other countries.)
The Australian Small Scale Offerings Board (ASSOB) has raised over AU$133
million for more than 180 companies. More than 80% of those companies are
currently operation, and there have been no reports of fraud through the five

5|P a g e
years ASSOB has been operating.
Britain’s CrowdCube has raised £13 million for 73 companies, generating hundreds of jobs and fueling growth in the UK.
There are many successful crowdfunding sites using donation-based or accredited investor-based models, including: Kickstarter,
IndieGogo, CircleUp, AngelList, Seedrs, Symbid and the like.

THERE

M US T BE DE M O NS T R A BL E R E A S O NS F O R C RO W DF UN DI N G S UC C E S S ; O T HE RW IS E , I T I S A L L J US T

LU C K

For some, the proof that a fundraising vehicle (like crowdfunding) is viable lies in being able to demonstrate common traits among
companies that successfully use crowdfunding. According to one study, successful crowdfunding efforts include these common elements:


EDUCATED AND SUCCESSF UL BOARD MEMBERS FOR THE COMPANY



SIGNALED THEIR INTEND ED EXIT STRATEGY



PROVIDED FINANCIAL FORECASTS



OPERATED THEIR BUSINE SS USING THE ENTREPRENEUR’S OWN INVESTMENT CAPITAL BEFORE COMING TO SEEK FUNDS



OFFERING A LIMITED AMOUNT OF EQUITY FOR SALE

Crowdfunding has shown itself to be a viable means of securing funding for entrepreneurs who can make a good case for themselves. Not
all campaigns or crowdfunded companies will be successful, but this is also true for companies seeking other means of funding. The
entrepreneurs who succeed have something to say, something to back them up, and a solid plan for how to get where they are going.

6|P a g e
M YTH 3: T RADITIONAL FUNDING S OURCES WILL NOT TOUCH CROWDFUNDE D
COMPANIES FOR SUBSEQUENT ROUND S
The root of this myth comes from a tiny grain of truth. Companies that use equity crowdfunding will indeed have
more investors than if they had raised their money from a small group of wealthy investors, which could complicate
the process of doing a subsequent traditional funding round. Additionally, there is a common impression that only
weak companies (who could not otherwise fund themselves) resort to crowdfunding. Both of these suggestions are
flawed in light of the availability of collective-agent legal structures, proof that crowds do indeed make smart
fundraising decisions, and the limited pools of funding available from traditional funding sources (venture capital,
angel investors, and private equity).

M A NY

I N V E S TO RS , O N E VO I C E

If the prospect of a large number of investors is seen as a problem for
traditional funding sources, there are legal strategies that remove this
problem by aggregating large groups of investors into a single agent
or entity. Two models immediately come to mind: investor co-ops

“Crowdfunding enables early stage
companies to build and develop the

and nominee structures.

traction necessary to make a strong

Investor cooperatives (co-ops) provide a model where crowd

case for subsequent funding rounds

investors are combined into a
single cooperative entity,
which can act as a single,
large shareholder and

from VCs, angel funds and private
equity organizations.”

Board member
when negotiating additional funding rounds. This method is currently being proven by a
company called Symbid, operating in the Netherlands.
Nominee structures refer to a model where the ownership interests of crowdfunders are actually
controlled by the crowdfunding platform itself, allowing investors to vote for their preferences while relieving the individual investors from
the responsibility of administering their investments. This method is being employed by Seedrs in the UK.
7|P a g e
F UN NE LI N G

T HE BE S T UP W A R D , F E E D IN G TH E

VC S

First and foremost, the task of venture capital, angel investment, and private equity funds is to identify and invest in companies that will
increase the wealth of their investors. These traditional investment organizations will actively benefit from crowdfunding’s ability to initially
vet and support early-stage, high risk opportunities. Crowdfunding enables early stage companies to build and develop the traction
necessary to make a strong case for subsequent funding rounds from VCs, angel funds and private equity organizations. In fact, a strong
case has been made by James Surowieki in his book, The Wisdom of Crowds, for the accuracy of insights derived from the aggregation of
information and viewpoints of large groups of people. The companies made successful through crowdfunding will have a unique pedigree
when approaching traditional funding sources for their follow-up rounds of funding.
Crowdfunding is positioned to feed a wider array of potentially lucrative deals to the traditional funding
community than they currently see, providing an incentive for these organizations to partner with crowdfunding
portals rather than shun crowdfunded entrepreneurs. As well, traditional funding sources must turn away the vast
majority of potential opportunities because they have limited funds to invest or the entrepreneurs seeking funds
are not quite ready for a multi-million dollar investment round. This is not to say that the companies (who do not
receive traditional funding) are bad companies, or even to suggest that they are somehow weak. Rather, it
suggests a significant need unmet by traditional funding sources.

8|P a g e
M YTH 4: D EN OF THIEVES ( FRAUD AND FAILURE )
The most common complaint against crowdfunding – the threat of fraud – appears
over and over in the press. This view is repeated by the securities administration
lobby and venture capitalist bloggers. This myth begins and ends with the assertion
that crowdfunding will be some sort of “Wild West” of lawless and unscrupulous
actors conning ‘unsophisticated’ investors out of their nest eggs. Without
diminishing the real threat posed by fraud to all investors, the impression of
crowdfunding as uniquely dangerous is unfounded.
Fraud is a threat across all levels of and vehicles for investment and is not in any way
unique to crowdfunding. Fraud committed by Enron, MCI Worldcom, Sino-Forest,
Stratton Oakmont, Bernie Madoff and Fabrice Tourre affected millions of people and
cost trillions of dollars, and the graft represented by these examples in no way
reflects the vast majority of players in the traditional funding market. Since no single
investment vehicle is fraud-proof, the investment community’s primary focus should
be eliminating or minimizing fraud throughout all levels of business rather than
finger-pointing at any one type of investment platform or vehicle.

“Crowds can prod
opportunities from
hundreds and thousands
of directions at once,
helping to more quickly
identify and report
potential fraud before it
can do damage.”

The SEC’s regulations regarding the implementation of the JOBS Act were slow in coming because the 585 page document is so heavily
weighted with rules and requirements to protect investors from fraud. This proposal includes specific requirements for crowdfunding
portals to educate investors and potential investors to help them avoid making poor decisions, know what limits the law places on their
investing activities and understand the process involved with investing through the portal.
In fact, the most dangerous threat to investors is not fraud but ignorance. Fortunately, as the SEC and several industry leaders
acknowledge, there are multiple tools available to help protect and educate potential investors who want to use crowdfunding portals,
including, but not limited to: educational content and disclaimers, online testing for investor comprehension, cooling off periods and wait
times, as well as double opt-in consent for any online activity.

9|P a g e
Indeed, crowdfunding represents a powerful new anti-fraud tool. When the crowd pokes and prods companies – that is, when thousands
of individuals actively examine potential investment opportunities (like those on crowdfunding portals), these individuals are helping the
market to more quickly identify and report potential fraud before it can do damage.
Rather than fraud, the more credible threat to the future of crowdfunding is the potential for companies to fail. Companies will fail.
Companies will fail no matter what vehicle is used to fund them. Since failure is a recognized concern among entrepreneurs and earlystage investors alike, reputable crowdfunding organizations communicate the risk of company failure clearly. Moreover, investors are
urged – by investment professionals as well as crowdfunding platforms themselves – to diversify their portfolios to minimize the impact of
a single company’s failure. A balanced investment portfolio spreads risk across many investments to diminish the damage when a single
investment fails.
Ultimately, there is risk to investing in early-stage businesses. In the early days of crowdfunding, it is likely that there will be several
crowdfunded companies and crowdfunding portals that fail. This is part of the growing pains for any industry, but the net result will be the
same kind of improvement and innovation (drawn from the crowd) driving the best entrepreneurs to succeed. The crowdfunding portals
that do survive these growing pains will be those providing the best resources, showcase the best companies, and do the best job of
aiding their investors and entrepreneurs to make the best decisions possible. The responsibility owed to investors by crowdfunding portals
is to provide enough education to help investors make informed decisions as they consider different investment options.

10 | P a g e
M YTH 5: T HERE IS NO REASON TO MAKE EQUITY CROWDFUN DING AVAILABLE
TO THE GENERAL PUBLIC
The final myth is that there is no reason to provide equity crowdfunding opportunities to the general public (that is, non-accredited
investors). The reasoning behind this myth is simple: if there are already viable ways to fund companies (like VCs and angels), why is there
a need for another method (like crowdfunding)?
Crowdfunding has the potential to address several critical issues hampering the US economy: the funding gap, missed opportunities, and
the transfer of experience.

THE

L A DD E R ’ S M IS S I NG RU N GS

There is an enormous gulf between small pools of capital from friends,
family, and credit cards and significant investments from the VC
community, angel investors and incubators. This gulf stifles the
growth of potentially lucrative businesses.
This funding gap is negatively affecting more companies than ever, as
fewer companies are receiving funding for early stages. Equity
crowdfunding by the general public is ideal for bridging this gap.
Because the demand for funding is so high, and the pools of capital
from traditional sources are so limited, the supply-demand imbalance
gives great power to large investors and banks who use their leverage
to require businesses (seeking capital) to provide significant personal collateral or agree to lopsided legal terms in order to secure funding.
Moreover, because accredited investors make up such a small portion of the population, and accredited investor portals turn away most
companies seeking funding, there is a large unmet demand for funding.

THE

G RE A TE S T VA LU E - A D D A VA IL A BL E

The benefits of opening equity crowdfunding to the general public also include broadening participation in investment and
entrepreneurship, improving the public’s financial literacy, providing visibility into companies and markets that are currently opaque,
11 | P a g e
setting private investment benchmarks and best practices across a wide swath of businesses, streamlining financial transactions,
standardizing investor communications, and enabling better investment administration. To be sure, there are many benefits of
crowdfunding. Crowdfunding is fueling entrepreneurialism worldwide. Opening a broader base of investment opportunities will help
obtain more capital for investment in American businesses.

SUCCESS

TA K E S M O RE TH A N M O N E Y

Unlike many “money-only” or “funding-only” crowdfunding portals, many accredited investor crowdfunding portals offer resources and
business services to aid companies in developing their campaigns and building their business after a successful fundraise. General public
equity crowdfunding platforms – especially those already working with accredited investors – are uniquely poised to give entrepreneurs
the same access to resources and business services that help to develop their campaigns and then build their businesses. Because of the
wide-reach of crowdfunding, platforms that want to bring resources and services to entrepreneurs have access to large numbers of
potential mentors, board members, employees, and partners who can help drive potential success for companies in the long term.

12 | P a g e
C ONCLUSION
While there are risks to crowdfunding – which the forgoing myths exaggerate – those risks come from the high failure rate of young
businesses rather than any weaknesses endemic to crowdfunding itself. Crowdfunding is poised to take its place as part of a continuum of
funding options for businesses, helping to vet ideas and prepare businesses for greater growth later in their life-cycles. Indeed, where it is
currently practiced, crowdfunding has shown a diversity of ways in which a community of individuals can come together to help a great
idea and a great entrepreneurial team succeed. This is the great hope of crowdfunding.

About Wall&Main: Wall&Main, Inc., is the nation’s most innovative crowdfunding portal. Wall&Main is the only crowdfunding portal to
have successful crowdfunded itself using a rewards-model campaign, and will soon be open to offer investors and backers early access to
great early-stage companies. Wall&Main’s platforms, tools for entrepreneurs and knowledge resources are geared to help companies
across all industries grow, prosper, and generate value for their investors, communities and customers. Follow us on Twitter
(@WallandMainInc), Facebook, and YouTube. For more information, visit http://www.wallandmain.com.

13 | P a g e

Contenu connexe

En vedette

Marcy Coffee Print
Marcy Coffee PrintMarcy Coffee Print
Marcy Coffee Printmarcy8
 
241 Maddox Bc1.Indd
241 Maddox Bc1.Indd241 Maddox Bc1.Indd
241 Maddox Bc1.Inddlmaddox
 
InvitacióN Foro Para La Igualdad 2009
InvitacióN Foro Para La Igualdad 2009InvitacióN Foro Para La Igualdad 2009
InvitacióN Foro Para La Igualdad 2009Lur Gozoa
 
WongResume_2015a
WongResume_2015aWongResume_2015a
WongResume_2015aScott Wong
 
Proyecto participativo 3° e
Proyecto participativo 3° eProyecto participativo 3° e
Proyecto participativo 3° eEducacion
 
M2 a5 benítez_juan
M2 a5 benítez_juanM2 a5 benítez_juan
M2 a5 benítez_juanjubebu
 
Tarea3 comp comunic_tecnol_ana milena olave
Tarea3 comp comunic_tecnol_ana milena olaveTarea3 comp comunic_tecnol_ana milena olave
Tarea3 comp comunic_tecnol_ana milena olaveaolave68
 
Español contenido cientifico "Cuentos centroamericanos".
Español contenido cientifico "Cuentos centroamericanos".Español contenido cientifico "Cuentos centroamericanos".
Español contenido cientifico "Cuentos centroamericanos".Marjorie Valencia
 
Town Hall Meetings - Parish Overview and Vision (12/3/2013)
Town Hall Meetings - Parish Overview and Vision (12/3/2013)Town Hall Meetings - Parish Overview and Vision (12/3/2013)
Town Hall Meetings - Parish Overview and Vision (12/3/2013)pennpadre
 
How to Discuss E-Books with Patrons
How to Discuss E-Books with PatronsHow to Discuss E-Books with Patrons
How to Discuss E-Books with PatronsALATechSource
 
Mapping Roles and Responsibilities for Social Media Risk Management
Mapping Roles and Responsibilities for Social Media Risk ManagementMapping Roles and Responsibilities for Social Media Risk Management
Mapping Roles and Responsibilities for Social Media Risk ManagementNexgate
 
CREATING BLOG PROFITS WITH SIMPLE METHODS
CREATING BLOG PROFITS WITH SIMPLE METHODSCREATING BLOG PROFITS WITH SIMPLE METHODS
CREATING BLOG PROFITS WITH SIMPLE METHODSFeroz Khan
 
Español contenido ciemtifico "Diversidad de palabras".
Español contenido ciemtifico "Diversidad de palabras".Español contenido ciemtifico "Diversidad de palabras".
Español contenido ciemtifico "Diversidad de palabras".Marjorie Valencia
 
Planificación primer jornada Español
Planificación primer jornada EspañolPlanificación primer jornada Español
Planificación primer jornada EspañolJosHhx G
 

En vedette (19)

Marcy Coffee Print
Marcy Coffee PrintMarcy Coffee Print
Marcy Coffee Print
 
241 Maddox Bc1.Indd
241 Maddox Bc1.Indd241 Maddox Bc1.Indd
241 Maddox Bc1.Indd
 
InvitacióN Foro Para La Igualdad 2009
InvitacióN Foro Para La Igualdad 2009InvitacióN Foro Para La Igualdad 2009
InvitacióN Foro Para La Igualdad 2009
 
WongResume_2015a
WongResume_2015aWongResume_2015a
WongResume_2015a
 
Ten keys
Ten keysTen keys
Ten keys
 
Georgia State University TCORS
Georgia State University TCORSGeorgia State University TCORS
Georgia State University TCORS
 
Proyecto participativo 3° e
Proyecto participativo 3° eProyecto participativo 3° e
Proyecto participativo 3° e
 
M2 a5 benítez_juan
M2 a5 benítez_juanM2 a5 benítez_juan
M2 a5 benítez_juan
 
Tarea3 comp comunic_tecnol_ana milena olave
Tarea3 comp comunic_tecnol_ana milena olaveTarea3 comp comunic_tecnol_ana milena olave
Tarea3 comp comunic_tecnol_ana milena olave
 
Español contenido cientifico "Cuentos centroamericanos".
Español contenido cientifico "Cuentos centroamericanos".Español contenido cientifico "Cuentos centroamericanos".
Español contenido cientifico "Cuentos centroamericanos".
 
Franquicias
FranquiciasFranquicias
Franquicias
 
Ambientede trabajo word
Ambientede trabajo wordAmbientede trabajo word
Ambientede trabajo word
 
Town Hall Meetings - Parish Overview and Vision (12/3/2013)
Town Hall Meetings - Parish Overview and Vision (12/3/2013)Town Hall Meetings - Parish Overview and Vision (12/3/2013)
Town Hall Meetings - Parish Overview and Vision (12/3/2013)
 
How to Discuss E-Books with Patrons
How to Discuss E-Books with PatronsHow to Discuss E-Books with Patrons
How to Discuss E-Books with Patrons
 
Proses menterjemah
Proses menterjemahProses menterjemah
Proses menterjemah
 
Mapping Roles and Responsibilities for Social Media Risk Management
Mapping Roles and Responsibilities for Social Media Risk ManagementMapping Roles and Responsibilities for Social Media Risk Management
Mapping Roles and Responsibilities for Social Media Risk Management
 
CREATING BLOG PROFITS WITH SIMPLE METHODS
CREATING BLOG PROFITS WITH SIMPLE METHODSCREATING BLOG PROFITS WITH SIMPLE METHODS
CREATING BLOG PROFITS WITH SIMPLE METHODS
 
Español contenido ciemtifico "Diversidad de palabras".
Español contenido ciemtifico "Diversidad de palabras".Español contenido ciemtifico "Diversidad de palabras".
Español contenido ciemtifico "Diversidad de palabras".
 
Planificación primer jornada Español
Planificación primer jornada EspañolPlanificación primer jornada Español
Planificación primer jornada Español
 

Similaire à 5 myths whitepaper

Louis BELLOIN - Report on Crowdfunding - 2013
Louis BELLOIN  - Report on Crowdfunding - 2013Louis BELLOIN  - Report on Crowdfunding - 2013
Louis BELLOIN - Report on Crowdfunding - 2013Louis BELLOIN
 
alliedcrowds_gew_report
alliedcrowds_gew_reportalliedcrowds_gew_report
alliedcrowds_gew_reportShareq Husain
 
Navigating Downturn Alley - The PRactice May 2016 issue
Navigating Downturn Alley - The PRactice May 2016 issueNavigating Downturn Alley - The PRactice May 2016 issue
Navigating Downturn Alley - The PRactice May 2016 issueThe PRactice
 
An initial exploration of Crowd Funding
An initial exploration of Crowd FundingAn initial exploration of Crowd Funding
An initial exploration of Crowd FundingNiamh O Riordan
 
SOCIAL ENTERPRISE - Plumb
SOCIAL ENTERPRISE - PlumbSOCIAL ENTERPRISE - Plumb
SOCIAL ENTERPRISE - PlumbRalph Plumb
 
Delhaize Group Case Study
Delhaize Group Case StudyDelhaize Group Case Study
Delhaize Group Case StudyMichelle Singh
 
The role of the media towards building a critical mass of young entrepreneurs
The role of the media towards building a critical mass of young entrepreneursThe role of the media towards building a critical mass of young entrepreneurs
The role of the media towards building a critical mass of young entrepreneursMy Beautiful Africa
 
The One Billion Dollar Question
The One Billion Dollar QuestionThe One Billion Dollar Question
The One Billion Dollar QuestionMuhammad Chbib
 
youth empowerment summit day three
youth empowerment summit day threeyouth empowerment summit day three
youth empowerment summit day threeKing Jesus Agyemang
 
Essay On Road Trip
Essay On Road TripEssay On Road Trip
Essay On Road TripLeslie Lee
 
The dynamics of crowdfunding: An exploratory study
The dynamics of crowdfunding: An exploratory studyThe dynamics of crowdfunding: An exploratory study
The dynamics of crowdfunding: An exploratory studypchodge
 
Advantages And Disadvantages Of IQ Based System
Advantages And Disadvantages Of IQ Based SystemAdvantages And Disadvantages Of IQ Based System
Advantages And Disadvantages Of IQ Based SystemLaura Johnson
 
Collaboration of the Masses: Crowdsourcing & Crowdfunding
Collaboration of the Masses: Crowdsourcing & CrowdfundingCollaboration of the Masses: Crowdsourcing & Crowdfunding
Collaboration of the Masses: Crowdsourcing & CrowdfundingLaura Amole
 
Düsseldorf keynote by brigit law
Düsseldorf keynote by brigit lawDüsseldorf keynote by brigit law
Düsseldorf keynote by brigit lawBrigit Law
 
Companization - Business as usual is over!
Companization - Business as usual is over! Companization - Business as usual is over!
Companization - Business as usual is over! Plantagon
 
The Economic Forces Driving A Multinational Corporation
The Economic Forces Driving A Multinational CorporationThe Economic Forces Driving A Multinational Corporation
The Economic Forces Driving A Multinational CorporationKelly Ratkovic
 

Similaire à 5 myths whitepaper (20)

Louis BELLOIN - Report on Crowdfunding - 2013
Louis BELLOIN  - Report on Crowdfunding - 2013Louis BELLOIN  - Report on Crowdfunding - 2013
Louis BELLOIN - Report on Crowdfunding - 2013
 
alliedcrowds_gew_report
alliedcrowds_gew_reportalliedcrowds_gew_report
alliedcrowds_gew_report
 
Navigating Downturn Alley - The PRactice May 2016 issue
Navigating Downturn Alley - The PRactice May 2016 issueNavigating Downturn Alley - The PRactice May 2016 issue
Navigating Downturn Alley - The PRactice May 2016 issue
 
An initial exploration of Crowd Funding
An initial exploration of Crowd FundingAn initial exploration of Crowd Funding
An initial exploration of Crowd Funding
 
SOCIAL ENTERPRISE - Plumb
SOCIAL ENTERPRISE - PlumbSOCIAL ENTERPRISE - Plumb
SOCIAL ENTERPRISE - Plumb
 
Delhaize Group Case Study
Delhaize Group Case StudyDelhaize Group Case Study
Delhaize Group Case Study
 
The role of the media towards building a critical mass of young entrepreneurs
The role of the media towards building a critical mass of young entrepreneursThe role of the media towards building a critical mass of young entrepreneurs
The role of the media towards building a critical mass of young entrepreneurs
 
The One Billion Dollar Question
The One Billion Dollar QuestionThe One Billion Dollar Question
The One Billion Dollar Question
 
the future of crowdfunding
 the future of crowdfunding the future of crowdfunding
the future of crowdfunding
 
youth empowerment summit day three
youth empowerment summit day threeyouth empowerment summit day three
youth empowerment summit day three
 
Essay On Road Trip
Essay On Road TripEssay On Road Trip
Essay On Road Trip
 
The dynamics of crowdfunding: An exploratory study
The dynamics of crowdfunding: An exploratory studyThe dynamics of crowdfunding: An exploratory study
The dynamics of crowdfunding: An exploratory study
 
Fargo Inc
Fargo IncFargo Inc
Fargo Inc
 
Advantages And Disadvantages Of IQ Based System
Advantages And Disadvantages Of IQ Based SystemAdvantages And Disadvantages Of IQ Based System
Advantages And Disadvantages Of IQ Based System
 
Business Research Method
Business Research MethodBusiness Research Method
Business Research Method
 
Collaboration of the Masses: Crowdsourcing & Crowdfunding
Collaboration of the Masses: Crowdsourcing & CrowdfundingCollaboration of the Masses: Crowdsourcing & Crowdfunding
Collaboration of the Masses: Crowdsourcing & Crowdfunding
 
Reading croud funding
Reading croud fundingReading croud funding
Reading croud funding
 
Düsseldorf keynote by brigit law
Düsseldorf keynote by brigit lawDüsseldorf keynote by brigit law
Düsseldorf keynote by brigit law
 
Companization - Business as usual is over!
Companization - Business as usual is over! Companization - Business as usual is over!
Companization - Business as usual is over!
 
The Economic Forces Driving A Multinational Corporation
The Economic Forces Driving A Multinational CorporationThe Economic Forces Driving A Multinational Corporation
The Economic Forces Driving A Multinational Corporation
 

Dernier

UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGlokeshwarmaha
 
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdfTalent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdfCharles Cotter, PhD
 
Q2 2024 APCO Geopolitical Radar - The Global Operating Environment for Business
Q2 2024 APCO Geopolitical Radar - The Global Operating Environment for BusinessQ2 2024 APCO Geopolitical Radar - The Global Operating Environment for Business
Q2 2024 APCO Geopolitical Radar - The Global Operating Environment for BusinessAPCO
 
Upgrade Your Banking Experience with Advanced Core Banking Applications
Upgrade Your Banking Experience with Advanced Core Banking ApplicationsUpgrade Your Banking Experience with Advanced Core Banking Applications
Upgrade Your Banking Experience with Advanced Core Banking ApplicationsIntellect Design Arena Ltd
 
Project Brief & Information Architecture Report
Project Brief & Information Architecture ReportProject Brief & Information Architecture Report
Project Brief & Information Architecture Reportamberjiles31
 
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...Khaled Al Awadi
 
Lecture_6.pptx English speaking easyb to
Lecture_6.pptx English speaking easyb toLecture_6.pptx English speaking easyb to
Lecture_6.pptx English speaking easyb toumarfarooquejamali32
 
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 Building Your Personal Brand on LinkedIn - Expert Planet-  2024 Building Your Personal Brand on LinkedIn - Expert Planet-  2024
Building Your Personal Brand on LinkedIn - Expert Planet- 2024Stephan Koning
 
Mihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZMihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZKanakChauhan5
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access
 
Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access
 
Live-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarLive-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarNathanielSchmuck
 
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptxCracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptxWorkforce Group
 
Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsP&CO
 
7movierulz.uk
7movierulz.uk7movierulz.uk
7movierulz.ukaroemirsr
 
Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..dlewis191
 
Fabric RFID Wristbands in Ireland for Events and Festivals
Fabric RFID Wristbands in Ireland for Events and FestivalsFabric RFID Wristbands in Ireland for Events and Festivals
Fabric RFID Wristbands in Ireland for Events and FestivalsWristbands Ireland
 
PDT 88 - 4 million seed - Seed - Protecto.pdf
PDT 88 - 4 million seed - Seed - Protecto.pdfPDT 88 - 4 million seed - Seed - Protecto.pdf
PDT 88 - 4 million seed - Seed - Protecto.pdfHajeJanKamps
 

Dernier (20)

Investment Opportunity for Thailand's Automotive & EV Industries
Investment Opportunity for Thailand's Automotive & EV IndustriesInvestment Opportunity for Thailand's Automotive & EV Industries
Investment Opportunity for Thailand's Automotive & EV Industries
 
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISINGUNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
UNLEASHING THE POWER OF PROGRAMMATIC ADVERTISING
 
WAM Corporate Presentation Mar 25 2024.pdf
WAM Corporate Presentation Mar 25 2024.pdfWAM Corporate Presentation Mar 25 2024.pdf
WAM Corporate Presentation Mar 25 2024.pdf
 
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdfTalent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
Talent Management research intelligence_13 paradigm shifts_20 March 2024.pdf
 
Q2 2024 APCO Geopolitical Radar - The Global Operating Environment for Business
Q2 2024 APCO Geopolitical Radar - The Global Operating Environment for BusinessQ2 2024 APCO Geopolitical Radar - The Global Operating Environment for Business
Q2 2024 APCO Geopolitical Radar - The Global Operating Environment for Business
 
Upgrade Your Banking Experience with Advanced Core Banking Applications
Upgrade Your Banking Experience with Advanced Core Banking ApplicationsUpgrade Your Banking Experience with Advanced Core Banking Applications
Upgrade Your Banking Experience with Advanced Core Banking Applications
 
Project Brief & Information Architecture Report
Project Brief & Information Architecture ReportProject Brief & Information Architecture Report
Project Brief & Information Architecture Report
 
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...NewBase  25 March  2024  Energy News issue - 1710 by Khaled Al Awadi_compress...
NewBase 25 March 2024 Energy News issue - 1710 by Khaled Al Awadi_compress...
 
Lecture_6.pptx English speaking easyb to
Lecture_6.pptx English speaking easyb toLecture_6.pptx English speaking easyb to
Lecture_6.pptx English speaking easyb to
 
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 Building Your Personal Brand on LinkedIn - Expert Planet-  2024 Building Your Personal Brand on LinkedIn - Expert Planet-  2024
Building Your Personal Brand on LinkedIn - Expert Planet- 2024
 
Mihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZMihir Menda - Member of Supervisory Board at RMZ
Mihir Menda - Member of Supervisory Board at RMZ
 
Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024Borderless Access - Global Panel book-unlock 2024
Borderless Access - Global Panel book-unlock 2024
 
Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024Borderless Access - Global B2B Panel book-unlock 2024
Borderless Access - Global B2B Panel book-unlock 2024
 
Live-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry WebinarLive-Streaming in the Music Industry Webinar
Live-Streaming in the Music Industry Webinar
 
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptxCracking the ‘Business Process Outsourcing’ Code Main.pptx
Cracking the ‘Business Process Outsourcing’ Code Main.pptx
 
Entrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizationsEntrepreneurship & organisations: influences and organizations
Entrepreneurship & organisations: influences and organizations
 
7movierulz.uk
7movierulz.uk7movierulz.uk
7movierulz.uk
 
Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..Team B Mind Map for Organizational Chg..
Team B Mind Map for Organizational Chg..
 
Fabric RFID Wristbands in Ireland for Events and Festivals
Fabric RFID Wristbands in Ireland for Events and FestivalsFabric RFID Wristbands in Ireland for Events and Festivals
Fabric RFID Wristbands in Ireland for Events and Festivals
 
PDT 88 - 4 million seed - Seed - Protecto.pdf
PDT 88 - 4 million seed - Seed - Protecto.pdfPDT 88 - 4 million seed - Seed - Protecto.pdf
PDT 88 - 4 million seed - Seed - Protecto.pdf
 

5 myths whitepaper

  • 1. DEBUNKING THE 5 LEADING MYTHS ABOUT CROWDFUNDING Wall&Main Knowledge Exchange Whitepapers November 7, 2013
  • 2. I NTRODUCTION Reading articles in the news and on crowdfunding forums can seem like sifting through advertisements and scary stories. A lot of content is either announcements of new crowdfunding campaigns or interviews with traditional investment organizations arguing that it is too scary to invest in private companies without an investment manager by your side. Much of this content has recently resurfaced with the release of the Securities and Exchange Commission’s proposed rules for implementing Title III of the Jumpstart Our Business Startups Act (JOBS Act) and regulating public crowdfunding in the United States. The scary stories are just that – “stories” – but when they are repeated often enough they become the stuff of myth. The website of the National Crowdfunding Association of Canada (NCFA) is running a series of articles to address the most common myths being perpetrated against the crowdfunding industry. We recommend that you read this excellent series in its entirety. We have shortened and summarized some of the myths discussed in the NCFA series for use here: 1. T H E C R O W D I S M A D E O U T O F D A N G E R O U S F O O L S 2. C R O W D F U N D I N G C A N N O T P O S S I B L Y W O R K 3. T R A D I T I O N A L F U N D I N G S O U R C E S W I L L N O T T O U C H C R O W D F U N D E D C O M P A N I E S F O R S U B S E Q U E N T R O U N D S 4. D E N O F T H I E V E S ( F R A U D A N D F A I L U R E ) 5. T H E R E I S N O R E A S O N T O M A K E E Q U I T Y C R O W D F U N D I N G A V A I L A B L E T O T H E G E N E R A L P U B L I C These “myths” make for harrowing headlines and great talking points, but none of them hold up to much scrutiny. We have addressed each of them in turn, providing analysis and examples. Read on to learn more. 1|P a g e
  • 3. M YTH 1: T HE CROWD IS MADE OF DAN GEROUS FOOLS There are two roots to this myth. First, in order to believe this myth, you have to fundamentally believe that people will always do incredibly stupid, self-destructive and dangerous things when left to their own devices. Second, you also have to believe that there is special knowledge possessed by investment professionals that cannot be transmitted to, or understood by, the general public. To be sure, large groups of people have done some incredibly destructive things. Then again, large groups of people have done incredibly noble and beneficial things. People arguing that the crowd is inherently dangerous will offer cherry-picked examples of crowds becoming violent or acting against their own interests. For every Nazi Germany example, there is an Allied Forces example to offer a counterpoint. For every witch-hunt, there is a community rallying around a barn-raising. Rather than rely “The crowd, as it turns out, is not a gigantic teeming mass. It is made out of people” on such anecdotes, let us determine a relevant path to answering this myth. C RO W DF UN D IN G E NA B LE S A DI VE RS I TY O F VI E W S TO W O RK TO G E THE R The crowd, as it turns out, is not a gigantic teeming mass. It is made out of people. The crowd is comprised of separate individuals who each have the ability to quickly adapt to changing market conditions. Individuals also have the ability to fuel innovation and creativity through the cross pollination of ideas. Moreover, the crowd can learn from and evaluate the views of experts, benefitting the crowd and furthering market knowledge. The SEC proposed rules for the JOBS Act includes specific analysis and acknowledgement of the crowd’s wisdom and evaluative capabilities. DIVERSITY BREEDS ADVANCEMENT A crowd of people, drawing on the breadth and depth of their collective experiences and backgrounds, has deeper and broader industry and market knowledge than any single expert. 2|P a g e
  • 4. Crowds enable risk to be spread in small amounts across the entire population, reducing risk to any single individual. Moreover, the crowd also tends to be leery of outlandish offers and, when coupled with excellent fraud detection tools, can help to identify and isolate fraudsters. Crowds are more than just a class of investors, as they provide some specific long-term advantages for entrepreneurs. While large-scale investors make great board members, crowd investors are a word-of-mouth channel capable of magnifying any fundraising effort. Crowd investors, when convinced, can be enlisted to increase the reach and strength of a company’s message and rally other supporters to spread the word about that company’s mission, products and crowdfunding campaign. In addition to being instrumental in successful fund raising, crowds have a tendency to become an installed user based for companies seeking to offer goods and services to the public. Because of the feedback and insight from the members of crowd, the crowd can be instrumental in the period between the funding stage and full operation. As they process and respond to product and marketing information, the crowd can help refine messaging and product design to ensure the best possible product and communications for bringing in new customers. E N R I C H M EN T BY P A RT I CI P AT I O N I S N O T ABO U T P RI Z ES Crowdfunding rebalances the funding landscape by distributing negotiating power and knowledge away from entrenched traditional funding organizations. When companies can crowdfund themselves, they have more power over their capitalization process and the destiny of their company. DISTRIBUTION ENHANCES KNOWLEDGE What happens when investment knowledge and power are distributed to the public? For starters, public participation in entrepreneurship and investment will give the general public direct insight into the process of building companies and more generally into the underlying dynamic process of market capitalism. Engagement between the general public and the entrepreneur community will also provide entrepreneurs with greater visibility, helping great ideas spread faster than ever before. Crowdfunding makes it possible for governmental entities, companies and universities to work together to strengthen community, regional, and national economic goals. Crowdfunding also allows individuals to invest in their local or regional community. 3|P a g e
  • 5. On a societal level, widespread participation in crowdfunding will lead to greater transparency into (that is, understanding of) private companies because such widespread participation will require the standardization of collecting and disseminating financial information, like reporting and valuations. On an individual level, people will have access to a broader and more diverse range of potential investments to include in their portfolios. For individuals with investment strategies that include high risk and high reward investments, early-stage private companies (like those on crowdfunding portals) are an attractive option. Finally, access to a broader funding pool lowers the funding entry barrier for disruptive companies that need to be able to scale quickly to the point where they can sustain themselves on narrow margin, technology-leveraging business models. 4|P a g e
  • 6. M YTH 2: C ROWDFUNDING CANNOT POSSIBLY WORK As with any innovation, some people simply cannot accept that a different way of doing something might be feasible, functional or useful. The “crowdfunding can’t work” myth can be tricky to overcome because you first have to get the critic to define what he or she means by “work” – that is, you have to get the critic to offer his or her metrics for crowdfunding success. There are three ways to consider whether or not crowdfunding “works” or is “In the United States alone, crowdfunding is a $3 billion successful. Are crowdfunding portals sustainable? Are people able to use crowdfunding portals to start sustainable businesses? Are there measurable ways to determine what makes a campaign successful? business. Billion.” The answer to all three questions is “yes.” C RO W DF UN D I N G W O R K S W E L L E NO U GH F O R PO R T A L S T O B E S US TA I NA BL E The presence of myriad thriving crowdfunding portals – with many different funding models like debt, equity, rewards-based and donation-based – indicates that this is an industry sustaining viable, stable and sound companies. In the United States alone, crowdfunding is a $3 billion business. Billion. C RO W DF UN D I N G S U PP O R TS TH E C RE A T IO N O F VIA B LE BU S I NE S S E S If crowdfunding does not work, there should not be any examples of portals that have successfully raised funds for entrepreneurs and then watched (or helped) as those entrepreneurs ran successful businesses. But there are plenty of examples of successful crowdfunding campaigns. (Because equity-based crowdfunding from the general pubic is not yet permitted in the U.S., many examples are from other countries.) The Australian Small Scale Offerings Board (ASSOB) has raised over AU$133 million for more than 180 companies. More than 80% of those companies are currently operation, and there have been no reports of fraud through the five 5|P a g e
  • 7. years ASSOB has been operating. Britain’s CrowdCube has raised £13 million for 73 companies, generating hundreds of jobs and fueling growth in the UK. There are many successful crowdfunding sites using donation-based or accredited investor-based models, including: Kickstarter, IndieGogo, CircleUp, AngelList, Seedrs, Symbid and the like. THERE M US T BE DE M O NS T R A BL E R E A S O NS F O R C RO W DF UN DI N G S UC C E S S ; O T HE RW IS E , I T I S A L L J US T LU C K For some, the proof that a fundraising vehicle (like crowdfunding) is viable lies in being able to demonstrate common traits among companies that successfully use crowdfunding. According to one study, successful crowdfunding efforts include these common elements:  EDUCATED AND SUCCESSF UL BOARD MEMBERS FOR THE COMPANY  SIGNALED THEIR INTEND ED EXIT STRATEGY  PROVIDED FINANCIAL FORECASTS  OPERATED THEIR BUSINE SS USING THE ENTREPRENEUR’S OWN INVESTMENT CAPITAL BEFORE COMING TO SEEK FUNDS  OFFERING A LIMITED AMOUNT OF EQUITY FOR SALE Crowdfunding has shown itself to be a viable means of securing funding for entrepreneurs who can make a good case for themselves. Not all campaigns or crowdfunded companies will be successful, but this is also true for companies seeking other means of funding. The entrepreneurs who succeed have something to say, something to back them up, and a solid plan for how to get where they are going. 6|P a g e
  • 8. M YTH 3: T RADITIONAL FUNDING S OURCES WILL NOT TOUCH CROWDFUNDE D COMPANIES FOR SUBSEQUENT ROUND S The root of this myth comes from a tiny grain of truth. Companies that use equity crowdfunding will indeed have more investors than if they had raised their money from a small group of wealthy investors, which could complicate the process of doing a subsequent traditional funding round. Additionally, there is a common impression that only weak companies (who could not otherwise fund themselves) resort to crowdfunding. Both of these suggestions are flawed in light of the availability of collective-agent legal structures, proof that crowds do indeed make smart fundraising decisions, and the limited pools of funding available from traditional funding sources (venture capital, angel investors, and private equity). M A NY I N V E S TO RS , O N E VO I C E If the prospect of a large number of investors is seen as a problem for traditional funding sources, there are legal strategies that remove this problem by aggregating large groups of investors into a single agent or entity. Two models immediately come to mind: investor co-ops “Crowdfunding enables early stage companies to build and develop the and nominee structures. traction necessary to make a strong Investor cooperatives (co-ops) provide a model where crowd case for subsequent funding rounds investors are combined into a single cooperative entity, which can act as a single, large shareholder and from VCs, angel funds and private equity organizations.” Board member when negotiating additional funding rounds. This method is currently being proven by a company called Symbid, operating in the Netherlands. Nominee structures refer to a model where the ownership interests of crowdfunders are actually controlled by the crowdfunding platform itself, allowing investors to vote for their preferences while relieving the individual investors from the responsibility of administering their investments. This method is being employed by Seedrs in the UK. 7|P a g e
  • 9. F UN NE LI N G T HE BE S T UP W A R D , F E E D IN G TH E VC S First and foremost, the task of venture capital, angel investment, and private equity funds is to identify and invest in companies that will increase the wealth of their investors. These traditional investment organizations will actively benefit from crowdfunding’s ability to initially vet and support early-stage, high risk opportunities. Crowdfunding enables early stage companies to build and develop the traction necessary to make a strong case for subsequent funding rounds from VCs, angel funds and private equity organizations. In fact, a strong case has been made by James Surowieki in his book, The Wisdom of Crowds, for the accuracy of insights derived from the aggregation of information and viewpoints of large groups of people. The companies made successful through crowdfunding will have a unique pedigree when approaching traditional funding sources for their follow-up rounds of funding. Crowdfunding is positioned to feed a wider array of potentially lucrative deals to the traditional funding community than they currently see, providing an incentive for these organizations to partner with crowdfunding portals rather than shun crowdfunded entrepreneurs. As well, traditional funding sources must turn away the vast majority of potential opportunities because they have limited funds to invest or the entrepreneurs seeking funds are not quite ready for a multi-million dollar investment round. This is not to say that the companies (who do not receive traditional funding) are bad companies, or even to suggest that they are somehow weak. Rather, it suggests a significant need unmet by traditional funding sources. 8|P a g e
  • 10. M YTH 4: D EN OF THIEVES ( FRAUD AND FAILURE ) The most common complaint against crowdfunding – the threat of fraud – appears over and over in the press. This view is repeated by the securities administration lobby and venture capitalist bloggers. This myth begins and ends with the assertion that crowdfunding will be some sort of “Wild West” of lawless and unscrupulous actors conning ‘unsophisticated’ investors out of their nest eggs. Without diminishing the real threat posed by fraud to all investors, the impression of crowdfunding as uniquely dangerous is unfounded. Fraud is a threat across all levels of and vehicles for investment and is not in any way unique to crowdfunding. Fraud committed by Enron, MCI Worldcom, Sino-Forest, Stratton Oakmont, Bernie Madoff and Fabrice Tourre affected millions of people and cost trillions of dollars, and the graft represented by these examples in no way reflects the vast majority of players in the traditional funding market. Since no single investment vehicle is fraud-proof, the investment community’s primary focus should be eliminating or minimizing fraud throughout all levels of business rather than finger-pointing at any one type of investment platform or vehicle. “Crowds can prod opportunities from hundreds and thousands of directions at once, helping to more quickly identify and report potential fraud before it can do damage.” The SEC’s regulations regarding the implementation of the JOBS Act were slow in coming because the 585 page document is so heavily weighted with rules and requirements to protect investors from fraud. This proposal includes specific requirements for crowdfunding portals to educate investors and potential investors to help them avoid making poor decisions, know what limits the law places on their investing activities and understand the process involved with investing through the portal. In fact, the most dangerous threat to investors is not fraud but ignorance. Fortunately, as the SEC and several industry leaders acknowledge, there are multiple tools available to help protect and educate potential investors who want to use crowdfunding portals, including, but not limited to: educational content and disclaimers, online testing for investor comprehension, cooling off periods and wait times, as well as double opt-in consent for any online activity. 9|P a g e
  • 11. Indeed, crowdfunding represents a powerful new anti-fraud tool. When the crowd pokes and prods companies – that is, when thousands of individuals actively examine potential investment opportunities (like those on crowdfunding portals), these individuals are helping the market to more quickly identify and report potential fraud before it can do damage. Rather than fraud, the more credible threat to the future of crowdfunding is the potential for companies to fail. Companies will fail. Companies will fail no matter what vehicle is used to fund them. Since failure is a recognized concern among entrepreneurs and earlystage investors alike, reputable crowdfunding organizations communicate the risk of company failure clearly. Moreover, investors are urged – by investment professionals as well as crowdfunding platforms themselves – to diversify their portfolios to minimize the impact of a single company’s failure. A balanced investment portfolio spreads risk across many investments to diminish the damage when a single investment fails. Ultimately, there is risk to investing in early-stage businesses. In the early days of crowdfunding, it is likely that there will be several crowdfunded companies and crowdfunding portals that fail. This is part of the growing pains for any industry, but the net result will be the same kind of improvement and innovation (drawn from the crowd) driving the best entrepreneurs to succeed. The crowdfunding portals that do survive these growing pains will be those providing the best resources, showcase the best companies, and do the best job of aiding their investors and entrepreneurs to make the best decisions possible. The responsibility owed to investors by crowdfunding portals is to provide enough education to help investors make informed decisions as they consider different investment options. 10 | P a g e
  • 12. M YTH 5: T HERE IS NO REASON TO MAKE EQUITY CROWDFUN DING AVAILABLE TO THE GENERAL PUBLIC The final myth is that there is no reason to provide equity crowdfunding opportunities to the general public (that is, non-accredited investors). The reasoning behind this myth is simple: if there are already viable ways to fund companies (like VCs and angels), why is there a need for another method (like crowdfunding)? Crowdfunding has the potential to address several critical issues hampering the US economy: the funding gap, missed opportunities, and the transfer of experience. THE L A DD E R ’ S M IS S I NG RU N GS There is an enormous gulf between small pools of capital from friends, family, and credit cards and significant investments from the VC community, angel investors and incubators. This gulf stifles the growth of potentially lucrative businesses. This funding gap is negatively affecting more companies than ever, as fewer companies are receiving funding for early stages. Equity crowdfunding by the general public is ideal for bridging this gap. Because the demand for funding is so high, and the pools of capital from traditional sources are so limited, the supply-demand imbalance gives great power to large investors and banks who use their leverage to require businesses (seeking capital) to provide significant personal collateral or agree to lopsided legal terms in order to secure funding. Moreover, because accredited investors make up such a small portion of the population, and accredited investor portals turn away most companies seeking funding, there is a large unmet demand for funding. THE G RE A TE S T VA LU E - A D D A VA IL A BL E The benefits of opening equity crowdfunding to the general public also include broadening participation in investment and entrepreneurship, improving the public’s financial literacy, providing visibility into companies and markets that are currently opaque, 11 | P a g e
  • 13. setting private investment benchmarks and best practices across a wide swath of businesses, streamlining financial transactions, standardizing investor communications, and enabling better investment administration. To be sure, there are many benefits of crowdfunding. Crowdfunding is fueling entrepreneurialism worldwide. Opening a broader base of investment opportunities will help obtain more capital for investment in American businesses. SUCCESS TA K E S M O RE TH A N M O N E Y Unlike many “money-only” or “funding-only” crowdfunding portals, many accredited investor crowdfunding portals offer resources and business services to aid companies in developing their campaigns and building their business after a successful fundraise. General public equity crowdfunding platforms – especially those already working with accredited investors – are uniquely poised to give entrepreneurs the same access to resources and business services that help to develop their campaigns and then build their businesses. Because of the wide-reach of crowdfunding, platforms that want to bring resources and services to entrepreneurs have access to large numbers of potential mentors, board members, employees, and partners who can help drive potential success for companies in the long term. 12 | P a g e
  • 14. C ONCLUSION While there are risks to crowdfunding – which the forgoing myths exaggerate – those risks come from the high failure rate of young businesses rather than any weaknesses endemic to crowdfunding itself. Crowdfunding is poised to take its place as part of a continuum of funding options for businesses, helping to vet ideas and prepare businesses for greater growth later in their life-cycles. Indeed, where it is currently practiced, crowdfunding has shown a diversity of ways in which a community of individuals can come together to help a great idea and a great entrepreneurial team succeed. This is the great hope of crowdfunding. About Wall&Main: Wall&Main, Inc., is the nation’s most innovative crowdfunding portal. Wall&Main is the only crowdfunding portal to have successful crowdfunded itself using a rewards-model campaign, and will soon be open to offer investors and backers early access to great early-stage companies. Wall&Main’s platforms, tools for entrepreneurs and knowledge resources are geared to help companies across all industries grow, prosper, and generate value for their investors, communities and customers. Follow us on Twitter (@WallandMainInc), Facebook, and YouTube. For more information, visit http://www.wallandmain.com. 13 | P a g e