Crowd funding lets little guys in on investment act

(From U-T San Diego, May 1, 2012)

Got a half-baked idea? Need 20 grand to get launched? Are your old man and Uncle Harry broke and on the skids? Who do you call? The rest of the world!

Welcome to “crowd funding,” where you can get 5,000 people who don’t know you from Adam, are not sophisticated investors, love your idea and want to support what you are doing, have a limited expectation of ever making any real money on their investment, and hope you will at least send them one of whatever you are making. This is the new paradigm for entrepreneurship 2.0.

In early April, President Barack Obama signed the JOBS Act that is designed to loosen the requirements for companies looking to raise capital. Strict rules from the Securities and Exchange Commission and the magical wall erected by the big, bad (and up to now, monopolistic) investment banks that kept small companies from accessing the public markets have been shredded.

Audited financials, liquidation preferences, are you kidding me? Welcome to the new wild, wild west where Kickstarter, Indiegogo and CircleUp are just a few of the clearing houses and facilitators designed to connect the “I want to get in on this technology boom” small investor to the myriad capital-starved companies that offer up the promise of riches — or at least a shot at being part of the next big thing.

You know crowd funding works when you see that it is being used in multiple venues, not just technology. Hello, Broadway. The revival of “Godspell” on the Great White Way has 750 investors, some of whom put in no more than $1,000 and wouldn’t know a playbill from an electric bill. But like Max Bialystock, they are now Broadway producers. Crowd funding for commercial theater.

It tells you that the world of capital is going to be democratized in a way that is radical, and the final outcome of which is unknown. If you want to lose your shirt, you no longer have to be an “accredited investor” — a term of art that required you to have a certain amount of net worth and income before you leapt off the deep end and invested in Amalgamated Widget. Now anybody who can’t afford a ticket to Vegas can play the slots (we mean invest) on whatever their little heart desires. Online, over the Internet, unregulated.

And what is fascinating is this new breed of investor knows going in that they will probably not make any money. And they still want to do it. In a New York Times article, Sue O’Connor, a human resources director in Chicago and an investor in “Godspell,” says, “I hope I will see a return, but I feel it is probably in my best interest to assume I won’t.”

The Pebble E-Ink smart watch, a device that syncs to your iPhone, showing text messages and telling time, raised $4 million in five days on Kickstarter. The investors get a watch — no equity.

The world has changed. Yes, there are still some rules and regulations, but fundamentally, this thing called crowd sourcing, crowd funding, the wisdom of crowds, is going to level the playing field in a critical way. What it really does is call out to the entrepreneur to bring it. The best ideas have always found venture money, and now the vote on what those best ideas are has been opened up to the world. Show me what you got.

© Copyright 2012 The San Diego Union-Tribune, LLC. An MLIM LLC Company. All rights reserved.

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