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What "Business Crowdfunding" Investing Might Look Like

posted Nov 11, 2013, 2:58 PM by Unknown user   [ updated Nov 11, 2013, 2:59 PM ]

What if you had been the guy to "loan" Mark Zuckerberg, Founder of Facebook, the few thousand dollars he needed to get his initial version of Facebook hosted on the web? Today that small investment would be worth literally hundreds of millions of dollars.

Article Contributed by Chance Barnett, Founder & CEO Crowdfunder

Of course, Facebook is an exceptional company, but the point still matters.

Investing in promising companies at an early stage can yield incredible returns. Great risk can have great rewards.

Considering this… what if you could have the opportunity to invest a few hundred or a few thousand dollars in an early stage company or founder you know or believe in?

Most people who aren't career investors don’t get opportunities to buy a small ownership stake in an early stage company during its initial growth phase.

However, if the current crowdfunding legislation in the U.S. Senate goes through, there will be a new capital market created literally overnight that will make this possible.

This new market will, for the first time, allow "everyday" people who aren’t accredited investors, to have access to investing smaller sums of money in a company for ownership. (If you're not up on the latest crowdfunding legislation in the U.S., here’s a quick summary about the crowdfunding laws.)

Business Crowdfunding: A New Class of Investors

When you talk about crowdfunding today many people’s reference point is one of the “Donation Model” sites like Kickstarter. People who fund projects on these sites can only donate funds, and as such there is no real investment or return. Donators are not allowed to receive any form of ownership or compensation for their donation, other than basic rewards or prizes.

Without real compensation or potential return for funding a project on these sites, it’s no wonder that the most frequent amount individuals donate to projects on Kickstarter is just $25.

With the passage of a crowdfunding bill, a new crowdfunding market will be created where people will invest and receive ownership in the companies they fund. This new market is what’s called “business crowdfunding.” As this will be an entirely new market in the U.S., it’s interesting to consider what the fundraising and investment activity in this market will look like.

As food for thought, here are data points to consider:

Crowdfunding Data

Donation data from Kickstarter:

  • Top Categories: Music, Film, Design
  • Most common donation amount: $25
  • Average amount of funds raised in a campaign: $7000

Currently, unlike the U.S., laws in the UK and France permit business crowdfunding.

Business crowdfunding on UK site

  • Top Categories/Industries: Professional businesses, Leisure &Tourism, Food & Drink, Financial Services
  • Average amount raised by a company: $400,000
  • Average investment amount by investors: $2,900

As a brief conclusion, the data here points out that not only will business crowdfunding in the U.S. attract some different types of companies relative to donation model sites (less “creative” and more profit driven), but that the investing behavior around these companies will differ as well.

What are your thoughts on what the U.S. business crowdfunding landscape will look like?

Will the average amount raised be higher?

Will investors invest less or more on average?

Which industries will prosper most in this landscape?

Time will tell.

Let us know your thoughts in the comments below, or if you really want to share your opinion.  Send Daily Crowdsource an article for crowdfunding month to consider.

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