Crowdfunding brings venture capitalism to the masses

Turned down for a bank loan but determined to get her knitting book business off the ground, Shannon Okey joined the growing ranks of entrepreneurs raising start-up money online. She sent out an appeal to her 7,000 Twitter followers and offered books, knitting designs and even a custom-knit sweater to people willing to pledge their support on the crowdfunding website Kickstarter.com. Within a month, she'd raised $12,480 from 283 backers. Two years later, Okey has grown Cooperative Press into a six figure business. "I knew that I could go to my audience who is already out there and say, 'Here's this cool thing --- will you give us money?'" the Ohio-based indie publisher told AFP. "People who get us are the ones who stepped up and supported us." Nearly $1.5 billion was raised for over a million different campaigns around the world last year by 452 different crowdfunding sites, according to a recent industry report from research firm Massolution. That number is expected to grow exponentially once US regulators approve a recently-passed law that allows regular people to buy stock in a startup company using crowdfunding. This kind of equity-based funding is currently restricted to accredited investors, such as venture capitalists. Small businesses will soon be allowed to raise up to $1 million in any 12 month period from up to 10,000 individual investors without filing an expensive public stock offering. US President Barack Obama touted the new law as a "game-changer" that will spur economic growth by radically expanding the availability of startup capital. But critics warn that it could lead to harmful fraud, loss and litigation. "Historically, investors have been categorized as friends, family, founders and fools," said Richard Miller, senior vice president of the National Association of Seed and Venture Funds, an Ohio-based nonprofit group. "Crowdfunding falls under one of these, but I'm not sure which one yet." Rules currently being drafted by securities regulators are expected to help protect investors by limiting how much money people can put into new projects, ensuring that they are well informed of potential risks, and requiring that investments take place through neutral crowdfunding portals. Advocates say equity-based crowdfunding will be a huge boon in "flyover" states like Ohio, which are often overlooked by professional venture capitalists. "For better or worse, there is a 'follow the herd' mentality among investors," said Chance Barnett, the Los Angeles-based founder of crowdfunder.com. "One of the most powerful aspects of the web is that it offers what I like to call 'social proof.' If there are 400 smart people who support an idea, I'm very likely to take a big interest." Crowdfunding began as a way to raise money for artistic projects. Bands asked their fans to donate money so they could put out a new album. Filmmakers swapped DVDs of their projects or even producer credits for pledges. Museums got into the game as they sought new ways to raise funds for exhibits, as did charities. It has grown to become a powerful tool for startups, and a way to market new products. The Pebble e-paper "smart watch" -- which alerts people to e-mail and appointments and can function as a golf rangefinder -- recently garnered $10.2 million in support from 69,000 backers on Kickstarter by offering the watch to donors. An Oregon-based startup called ElevationLab set a goal of $75,000 to develop a stylish new iPod dock and ended up raising $1.5 million because so many people wanted to get their hands on it. A recent "staff pick" on Kickstarter is "Kitty Garden Party" leggings by a Rhode Island fashion company that needs $5,000 to meet the cost of mass production. The campaign features a quirky video of designer Joseph Aaron Segel making his pitch and showing off his wares -- a tote bag for pledges of $25, a t-shirt and tote for $50 and the leggings for $75 -- with the aid of a fluffy white cat. "As a young brand with big dreams we could only afford to produce 2 pairs because of the large minimums required to produce high quality digitally printed fabric in the USA," Segel wrote in his pitch. "So we were thinking why not try a Kickstarter so we can get our kitty crazed fans what they want! =^.^= MEOW!"