Crowdfunding enters the business mainstream

Innovation is finally being freed from the constraints and shackles of banks, venture capitalists, and corporate finance departments.
Written by Joe McKendrick, Contributing Writer on

Last week, two events took place that suggest that crowdfunding -- in which startup or seed capital is raised over networks -- has crossed the chasm from cutting-edge to business mainstream.

As suggested by startup consultant Larry Downes in a recent post at the Harvard Business Review blogsite, crowdfunding just hit its "big bang" moment.

First, the leading crowdfunding site, Kickstarter, announced it has now financed more than 50,000 projects, with pledges coming from more than five million backers.

Second, the U.S. Securities and Exchange Commission finally cleared the way for individuals to invest in crowdfunded ventures, as spelled out in a recent proposed rulemaking document. The SEC has held up provisions of the 2012 Jumpstart our Business Startups (JOBS) Act, pending investigation and review of procedures for allowing startups to publicly solicit direct investments. Until all is approved, crowdfunded investments into startups are categorized as "donations" versus equity stakes. Plus, the activity is still limited to “accredited" investors, which the SEC defines as having verified annual income of over $200,000 or net worth of $1 million.

The emergence of unfettered crowdfunding is significant, Downes says, because crowdfunded equity financing -- borne on websites and linked through social networking -- has the potential to not just disrupt the current finance market, but "blow away" the existing structure.

Plus, crowdfunding isn't just going to shake up the startup financing market -- it will have a disruptive impact on existing business practices as well. As Downes puts it, crowdfunding will change the way research and development is approached:

"The old approach, characterized by secretive and proprietary internal projects, is being challenged by a crowd-based model based on cloud computing, large-scale databases, and the exploding availability of off-the-shelf hardware and software components.  New products, services, and companies are created virtually, build their supply chains in the cloud, and connect with early customers through social media. Thanks to the growing use of these tools, the economic advantage of internal R&D over external efforts is being reversed in industry after industry. We call this the victory of 'innovation by combine' over traditional 'innovation by design.'”

It's likely, then, crowdfunding will level the playing field between small startups and established businesses with large R&D budgets. While Downes doesn't mention it, it's not out of the realm of possibility that intrapreneurs who are launching new lines quasi-independently of their mother enterprises also may tap into crowdfunding as a resource, versus attempting to wring funding from their internal financial departments.

Innovation may finally be freed from the constraints and shackles of banks, venture capitalists, and corporate finance departments.

Thumbnail: Flickr/Ken Hawkins

This post was originally published on Smartplanet.com

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