Crowdfunding For Small Businesses Gets Kick-Start
Starting today, small companies can raise up to $1 million from ordinary investors through what are called "crowdfunding portals." These portals are different from sites like Kickstarter. As one of the portal sites SeedInvest explains on its website: "Kickstarter promises rewards for successful projects in the form of anything that is not monetary, whereas equity crowdfunding, as its name suggests, promises a financial slice of the pie when it comes to startup and small-business investment." So in other words, instead of just getting, say, a t-shirt, by investing through one of these portals, you get an actual equity stake in a small company that's looking to raise money and grow. You own a piece of the company. And you can make money by selling that stake down the road if it appreciates in value. It used to be that to buy shares in a company that's too small or young to be publicly traded, you needed to be what's called an "accredited investor." That means you had to be pretty wealthy. But as part of the JOBS Act in 2012, Congress decided there should be a way for ordinary Americans to invest in small businesses or startups too. To protect investors though, there are new rules surrounding the process. If you're a small business owner looking to raise money this way, you have to go through a registered broker dealer or a funding portal that's been approved by regulators. Some of these new portals include NextSeed, SeedInvest, and Wefunder. Of course there are risks for investors. The self-regulatory industry group FINRA (the Financial Industry Regulatory Authority) has posted advice for ordinary people interested in investing in an early-stage company through crowdfunding here. For businesses, crowd-funding promises to expand the world of options for raising capital. It's possible that businesses could raise money more cheaply and/or easily by crowdfunding than through traditional bank loans or professional investors. But, fees appear to be a question mark at this point. If the fees are too high, either for investors or businesses, that might stop crowdfunding from really taking off.
States Tout Crowdfunding As The Future Of Private Investment
Some typical crowdfunding proposals posted online may look like this: Help my band record our next album or please contribute to my child's medical expenses. But here's one thing the average investor can't do through crowdfunding: buy stake in a private company. That policy, however, is under closer scrutiny. With more competition for venture capital funding, equity crowdfunding is getting more attention. "Many people have heard of Kickstarter or Indiegogo in the nonprofit or charitable space," says Branden Peterson, a Minnesota lawmaker who has co-sponsored a bill to legalize the practice within state borders. "This would allow individuals to use a similar vehicle to purchase actual equity in startups they believe in." There are barriers when it comes to investing in startups. Depression-era laws restrict a private company from advertising money-raising efforts to the masses. Those laws were meant to protect non-accredited investors, those who don't meet high income levels, from losing their life savings. But Peterson says those laws are behind the times. Gaza Tech Hub Finds Success In International Crowdfunding ALL TECH CONSIDERED Gaza Tech Hub Finds Success In International Crowdfunding The Kid Who Crowdfunded His College Education — In 1987 STRANGE NEWS The Kid Who Crowdfunded His College Education — In 1987 Kooky Kickstarters — Why They Succeed THE PROTOJOURNALIST Kooky Kickstarters — Why They Succeed "In today's world, we leverage the Internet to do so many things to make our lives easier," he says. "This is another way of leveraging that power to bring people around causes they support." Congress approved a law creating a federal framework for equity crowdfunding. The goal was simple: give startups another option to get their ideas off the ground. Supporters say it trumps traditional methods, like securing hard-to-get bank loans, tracking down angel investors or going public and selling stock. But years later, the Securities and Exchange Commission still hasn't finalized rules. That's why Minnesota, and at least a dozen other states, have either considered or passed their own crowdfunding laws. Crowdfunding supporters say they've been patient long enough. But Adam Pritchard, a securities law professor at the University of Michigan, says the commission is taking a careful approach to protect consumers. "Given the very small amounts that can be raised under crowdfunding, it's going to attract a very large number of people wanting to fund businesses," he says. "And it doesn't take a lot of money at stake to bring the fraudsters out of the woodwork." Pritchard adds that the feds are feeling the pressure from regulators at the state level. In Minnesota, the Department of Commerce issued a letter when the crowdfunding bill first surfaced. It listed several concerns, including data privacy and recourse for investors who lose a lot of money. The department is now working on a compromise with bill sponsors. That's good news for entrepreneurs like Bob Carney Jr., who says he would take advantage of equity crowdfunding. "This is a tremendous breakthrough in the ability to finance businesses," he says. "When you have a group of people starting a business, they all have a network of friends, and they have reputations. So this is a chance for groups of people to tap into these networks." Some experts don't see this as a game-changer, especially with the strict caps likely to be placed on how much money can be invested or raised. But for startups that want to get past the idea stage, every dollar helps.
Is Crowdfunding An OK Way To Raise Money For Zika Research?
With the Zika virus spreading through Latin American and into U.S. territory, lots of researchers want to pursue projects to help fight the disease. But there's one problem: money. Or rather, getting money to researchers. President Obama has requested $1.9 billion from Congress to fight Zika, but this appeal is being held up by a vote in Congress. In the interim, the White House redirected $510 million from federal money left over from the response to Ebola. The National Institutes of Health, the major grant-allocating agency in the U.S., must wait for congressional approval before it can apportion funds to researchers. And it takes time for government allocated grants to be approved and distributed. So scientists are doing what other cash-strapped innovators have done: They're using crowdfunding to raise the needed finances. On March 28, the Zika Virus Challenge, an online project where scientists can describe what they'd like to do and ask for seed funding, went live on Experiment — a crowdfunding platform for scientists. That raises an important question: Is it wise for scientists to go the independent route? Or are there potential downsides to the raise-the-money-yourself route — even if it means you could get money faster? For instance, experts in the field typically scrutinize grant requests submitted to NIH. "One concern about a platform like Experiment is who reviews the science, especially when it comes to safety or experiment design," says Nahid Bhadelia, an infectious disease doctor at the Boston University School of Medicine. "There are so many different fields, so do they get specialists for every single different experiment?" But in the case of Zika, Bhadelia thinks crowdfunding could be beneficial — "As long as the proper peer review process is there, it can help fund projects that might not otherwise be funded," she says. According to Experiment's webpage, the in-house team reviews each proposal. Once the proposal passes this first critique, it is reviewed again by a panel of scientists who advise or who have used Experiment. So while other scientists review projects posted to Experiment, the process might lack the same objectivity as NIH's grant proposal steps. Another potential downside of posting a project on a crowdfunding platform is that you're revealing your research goals to other scientists — and potentially competitors — who may be investigating similar questions. Zika Virus Can Cause Brain Defects In Babies, CDC Confirms SHOTS - HEALTH NEWS Zika Virus Can Cause Brain Defects In Babies, CDC Confirms But that publicity could also be a good thing. For Michael Conway, an infectious disease researcher at Central Michigan University, posting a project on Experiment has opened up conversations with potential collaborators. He is raising money on Experiment to study how the Zika virus replicates in developing brain cells. This is particularly important because Zika is now seen as a cause of microencephaly — a condition where babies are born with abnormally small heads and brain damage. The idea of turning to the masses for research support pre-dates the Zika crisis. Experiment was set up in 2012 as a for-profit company for crowdfunding science. Its founders are Cindy Wu, Denny Luan and Skander Mzali. The idea came to Wu when she was working as research technician at the University of Washington in Seattle. She wanted to see if an enzyme designed to kill the anthrax bacterium in a dish could also be used as an antibiotic for other bacterial infections. But when she brought this idea to her adviser, she recalls her adviser saying something like, "the system doesn't fund young scientists like you." While Wu's adviser eventually helped her secure the money from one of his existing grants, the overall experience left Wu wondering how many potentially useful science projects were not funded. And those thoughts led her to team up with Luan and Mzali to create Experiment. How Contagious Is Zika? GOATS AND SODA How Contagious Is Zika? To date, Experiment has helped scientists raise funds for a wide range of research, from $10,643 to sequence the Joshua Trees to $2,277 to make insulin from algae. Experiment — which is similar to the United Kingdom's science crowdfunder, Walacea — has funneled more than $6 million to some 1,000 projects. Once the Experiment team validates a project, the investigators — who include high schoolers, graduate students, young faculty members and even established professors — reach out to their own scientific and social networks to bring in pledges.. A project has a month to meet its financial goal. If that happens, the researchers are expected to post their progress on the project page. Experiment takes an 8 percent slice from all successfully funded projects, accruing an average annual revenue of approximately $76,000. For the Zika challenge, the Experiment team contacted more than 300 scientists from national and international research institutions doing research related to Zika. Approximately 30 scientists ended up submitting a proposal. With the help of an external review panel of scientists who have studied infectious diseases recruited from the Ludwig Maximilian University of Munich, the San Francisco Zoo, and University College London — the team whittled the list of 30 down to 13 projects, now featured on the Challenge website. The Zika project that reaches its funding goal and has the most individual backers by April 27 will receive an extra $10,000 from Experiment, donated by one of the site's investors. The Zika projects range in approach. Some research teams want to explore ways to control the Aedes aegypti mosquito, which carries the disease, by using algae or roundworms. Another team hopes to use yeast to help develop drugs against Zika. Most of the projects are aiming for a few thousand dollars — a fraction of the money scientists can get from an NIH grant, which can amount up to $1 million. But even with a small amount of money, investigators can, at the very least, conduct preliminary research. "The glacial pace at which government-sponsored research is reviewed is slow," Conway says. "So there's still an immediate need to conduct pilot projects, get some preliminary data, and propose stronger NIH grant applications — which crowdfunding can help with." Conway himself has requested $2,000 on Experiment to buy laboratory supplies for his project, enabling him and his colleagues to produce some preliminary data that can be used to apply for larger grants. "It's a great way to get going fast. If you're [applying for grants through the NIH] and waiting for them to give you money, you're probably going to be too late," says Richard Kuhn, a virologist at Purdue University in West Lafayette, Indiana, who is not affiliated with Experiment. And although the 13 projects for the Zika Virus Challenge have already been selected, researchers are still welcome to post their other Zika-related projects on Experiment, Luan says. Currently, the Zika Virus Challenge is still in progress. And supporters are chipping in. One team, based in Brazil is looking to develop a rapid test for Zika. They have already exceeded their original funding goal of $6,000.
1 Crowdfunding is well suited to industries that create intellectual property, says Hal Varian, Google's chief economist.
2 The new initiative is the result of a partnership with popular crowdfunding platform RocketHub.
3 The future of crowdfunding lies in local online ecosystems that promote meaningful interaction online and off.