Money of the Crowds: Crowdsourced Funding

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In light of a mini-controversy set off this morning when the founder of a web startup apparently violated SEC laws when he sent out a Twitter message looking for investors, The Globe and Mail’s Matthew Ingram wonders why can’t we raise money from the crowd for startups?

“Why couldn’t someone ‘crowd-source’ a financing for a startup?” he asks. “Why not allow blogs and social networks to play a part in the raising of money? It’s not as though millions of people haven’t been just as impoverished by ‘qualified’ investments and prospectuses as they could ever be by investing in a Twitter financing. Why do we need the government protecting us from ourselves?”

And he raises a good point. What’s more, crowd funding is already a fairly booming business — just not so much for the funding of startups.

  • A Swarm of Angels is in the process of raising £1 million to fund the creation of a feature film (and they’re not the first to try that).
  • SellABand has tapped the crowd to raise $50,000 each for 24 separate artists to record albums. So-called “believers” who invest $10 or more in fledgling bands own a piece of their investment and make money from advertising on the site and sales of the recorded tracks, and they have the right to open a shop on the site to sell merchandise related to the acts they’ve invested in.
  • Last November, a group of football fans at MyFootBallClub in the UK raised money from around 30,000 footie fans and purchased a majority stake (75%) in minor league team Ebbsfleet United for £600,000. Every fan who purchased a share of the team gets to vote on which players to purchase, which to trade, how much to charge for season tickets, and what the club’s weekly budget is, among other operational decisions. In August, the site’s members raised an additional £20,000 to buy striker Michael Gash from rival Cambridge City.

Could this model work for startups? Probably. According to Mashable, Jason Goldberg of SocialMedian — the founder who tweeted the controversial funding announcement — claims to have found 3 legitimate investors within 30 minutes of putting out his message on Twitter. And, the idea of crowdsourced micro-financing via social media seems to be something that other entrepreneurs are interested, judging by the discussion about Goldberg’s tweet unfolding on Twitter.

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  • http://www.WeightJournals.com marcel

    I’ve thought of doing something like this.
    It would would well as WP plugin or Facebook app.

    The banks need the competition…

  • timothy_plank

    For an investor to see a decent return on a fairly risky venture, they need a decent percentage of equity. In turn, startups generally need a decent sum of money. Crowdsourcing to a large number of people simply wouldn’t provide a return as their individual percentages would be very low. You would also require a lot of administration to communicate with all your investors.

    Considering for a moment that you could offer a return on small investment stakes, you then have the problem of who has management control or influence. If you had a few hundred minor investors, you’d be struggling to accept input from each of them, and struggling to find the time to explain yourself to each of your investors.

    The idea is fun but the reality I think is too disconnected.

    What could potentially work is a scenario where startups fund startups. A small group of startups club together to invest in other ventures, where they not only bring funding to the table but a wealth of combined experience. Of course, this extends to any group of companies who can provide expertise and are willing to collaborate, though you’d find other startups understanding the concept a lot quicker.

    Timothy
    http://www.mylifeoftravel.com

  • Tony T.

    This has been tried. Cambrian House (http://www.cambrianhouse.com/) is the first one that comes to mind…

  • James_White

    @ timothy_plank – Small point of argument: percentage vs. quantity. The size of the investment shouldn’t have any direct sway on the percentage of return — just the overall size. 10% is still 10% whether you’re talking about 10% of five figures or 10% of seven figures.

    The point about increased management costs associated with the flood of transactions is definitely true if you don’t redesign the mechanism. On the other hand, publicly held corporations manage to fulfill the SEC requirements for disclosure and input to all of their investors (granted that’s a level playing field). Just design the management model for efficiency with oversight… isn’t this what technology is embraced for?

    I don’t see how someone couldn’t make a sizeable return on smartly placed microinvestments, talk about the ultimate in risk management!