Crowdfunding Primer: What is crowdfunding?

Part 1 of a 6-part series

Crowdfunding, if done properly, is the future for how most small businesses in this country are going to be financed.” – Duncan Niederauer, CEO, NYSE

Crowdfunding is a pooling of funds from a large number of participants (a crowd) to raise funds for a project or new initiative usually through an Internet platform. This is not a new idea as many projects in history have been funded this way, without an Internet platform. Mutual funds are a similar concept where a large number of investors pool their resources for a common goal or investment strategy. Crowdfunding to date has mostly been used for creative or non-profit ventures through reward and donation sites such as KickStarter and IndieGoGo.

The idea of equity crowdfunding, or hyperfunding, is to access many individual investors for smaller investments into a venture for up to $1 million. By opening up the equity funding option for those people who are not accredited investors, a company can raise funds from many, many individuals at a much lower dollar amount. The lower participation amount protects the investor somewhat. For example, if you want to raise $1 million for your software startup, you can go and find five accredited investors (hard to find) and have them all invest $200,000 in your business in exchange for equity ownership. Or you could potentially raise the $1 million on a crowdfunding platform with 500 investors at $2,000 each.

Estimates of the potential crowdfunding market are impressive. “How Big Will the Debt and Equity Crowdfunding Investment Market Be?” (Best, Neiss, Stralser & Fleming 2013) from the University of California, Berkeley estimates that if 2.5% of existing small business funding comes from crowdfunding, the totals could be $460 million in angel investor equity funding, $1 billion in small business funding, and $4 billion in small business loans under $100,000 would be replaced with crowdfunding. That is more than $5.5 Billion just in replaced existing funding, and that does not include the additional increase in potential crowdfunding based on increased access by investors and entrepreneurs.

A detailed white paper and overviews on this topic are available through the National Crowdfunding Association Website.

crowdfunding series