Crowdfunding Eases Cash Crunch for Arkansas Startups

by Jan Cottingham  on Monday, May. 6, 2013 12:00 am  

The Internet is profoundly democratic, lowercase “d.” Anyone with computer access can publish a book, hawk his collection of vintage duck decoys, provide advice on holistic healing.

Crowdfunding, enabled by the Internet, promises as profound a shift: Anyone can become a venture capitalist and anyone can solicit those would-be capitalists to support his startup dreams.

Crowdfunding competes with traditional sources of startup funding, “the keepers of the treasure” as Thom Ruhe of the Kauffman Foundation calls them. The foundation exists to promote entrepreneurship, and Ruhe is vice president of entrepreneurship at the foundation. He says crowdfunding is an innovation that has the potential to change everything.

Traditional sources of financing — “the angel investors, the networks that exist, the venture capitalists, the banking system” — have dominated the business startup system essentially forever. These are the “keepers of the key,” Ruhe says. “They’re the keepers of the treasure, the treasure that an entrepreneur needs to start the company.

“The emergence of crowdfunding is really adding competition to that scenario. And in very general terms, competition is a good thing,” he says. “I don’t mean to sound Pollyannaish when I say this, but it might even up the leverage of power a little bit if entrepreneurs have another option out there.”

(A couple of Little Rock enterprises have taken advantage of Kickstarter's crowdfunding platform.)

Crowdfunding Basics

In its broadest sense, crowdfunding lets people solicit money for their projects or startups over the Internet, potentially tapping thousands of small funders. Four main kinds of crowdfunding have emerged: charitable, reward, equity and lending-based, also known in some quarters as micro-financing.

Charitable is exactly that: Donors give money to a cause — animal welfare, someone’s independent film — with no expectation of receiving anything but self-regard and maybe a thank-you note in return.

In reward crowdfunding, dominated by the company Kickstarter, the people behind the projects being funded provide tangible rewards tied to giving levels, much like the gifts offered during a public television or radio fundraising drive: a DVD for $10, an invitation to the film premier for $100.

Equity crowdfunding — also known as securities crowdfunding, in which financial supporters buy a stake in the enterprise — is a much more serious business. The bipartisan Jumpstart Our Business Startups Act — JOBS Act — approved by Congress a year ago was designed to help small business gain access to capital.

One of the bill’s provisions would open up equity crowdfunding to a much larger pool of investors, letting small enterprises sell stake in their companies online directly to the public. “For the first time ordinary Americans will be able to go online and invest in entrepreneurs that they believe in,” President Barack Obama said.

 

 

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