Crowdfunding for Startups – Tech Mistress

oTeKbits ran crowd sourcing stories early this year but I will do a recap of what crowdfunding is all about. Crowdsourcing, crowdfunding a.k.a hyper funding is the collective cooperation, attention and trust by people who network and pool their money and other resources together usually via the internet to support efforts initiated by other people or organizations.

Popular crowdsourcing sites are Indiegogo and Kickstarter, which is the world’s largest funding platform for creative projects and whose name is becoming ubiquitous with the word crowdsourcing.

A major disadvantage to Crowdsourcing is the requirement to disclose the idea for which funding is sought in public when it is at a very early stage. This exposes the promoter of the idea to the risk of the idea being copied and developed ahead by better-financed competitors.

Can crowdsourcing be used to raise funds for start ups? Yes and No. Normally, soliciting investments from the general public is most often illegal unless the opportunity has been filed with an appropriate securities regulatory authority like the Securities and Exchange Commission SEC.

Last year, a group of entrepreneurs formed ‘The Startup Exemption’ with the goal to lobby Washington, D.C. to update the U.S. Federal Security Laws and make it legal for entrepreneurs to use crowdfunding to raise a limited amount of early-stage equity-based financing. With the assistance of the Small Business and Entrepreneurship Council (SBEC) they partook in two hearings on Capitol Hill, this eventually led to the United States of America JOBS Act which allows for a wider pool of smaller investors with fewer restrictions.

The Act was signed into law by President Obama on April 5, 2012 and entrepreneurs are excited about the prospect of raising money passively from many people who are interested in their business rather than having to dedicate a significant chunk of time to raising capital from big investors and venture capitalists.

Is crowdfunding the perfect solution? There are significant problems with it for a high growth tech company. The most successful high growth tech startups can be termed to be a partnership between founders and experienced investors. Are crowdsourced funds free money? Will the funds be taxable?

So many questions related to it but in years to come as organized society continues to get disorganized via disruptive media, Crowdsourcing may yet be the breeding ground for tech startups as more banks fail to raise capital for budding entrepreneurs. The pace for regulation is being set in America, hopefully a form of it will be adopted here in Nigeria and with as little as a thousand naira you may own a part of any tech start up of your choice.