Originally published in The Frederick News Post
First, the crowd cleaned up France with “La Marseillaise” in 1789. Then there was the removal of the Berlin Wall and the Arab Spring. Now, the crowd is investing money. It is called crowdfunding. This is a class of social media websites that allows people with ideas big or small to reach out to others who have money to fund good ideas. The funders are people who browse the site or get an email about new ideas of certain types from a crowdfunding site.
What will you find on a visit to one of these websites? Suppose you own a historic property that needs work. You go to one of the biggest sites, Indiegogo.com, to mount an appeal. First, get an account and tag the appeal type. Then, upload a photo of the worst of the damage. Write a short description with someone’s quote on the historic importance of the place. There is a 60-day window for the appeal. Set up a link to Indiegogo.com to update browsers on the success or the need so Indiegogo.com will keep it “top of mind.” Then there is a place to upload a video of a tour of the property or an essay evoking the wonder of the place. Save and the appeal goes live.
But this platform has a price tag. If there is success in getting to the goal, Indiegogo.com takes 4 percent of total contributions before they remit the balance. If it falls short, they take 9 percent.
Analysts in the audience may be muttering that this is not investing and there is no return. Just so. Indiegogo.com and the top five crowdfunding sites all work on the “donation” model. The return is the donor’s satisfaction in bringing — in his or her judgment — good ideas to fruition. Individuals, businesses, and nonprofits all use these sites as a way to raise money because they are outside traditional organized donor groups with like demographics. In 2012, crowdfunding sites as a group raised more than $2.6 billion worldwide and in 2013 is on track for an amount of more than $5 billion.
But there is at least one major site that supports investing with a more tangible return. This is SoMoLend.com. Appeals range from $100 to $1 million. Entrepreneurs fill out the more traditional loan applications and their proposals receive a risk rating prior to release for publication on the site. Investors can also browse the site and read loan proposal packages. They can also receive updates from the site on different groups on the site cut by industry, rate of return/risk level. When there is a match, borrowers and lenders link up and legal documents for a commercial loan are drawn up. Funding is funneled to the entrepreneur through SoMoLend, less a 4-point origination fee.
Generally, entrepreneurs are startups or companies with less than 15 employees. Lenders range from affluent individuals seeking to invest locally to banks and cities and towns with a mandate to invest in the community.
Our experience at SCORE Frederick has shown that the traditional sources of lending, for example, banks and credit unions, are sometimes very selective with small start-up lending. Therefore, crowdfunding sources may be an answer that fills this niche. The rapid growth of the production from crowdfunding sites certainly suggests that this is the case.
At SCORE Frederick we are in existence to help small businesses succeed and this relatively new funding source can certainly contribute to that cause.
Dana Burton is a project management professional and a certified SCORE Frederick mentor.
SCORE is a nationwide volunteer network of 330 chapters dedicated to the formation, growth and success of small businesses. SCORE Frederick provides free and confidential business advice and mentoring to start-up businesses and to established small businesses. SCORE Frederick also offers workshops for both start-ups and established businesses.