Crowd funding, in which a group of investors pools money to fund a project or startup business — often online through social media and sites such as Kickstarter.com — has gained attention recently as a possible source for stimulating economic growth.
But an expert on entrepreneurship at Washington University in St. Louis says crowd funding may not be all its cracked up to be.
“Unless the crowd funding story is a fundamental part of a company’s marketing strategy, getting your startup capital from the crowd may pose more troubles than benefit,” says Clifford Holekamp, senior lecturer in entrepreneurship at Olin Business School.
The House Financial Services Committee recently approved the Entrepreneurship Access to Capital Act that would allow small businesses to seek investors through social networking and other online methods.
The legislation allows businesses to sell unregistered securities as long as the total amount raised is less than $2 million. Individual investments are limited to $10,000 or 10 percent of the investor’s annual income.
President Barack Obama has proposed further reducing regulations for startups, especially crowd funding, in his jobs bills.
But opponents of crowd funding worry about investor protection.
“While I favor this recent legislation, I do so more on the grounds of personal liberty than for the purpose of the business opportunity,” Holekamp says.
While he says crowd funding can be a great method for soliciting nonprofit donations, it “becomes complex if soliciting micro loans and can create a mess if offering equity,” Holekamp says.
“Having a small multitude of amateur investors to manage can really distract an entrepreneur from focusing on their business operations,” Holekamp says. “Plus, most serious angel investors and venture capital firms, who a startup may still need later for additional capital, wouldn’t want the complexity and liability of co-investing with all of those less-experienced partners.”