Crowdfunding: Flash in the pan, or here to stay?

CrowdFor both people and businesses, getting older brings its share of challenges. However, the alternative is even less desirable.

Right now we’re seeing the business of “crowdfunding” mature somewhat and the process is a little painful for many involved in the industry. Crowdfunding, as you may know, is the process of leveraging the Internet to raise capital to fund a project. Kickstarter may be the most well known of the crowdfunding sites. Other notables are Indiegogo and AngelList. If you need more names, check out this article on Forbes.

Two crowdfunding models

For commercial fundraising, there are really two ways crowdfunding sites work. Fundraisers on Kickstarter usually offer the product they plan to produce in exchange for some cash. In other cases, premiums such as t-shirts are offered and some times nothing tangible is delivered; supporters make donations.

In the other crowdfunding model, kicking in cash buys you equity in the company. The crowdfunding investors are all mini-angels.

All the Internet-based pieces of the crowdfunding puzzle came together around 2010 and it really took off. Now, in 2014, the process is starting to have some history and go through a few growing pains.

Rules and regulation

Some of the growing pains are being caused by the anticipated Security and Exchange Commission (SEC) rules governing equity crowdfunding. Late last month Robb Mandelbaum gave an update on the proposed rules in his NY Times blog. He noted that the SEC posted the rules for comments more than three months earlier and still hadn’t shown any signs of issuing final regulations.

That leaves the world of equity crowdfunding up in the air and its future somewhat in doubt. There is nothing investors like less than uncertainty.

A different issue faces the “product promising” crowdfunding industry. Ethan Molllick, a Wharton School professor, says that among the tech and design-related crowdfunded projects, 75 percent failed to finish on time. It seems like no one will say publicly how many funded projects ultimately fail to deliver their proposed products.

Guessing at failure rates

Kickstarter is an “all or nothing” crowdfunding site. Proposals don’t get funded until their targets are met. Kickstarter is great about reporting stats on the percent of projects that get their desired funding. But failures among funded projects is left to speculation.

All of these developments are indicative of an industry that’s beginning to mature. Initial unbridled enthusiasm is replaced by measured judgment. For long term success this is necessary.

And if you’re considering crowdfunding a project, there is really one major takeaway here for you: thoroughly researching all your options today is more important—and probably a little more difficult—than it was yesterday.

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Image: Flickr “Crowd,” © 2007 James Cridland, used under a Creative Commons Attribution-ShareAlike license:

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