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New Forms of Start Up Funding Powering New Age of Innovation

Last month, as part of Via Meadia‘s focus on what we have loosely defined as the “jobs of the future”, we highlighted the crowdfunding company KickStarter. KickStarter, like other crowdfunders, is designed to pool money from thousands of ordinary people to fund entrepreneurs with ideas. It’s venture capitalism by the little guy, for the little guy.

Crowdfunding continues to grow. This still new market has seen more than $1.5 billion change hands and funded tens of thousands of projects. Unlike traditional venture capital, in which funding is provided in return for a monetary reward (usually equity), crowdfunding offers investors non-economic benefits. Arie Abecassis sits on the boards of multiple start-ups and notes that crowdfunding’s raison d’être has changed dramatically in a short period of time: “Many of these online platforms were originally thought of as places where you could discover quaint products, like an iPod accessory, or projects, such as funding a hiking trip, rather than the capital-formation facilities that they have become.”

Abecassis identifies four ways he expects the crowdfunding model to continue to evolve:

1. Vertical platforms will emerge to focus on select market segments. . . .

2. Crowdfunding platforms will evolve into “full-service” communities to better meet the needs of their members. . . .

3. Creativity and innovation through online crowdfunding will be supported not just by individuals but by organizations as well. . . .

4. Benefits-based crowdfunding will complement equity-based platforms. . . .

As old technologies and old jobs crumble, anxiety builds about what comes next. Via Meadia won’t try to predict which startups will turn into the Apple and Google of the next generation. But we do know that America’s genius is its dynamism: the willingness of its young people to take risks and start companies, and the willingness of investors to take a chance on these fledgling startups.

The evolution and rapid development of capital markets—and the crowd-sourcing platforms that decentralize them—will increase the speed at which new ideas make it to the market, in turn accelerating the pace of social change and pushing America toward a new kind of economy and social order in the years ahead.

Those who think that America’s time has passed haven’t reckoned with the creativity and the hunger that drives our new generation of entrepreneurs.

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  • Jacksonian Libertarian

    This is definitely needed; the normal source of startup capital has been loans using home equity as collateral. The 35% fall in home values has destroyed this source of capital, along with American Family Net Worth which has fallen 40% in 3 years. With the Government sucking $1.3 Trillion per year out of the capital markets, small business loans have become impossible without completely supporting collateral, as banks have become risk adverse and prefer nice safe Treasuries. In a normal recovery as much as 80% of the new jobs are created by small business start ups and expansions. So the collapse of the Government created housing bubble, destroyed the source of funding for the largest job creators, and the Government’s deficit spending has robbed those same creators of bank funding as well. The only way to limit the damage the Government does to the economy is to limit the size and scope of the Government as both the Founding Fathers and the TEA Party support.

  • Mrs. Davis

    crowdfunding offers investors non-economic benefits.

    Who are these “investors” you speak of interested in non-economic benefits? I have a portfolio of beautiful bridges they can choose from.

    If you are talking about Kickstarter, you aren’t talking about investing, you are talking about donations or at most product pre-payment.

    If you are talking about the JOBS or Crowdfunding Bill signed into law, you are talking about investment, but with substantial limitations. (Read the link).

    For a lot of reasons, I doubt this will be a significant source of funds for new start-ups, though a couple of guys will get headlines for their killer app for the iphone. I do expect it to have a significant impact, but not what anyone expects. There is plenty of potential for this to look like the Securities Act of 1928. And lots of widows and orphans will be ripped off along the way leading to refinements in the implementation.

    But Jumpstarting Our Business Start-ups? I don’t think so.

  • Paul Dougherty

    Indeed it is the USA’s inventiveness that has made it unique. It should continue except for one huge threat lurking in the background everywhere. I refer to the over legalization and bureaucratic meddling that never stops. We have more lawyers than full time farmers. True entrepreneurs and their supporters are minuscule.

    Ideologues and utopians pour into politics and government. We have seen this before across the eastern pond and we now we see what it has produced.

    Look closely, my friends, like Europe we are heading for sclerosis. That innovation will save us is wishful thinking. Utopianism is its arch enemy; which one is growing in power?

  • BillH

    Non-economic benefits? Such as? Not being cynical. Just cant think of any non-economic benefits I would be willing to pay for, except from beneficence.

  • Joe Eagar

    This is not new. Various forms of crowd-sourcing have popped up for hundreds of years. They never work as advertised.

    The problem basically boils down to risk premiums. The risk of investing in start-ups is incredibly high, and crowd-sourcing methods typically lack the resources to monitor and handle that risk. The historical pattern for such ventures is they either make bad investments (South Sea bubble), or demand loan shark level rates of return (microcredit).

    Someone mentioned home equity loans as a source of start-up capital. Collateralized debt has a lot of advantages as a source of capital; investors get a safe, predictable return, and borrowers pay a reasonably low interest rate. In the end, there is no substitute for good collateral.

  • Joe Eagar

    Also, many of the projects on KickStarter look. As someone who successfully crowd-sourced an open-source initiative, I can tell you that even working for next to nothing still took a surprising amount of money.

    There’s also a time factor involved. You may think a project will take, say, six to twelve months, only to have it take seven years (as happened to me). For-profit investors may not forgive that as easily as non-profit ones did for me.

  • Joe Eagar

    Hrm, last comment was a bit mangled. Correction to first sentence, “Also, many of the projects on KickStarter look *undercapitalized*”.

  • kris

    JL@1: Hmm. Your comment about the importance of capital is leading me to wonder about the origin of the term “Capitalism”.


  • thibaud

    Kickstarter is to Via Meadia as green jobs are to Van Jones.

    Top categories for KS funding: video games, comics, cheapo accessories (docks, covers etc) for iPhones etc.

    Kickstarter’s impact on venture funding: $230m since 2008 – ie about one-tenth of one percent of VC and angel funding during that same period.

    Tell me again why funding comic books and iPhone covers, with a capital base equalling 0.001 of the total for the early-stage capital sector overall, will make any difference at all to US employment and GDP growth?

    I get why VentureBeat or TechCrunch wants to pump up this story. But why is a serious policy journal hyping this?

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