Jason Pang Jao: Financial renaissance

BY JASON PANG JAO

Published April 3, 2012

If someone asks, "What is the first thing you do when you open an Internet browser?" what would you say? If your answer is logging onto Facebook, you are definitely not alone.

Jason Pang Jao

Social networking is a growing mammoth. In 2011, the industry had 1.2 billion users and experienced a 41.4-percent growth in revenue from the previous year. The development of a dense network that links billions gave rise to a plethora of successful sub-industries, one of which is called crowdfunding.

The idea is simple. An entrepreneur, philanthropist, filmmaker, musician or scientist comes up with a brilliant idea. She wants to act on the idea but holds in her pocket only her lunch money, which of course, she intends to keep. Crowdfunding lets her post her idea on a funding portal on the Internet and collect funds from the general public.

This is contrary to the conventional funding sources such as Business Angel and Venture Capital, where a large portion of the founded entity's equities are exchanged for small capital early on. It is also different from credit card and bank loans, where the borrower often would have to personally guarantee with her and other people's personal assets of the repayment of the debt. In return for the funds, supporters seek rewards such as signed CDs, tickets to film premiers and cool new gadgets.

I call crowdfunding the Financial Renaissance because it has the potential to revolutionize the way people finance their projects and businesses in the future. For one, crowdfunding already helped tens of thousands of projects collect funding. One example is Printrbot: Your First 3D Printer. Project initiator Brook Drumm raised $10,000 in the first 11 hours of listing and reached his goal of $25,000 in just 45 hours. Drumm doubled his goal in just three days, and by the 30-day closing period, his project raised more than $830,000.

Crowdfunding gives people an alternative to the conventional funding sources. Startups without large growth potential, billion-dollar revenue projection or stellar connections with venture capitalists rarely succeed in signing a term sheet with the venture capitals. Experts have seen financing terms that are disadvantageous and even detrimental to the growth and development of early-stage businesses, such as impossible-to-reach targets, restrictions on raising more funds and mandatory exit at the end of an investment horizon, meaning that they pull the plug whether your business is ready or not.

Certain businesses such as organic coffee shops, boutique retailers and mobile application developers don’t necessarily require the supervision of business incubators, or firms that provide both money and insights. While insights are great, they also come at great expenses to the business owners, sometimes in the form of someone calling your office every day to check on you. Crowdfunding provides a faster and simpler way for people who simply need the money to raise capital from the $60-billion friends-and-family fund market through digital platforms.

While the crowdfunding industry is still in the developmental stage, signs of great momentum are emerging. Kickstarter, one of the largest crowdfunding sites in the United States, recently completed its first three multi-million dollar fundraisers, one of which raised an astonishing total of $3.3 million dollars (Double Fine Adventure — a video game). Other crowdfunders like IndieGoGo and Crowdcube are also attracting large user bases.

The Jumpstart Our Business Startups Act recently passed in both the Senate and the House in a rare bipartisan effort to induce entrepreneurial activities. It legalizes, among other things, equity-based crowdfunding in the U.S., or the option for an entrepreneur to exchange shares of her company for seed money.

David Welinsky, co-founder of Minute Capital, a new crowdfunder founded by students of the University, says his firm expects to launch an equity-based feature on its upcoming crowdfunding site after the act is signed into law on Thursday.

“We are very excited that this law is being passed,” Welinsky said. “We want to help entrepreneurs grow their businesses.”

Some people remain skeptical about the act. Andrew Sorkin of The New York Times says startups might benefit at investors’ expenses if the companies’ managers employ accounting gimmicks in their financial statements. The Securities Exchange Commission is expected to come out with a series of disclosure requirements for companies and crowdfunders who wish to participate in equity-based crowdfunding, according to the JOBS Act.

Despite some shortcomings, I think crowdfunding has a long but optimistic road ahead. Crowdfunding combines the power of the crowd with the wit of American entrepreneurs in the hopes of spurring innovation and organically creating jobs. Who knows? In 10 years, maybe anyone can be a Mark Zuckerberg.

Jason Pang Jao can be reached at pangjao@umich.edu.