NACO’s 2015 Angel of the Year, Mike Cegelski, says that being known as someone who writes cheques will draw entrepreneurs to you: “Five to ten years ago, it was an issue to find good companies. Now, through word of mouth, people are calling me. I have too much deal flow. Working with Anges Québec is a great way to help me deal with it. It’s a great problem to have.” What Is Crowdfunding? In 2008, President Obama passed legislation that would pave the way for crowdfunding for equity. Until that time, the majority of funds raised through the crowdfunding process had been done as either pre-orders for product or as fan support for company swag. In 2008, the JOBS Act would supposedly facilitate members of the general population making micro investments in startups. As of 2015, the US Securities and Exchange Commission (SEC) was still struggling to put into place the facility and regulations to allow such micro investments for equity practical. The term “crowdsourcing” was coined by Wired magazine editor Jeffrey Howe. Crowdsourcing refers to the outsourcing of any task normally assigned to an internal employee. Procter & Gamble has famously used crowdsourcing to move 75% of its new product research and development out from underneath their internal employees and into the hands of researchers distributed worldwide. Wikipedia is a great example of crowdsourcing, as are Yelp and Uber. Crowdfunding was first widely introduced to the public by www.kiva.org, a social venture that allowed individuals in the First World to make micro loans to entrepreneurs in the Third World. But it wasn’t until the arrival of Kickstarter that crowdfunding really took to the mainstream. On Kickstarter, and on the hundreds of crowdfunding sites that popped up after Kickstarter’s arrival, members of the public can purchase items that are not yet made. Kickstarter collects and aggregates these pre-orders until they have sufficient funds to develop and deliver on the product. Pebble, one of the world’s first distributors of smartwatches, famously kickstarted their Pebble Watch by seeking a few hundred thousand dollars in pre-orders. By the time their campaign had ended, the startup had collected $10 million of pre-orders for a smartwatch that had not yet been produced. Sometime in the near future, the SEC will facilitate the shift from crowdfunding products to crowdfunding for equity. This will allow startup founders to raise seed rounds in return for future gains in the form of equity. There are some potential downsides to crowdfunding. Often crowdfunding is undertaken by non-accredited, unsophisticated investors. These investors have no protections under the SEC. There have already been many cases of companies taking in hundreds of thousands of dollars and failing to deliver on their product promises. There are few legal repercussions in such cases and thus little protection for these micro investors. Furthermore, crowdfunding does not contribute the vital mentorship that often comes with Angel investing. — Dr. Sean Wise , Assoc. Professor of Entrepreneurship & Strategy, Ryerson University
How to Achieve Good Returns
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