When I opened our monthly Global LAVA group meeting last Friday, I couldn't help but pronounce it out loud: "If anyone would like to know what the market trends are, check out our LAVA (Los Angeles Venture Association) meetings and see how packed the room is!" What made about 80 people to meet at rather a vicious time -- 7:30 a.m. -- was not a question but a matter of fact: crowdfunding, our Global LAVA's topic of the month, is clearly on the minds of entrepreneurs.
The enormous impetus of the entrepreneurial community's decisive move toward crowdfunding -- the relatively new way to raise money via online communities -- is a result of the ultimate failure of the financial system that has proved to be dysfunctional for the most self-starters in the U.S. and globally.
In the past four years, according to the National SBA survey, almost half of small businesses have not been able to secure capital; 38 percent of small businesses had loans and lines of credit either reduced or revoked. As the most recent PWC Money Tree Report revealed, the investments into seed stage companies decreased by 31 percent last year -- the lowest annual seed dollars since 2003.
I believe there is a whole generation of the brightest and brilliant minds that have failed to obtain capital not because of their poor business models or lack of ambitions but because the VCs have primary focused on tech for at least past 25 years.
There is one more "catch." As a new study released by the Institute for Exceptional Growth Companies (IEGC) and Pepperdine University confirms, women-owned and foreign-owned businesses are 23 percent and 46 percent accordingly less likely to obtain venture capital.
While the fate of equity-based crowdfunding here in the United States is in the hands of the Securities & Exchange Commission (that was due to arrive with regulation rules last year but missed the deadline), rewards and donation's based crowdfunding models are getting their momentum. Why?
I would seriously argue that today, if you are a minority or represent any start-up but tech, and you look for seed capital, chances are crowdfunding is most likely the only option to go with.
After tirelessly trying to get the attention from Silicon Valley and local VCs to his SATORI Brands, an LA based international beverage start-up company, Daniel Regidor has recently turned to the on-line community. He started his first crowdfunding campaign on Kickstarter and presented the potential backers with an insightful video produced by the SATORI supporter Anthony Zuiker (a creator of the CSI TV series). In less than a week the company received almost 4,000 Facebook "likes" and on the day I am writing this post, there is $33K pledged toward the $60K goal.
If you are an entrepreneur and about to jump into crowdfunding websites, a note of warning: running a crowdfunding campaign is not easy and might be a grueling process. As Regidor confessed, without benefits of having an established network of friends and supporters in the media industry here in Los Angeles, the cost of his crowdfunding campaign would easily jump to $10K and more. He and his team are also in the dark on how to be featured on Kickstarter's main page, which increases the chances of being financed significantly. Lastly, the "all-or-nothing" model operated by Kickstarter means that if you haven't met a pre-set target, the money that you've been able to raise will be returned to the backers.
To date there are numerous other, primary niche crowdfunding platforms and not all of them have the "Cinderella clock." One of my favorite examples is WhenYouWish.com, a global reward-based crowdfunding platform with a focus on non-profits. The company is backed by John Mackey, the founder of Whole Foods Market and author of the recently published Conscious Capitalism. I love the book. At our Global LAVA meeting, the CEO and co-founder of When U Wish, Dave Harvilicz, was wearing a yellow t-shirt that had the tag "Team Conscious Capitalism" on. Harvilicz's motto -- "Forget big banks and government -- we, the people, can unite to bailout each other." Harvilicz and a team of other doers and disruptors are going to speak at our second annual Next Entrepreneurship and Global Crowdfunding Forum here in Los Angles on November 15th, 2013. Please mark your calendar. And let me know if you want the yellow t-shirt as well.
The rise of crowdfunding is not sudden. To date this new form of financing is the only form that directly connects passion with a market demand and a supply of capital. Add to this an emerging culture of transparency, thanks to the unlimited potential of thousands of blogs, discussion groups and e-mail threads that are on safeguard, and I bet you'll feel a welcome change in the financial system.
But most importantly, for most entrepreneurs crowdfunding is not just an option anymore. It is a necessity. And as we all know, necessity is the mother of invention. Stay tuned.