Crowdsourcing: Joining small business with small shareholders

Well, if you need an example of how the Internet, social media and related innovations can harness consumer or citizen sentiment, look no further than the case of the bullied bus monitor.

After video of the Greece, N.Y., woman being taunted by middle-schoolers went viral last week, a well-wisher in Canada set up a vacation fund in hopes of raising $5,000 to send the distraught grandmother on a vacation.  As you likely have heard, an outpouring of sympathyraised more than half a million dollars in a day or two for bus monitor Karen Klein, who’s also getting a trip to Disneyland from Southwest Airlines.

Crowdfunding clearly is an effective tool for charitable donations — Klein’s account on the Indiegogo site had surpassed $622,000 at last check over the weekend – but it’s also a new business model for start-ups and — depending on how the Securities and Exchange Commission rules —  individual investors.  This is a great moment for financial journalists to jump in with a business story about crowdfunding and how it’s opening up opportunities for entrepreneurs and potentially for people who would like to get in on the ground floor of promising companies.

Here are a few basics to get you started:

Basically, crowdsourcing or crowdfunding occurs when an artist, entrepreneur, someone trying to raise money for a cause or charity posts a request to the general public; instead of getting large lumps of cash from major investors, the person soliciting funds receives small amounts from many people.  It’s kind of like the coin jars collecting spare change for good causes that used to be more common at next to store cash registers.  For-profit crowdsourcing sites take a cut of the action; one article I read about the bullying victim said Indiegogo’s fee would be 4 percent, with another 3 percent skimmed off to pay credit-card processing fees.

As crowdsourcing has evolved it’s increasingly been considered a way to not just raise no-strings donations, but to enlist actual stakeholders who will receive a share of ownership in return for the capital they contribute.  Crowdsourcing was legitimized when President Obama signed the Jumpstart Our Business Startups Act back in April, but now the SEC gets to determine how these small-time securities will be regulation.

Read this discussion on Seeking Alpha; it’s an informative primer on the history of crowdfunding and the possible legal ramifications of the JOBS act.  As of April, the article says, there were more than 450 crowdfunding portals online and the market was expected to double this year to nearly $3 billion.

Here’s a report from Bloomberg Business Week about how some companies that wish to recruit equity investors are operating in this limb0 period; one requires prospective investors to have a minumum net worth, for example. And here’s a press release from PeoplesVC (venture capital) which sort of illustrates the way these sites are appealing to the 99-percenters who may feel shut out of larger equity markets.

This article from the Deseret News about a recent crowdfunding conference is a good read and a good resource for sources you might want to interview.  And this Forbes personal finance piece is a good template for researching investor dos and don’ts.

Visit crowdsourcing sites — nascent professional groups like the National Crowdfunding Association offer some member lists, or just Google — and search them for start-ups near you.  A Twitter search will turn up interesting food for thought, too.

And keep an eye on the Crowdfunding Professionals Association which includes brokers, banks and other financial-services players among its members.  It will be interesting to see which crowdsourcing portal, for example, is the first to be snatched up by large, established investment companies, assuming the SEC permits.

Here’s a Huffington Post story about authors successfully using crowdfunding to finance their books. (Kind of a savvy marketing tool, too — chances are anyone who kicked in toward the creation of a tome will want to buy the finished product.)