Crowdfunding: An Idea for a Business

I recently came across a guy named Gijsbert Koren from Netherlands, which introduced this idea of “crowdfunding” to me. He explains:

“Crowdfunding, inspired by crowdsourcing, describes the collective cooperation, attention and trust by people who network and pool their money together (via internet) in order to support efforts initiated by other people or organizations.”

Though his question was more in the direction of what could go wrong, I started thinking about it, and realized this could be made in to a lucrative business.

Mission: To bring together people that want to invest small amounts of money in entrepreneurial firms and entrepreneurs that need early stage funding.

Concept: A webpage with an auction-like system that allows entrepreneurs to post their business together with funding needs, and let small time investors “bid” on pieces of a company. For example an entrepreneur would say what his company was doing, at what stage it was, how much funds it needed, how much of the company it would be willing to give away for that amount and other relevant information. Let’s say he needed $50k and would be willing to give away 30 % of the company, an investor willing to invest $100 would then be able to post a bid for 0,06 % of the company. When and if the entrepreneur reached $50k, the bid (along with the other bids) would get accepted.

Business model
There are many ways to make money on this, some alternatives are:
- 1 % of the money invested or the of ownership of the start-up could be retained by the site
- 1 % of the returns could be retained by the site
- The site could provide services, like board members, to help develop the firms that are invested in
- Books and other relevant material could be sold in a related webshop (it is likely that not only those that use actual the services of the site would visit the site)
- Posting a firm could cost a small amount
- Placing bids could cost let’s say 0,1 % (so $10 out of $10 000 should be bearable)
- If you receive funding it cost 0,1 % of the funds received ($ 50 in the case above)
- Public support?

Marketing
Would you need investors or entrepreneurs first? And how would you reach and recruit them? This is of course a difficult issue, maybe you need some funds? (Can it be crowdfunded?) I’m sure that getting in touch with entrepreneurs should be easy enough, you can use personal contacts with incubators and such, most entrepreneurial districts have emerging technology funds, technology transfer offices and incubators that can point you in the right direction. Investors would maybe have to be reached through some sort of viral marketing? Or would ads in newspapers do for this kind of service?


Problems:
Some issues deserve some attention here, even if I don’t like to consider the problems the first day of a new idea.

How would you avoid scams?
In a small country like Norway it would be possible to only allow entrepreneurs to post after meeting them, and talking to them, a sort of due diligence light. In larger countries, like the US, this would of course be difficult, but maybe you would have to send in some paperwork or letters of recommendation?

How would investors get their returns?
A bid could be posted in a number of ways, the entrepreneur could say that he accepted that people would bid for the company, and get a share of it. That way, the investors would get dividends and profit from a potential exit. The entrepreneur could also chose to look for loans, that way the investors would get their money back at a certain date with the interest that was agreed upon. If there are 500 investors that has invested $100 each and they all have different terms, this could obviously offer some difficulties, this could be solved by the site acting as a proxy. Meaning, the site creates a fund for each entrepreneurial venture that gets funded and the site technically owns the small-investors part of the start-up. The dividends and money from the exit is then paid to the site, which forwards each parties money back to them.

How would the investors get a voice in the company?
If, as suggested in the previous part, the investors are represented by the company, board decisions could be done through a proxy that is the site. By investing through the site you agree that the site, as the technical owner, has a representative on board whose job is to represent the small investors.

But what about taxes?
These laws probably are different between countries, and I’m not an expert. I would however imagine that this would be double taxed, first a tax when the site collects dividends, and then a tax when each investor receives their money.

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