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Crowdfunding Could Open New Doors For Small Businesses

BOSTON — Amy Dasch needs cash to grow her small Cambridge company Abazyme. Abazyme does specialty work for medical diagnostics firms but Dasch hasn’t been able to get the funding she needs.

“It’s been very hard,” Dasch said.

Dasch has tried to raise money from angel investors, people who give seed funding in exchange for a share of the company. She spent six months and thousands of dollars on lawyers to go through the process and then the deal fell through.

“Which is kind of ridiculous because we’re actually at capacity,” Dasch said. “We can’t take any more projects because we need to hire people. So we’re kind of caught in a catch-22.”

Dasch is hoping that Congress will approve crowdfunding.

Tim Rowe runs the Cambridge Innovation Center, an office tower in Kendall Square that houses more than 400 startup companies.

“Basically, the short version of crowdfunding is that your friends, your neighbors, could invest $100, $500, $1,000 in your business,” Rowe said.

Rowe will testify before the Senate Banking Committee Tuesday. He thinks crowdfunding could help small businesses create jobs.

“Maybe it’s a new restaurant. Maybe it’s a new small construction business. Maybe you’re buying your first tools so you can go out there and start being a plumber,” Rowe said. “People need access to this kind of capital, and this is a fabulous way for them to get access to this kind of capital.”

Right now, they can’t. You have to be a federally-accredited investor to give money. It’s a law from about 80 years ago designed to protect regular folks from getting swindled and that is why Sen. Scott Brown says his crowdfunding bill requires intermediaries that vet companies before they can raise money.

“And it really is a check and balance to make sure people aren’t perpetuating any type of fraud,” Brown said.

Brown’s bill would also limit risk to individuals by capping the amount of money they can invest at $1,000. But Harvard Business School professor Bill Sahlman says that may defeat the purpose.

“I worry that if you cap the amount at a low number, that it’ll end up not moving the needle at all,” Sahlman said.

Sahlman prefers the $10,000 individual limit that the House of Representatives has already approved. Sahlman says many crowdfunding investors are going lose their money when some of these businesses fail. But he says while some will fail, others will succeed that otherwise could have never come to be.

“We actually need a lot more failure in the U.S., because we need a lot more shots on goal. And if we get that, then I think we’ll all be better off,” Sahlman said.

Amy Cortese hopes so too, but for a different reason. The author of a book called “Locavesting: The Revolution in Local Investing and How to Profit From It,” Cortese thinks Americans, with their mutual funds managed by people they don’t personally know, have forgotten that that they’re really part owners of a company.

“Now we have this intermediated, securitized sort of financial system that’s global. We’ve sort of lost the connection between investors and companies,” Cortese said. “What I think crowdfunding can be, at its best, is a way to bring that [connection] back.”

At the least, crowdfunding appeals to Boston-area startups because it would offer a new funding option. Mike Norman is a co-founder of Wefunder, a brand new Cambridge-based company that’s hoping to become a crowdfunding intermediary.

“And if you have a way to demonstrate that you have a good idea, that it’s been vetted by someone who’s trustworthy, and that you can raise capital in a much shorter period of time and you can get back to focusing on your business, I mean what entrepreneur is not gonna be excited about having that as an option?” Norman said.

Wefunder has a petition with 2,500 signatures pledging $6 million of investments in companies if Congress makes crowdfunding law.

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  • Anonymous

    If crowd funding has not been approved, how is that these sites exist?

    http://www.kickstarter.com/
    http://www.fundageek.com/WhatIsFG

    • http://twitter.com/CurtNickisch Curt Nickisch

      Kickstarter is a great example of the power of crowdfunding.  But you have to donate.  You’re giving your money away.  You cannot become an small-scale part owner of a company in exchange for your crowdfunding. 

      What Congress is debating would legalize crowdfunded equity ownership.

    • http://www.facebook.com/mauricelopes Maurice Lopes

      There is a fundamental difference between equity-based crowdfunding (CF) and donation based CF.

      Donation based CF a company or individual is asking for donations for a PROJECT, and it might be just donations, or you might be pre-ordering a product like TIK-TOK from Kickstarter…  In this type of CF you are not owning part of the company or project…. Your helping that project out, and maybe get something in return (a book, a CD, a beta version of the product…)

      Equity-based CF is where a company (established small business, or a new startup), sells a small part of its ownership (lets say 10%) in exchange for $100K in this scenario the crowd (500 investors @ $200 each) would all own a small piece of the company, there fore may see a substantial ROI if such company has a large liquidity event such as an acquisition or IPO.

      because offering PUBLICLY ownership is in essence an offering of securities, its illegal… so these bills are trying to change that, giving people a change to be part of something new (maybe the next Google or the next Facebook?)

      Maurice Lopes – http://www.EarlyShares.com

  • http://www.facebook.com/mauricelopes Maurice Lopes

    Great piece Curt, we are an equity-based crowdfunding platform (
    intermediary), and we believe the correct approach to the limits issue is a mix of the proposed bills, so if the Hr-2930 gets approved (with the larger limits) our platform will have it’s own smaller limits on investments per company for non-accredited investors, and of course the legislation based limit for accredited investors.  Maurice Lopes (EarlySahres.com)

       

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