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Crowdfunding may be more bust than windfall

Published on NewsOK Modified: April 24, 2013 at 4:37 pm •  Published: April 24, 2013

That caution extends to some of crowdfunding's biggest proponents, who expect that many companies that seek money will be too young for many investors' comfort— some of these businesses may be little more than an idea. Some of the skeptics are already involved in a type crowdfunding that's authorized by the government because the investors meet requirements for net worth — for example, they have more than $1 million in assets, not including their primary residence. The law assumes these investors are more sophisticated than those likely to take part in crowdfunding under the JOBS Act.

"We don't take idea stage companies — they're too risky," says Chance Barnett, CEO of Crowdfunder, a social networking site for investors and companies seeking capital. "We want to see them be much farther along than an idea on a napkin."

Companies must have a good track record and managers who have shown they can run a successful business, Barnett says.

"The assumption is that everyone gets funded, but nothing can be further from the truth," Barnett says. "A majority (of companies seeking funding) aren't companies that are deserving of capital today."

CircleUp, another crowdfunding service, turns down 98 percent of the companies that want to solicit funding on its site because it believes they're not likely to be good enough investments, Chief Operating Officer Rory Eakin says.

"We look at a number of different things — the experience of the management teams, do they have expertise, a plan for growth, the skill set to deliver on that plan," Eakin says. "Is it distinguished in its category, does it stand out for customers and potential investors?"

"Crowdfunding will not be a panacea for all small businesses — certain businesses are investment worthy and others are not," he says.

Stacey Shiring is optimistic that her three-year-old business, Creative Invites and Events, will be able to raise money when the rules are written and the crowdfunding sites are up and running. She doesn't know how much she'll seek, but she plans to use the money to expand her website. And she's happy the SEC is taking time to write regulations.

"A lot of good is going to come from it. Being diligent and making sure they do it right is a big concern," says Shiring, who sells invitations at her store in Cincinnati.

Shiring has already gotten investments from family and friends. She wants to use crowdfunding because her customers also want to invest and she wants them to be able to do so in a formal way. She expects that through crowdfunding online, they will be able to study her company's financial documents and make an informed investment decision.

Some companies are able to raise money even when they're not expecting to give much in return. Some of projects funded on websites like Kickstarter have been able to raise $100,000 or more. In return for giving money, donors — they're not investors — tend to get free samples of products or T-shirts.

With that kind of success in mind, a flood of companies are likely to seek funding when the crowdfunding investment sites are up and running, says Sean Carr, director of intellectual capital at the University of Virginia's Batten Institute, a part of the Darden School of Business.

"There are plenty of capital constrained entrepreneurs right now. They'll take whatever opportunities come along and if they think it'll be relatively easy to do it that way, they'll try it," he says.

But Carr is also wary about the number of good investments that will be available online, and wonders whether many of the companies will be resorting to crowdfunding because they can't raise money through family, friends or business associates.

"If I were an investor, my antenna would be going up," he says. "If you couldn't get funded that way, then this must be a lemon."