Crowdfunding IllustrationWhen crowdfunding first appeared on our entrepreneurial ecosystem radar in the early 2000s, it was mostly for musicians and artists. Back then, I wrote crowdfunding off as serious equity investing, since technically it was a violation of the Securities and Exchange Act of 1934. Years passed, and the legislation that I anticipated would squash crowdfunding never came. Then in April 2012, the Obama administration legitimized and democratized crowdfunding through the Jumpstart Our Business Startups (JOBS) Act. That was when crowdfunding went viral.

Early and innovative websites dedicated to crowdfunding platforms included ArtistShare (2003) Indiegogo (2008), Kickstarter (2009) and Microventures (2010). Today, more than 450 crowdfunding websites exist. Collectively, they arguably represent the most powerful small business-funding alternative in the world.

The three general categories of crowdfunding business models are donation or reward, lending, and equity, at 71 percent, 15 percent, and 14 percent market share respectively.(4)

In July 2015, Deal Index reported some enlightening facts:

  • Crowdfunding added an estimated $65 billion to the global economy in 2014.
  • There are now 1,250 crowdfunding platforms worldwide (counting both websites and offline resources).
  • Crowdfunding created 270,000 jobs in 2014.
  • Crowdfunding has created 100 million unaccredited investors in the United States alone.

Perhaps most impressive is that the crowdfunding market was estimated at $34 billion USD in 2015. Compare that with average annual investment of $30 billion in venture capital and $20 billion in angel capital, and we now have a new small-business funding leader. During a recent lecture on business funding at the Wharton Small Business Development Center, I stated this figure skeptically, since the source was a crowdfunding advocate. I promised my class that I would verify the information with an additional source, so I attended a panel discussion on crowdfunding at the University of Pennsylvania.

“That $34 billion estimate is correct,” proclaimed the panel moderator, venture capitalist Wayne Kimmel of Seventy Six Capital in Philadelphia. Furthermore, Massolution, a market research firm specializing in the crowdsourcing and crowdfunding industries, also concludes that the $34 billion estimate is accurate.

From a macroeconomic perspective, “crowdfunding is still comparatively small relative to both global corporate bond and lending markets, but it is growing exponentially,” reports the International Organization of Securities Commissions. That said, entrepreneurs and small-business owners rarely need corporate bonds or large debt instruments to fund their businesses. However, both need customers—and startups need the equity that crowdfunding provides. The customer provision is more important than the equity investment. Axiomatically, customers provide the only long-term sustainable source of business funding. Veteran entrepreneurs commonly refer to this tide-rising business-funding concept as smart money. It pays to be smart with business funding.

What does all this mean for you and your business?

First, if you lead a startup venture, consider crowdfunding as a strategic funding alternative to acquire both customers and business funding.

As a startup, crowdfunding is a logical choice when launching:

  • Creative works such as films, artistic works, journalism, or music
  • Philanthropic causes
  • Real-estate projects
  • A socially responsible business cause seeking to substantiate demand

Established businesses should also consider crowdfunding to:

  • Determine if there is a market (or not) for a new product or service
  • Build a following of customers and audience engagement around a new offering
  • Obtain feedback from end users to beta-test a new offering for improvements before a formal launch

What are the fundamental risks of crowdfunding?

  • Your intellectual property could be exposed prematurely if unprotected.
  • Scams — unfortunately, fraud exists everywhere, even in crowdfunding.
  • If you don’t have your ecommerce systems ready and you’re not prepared to work with regular customers, then your campaign will most likely fail.
  • You must spend time and money preparing for a successful campaign that, even when done properly, might yield unsuccessful results.

Crowdfunding’s leadership role in small-business funding is a good thing. Don’t think that it has taken anything away from venture capitalists or angel investors: It has expanded the business-funding pie.

“Crowdfunding is part of our entrepreneurial ecosystem now,” Kimmel proclaims. “It’s helped us equity investors work better together.”  Crowdfunding has democratized angel investing, once limited to the wealthy by law to protect wealth, for everyone. It also provides a debt-financing alternative to traditional commercial loans. Crowdfunding is a natural entry into angel investing and venture equity funding as part of the natural progression of business funding. This, fortunately, relieves some entrepreneurial funding pressure on friends and family. I for one am glad that crowdfunding has expanded our entrepreneurial ecosystem.