Standing on the Shoulders of the Crowd
Crowdfunding, i.e. raising capital through Internet platforms that enable startups to present their projects to prospective investors across the Web, is causing a veritable revolution in the way innovation and new firms get financed.
The crowdfunding formula is gaining acceptance in very country of the world. Initially based on mere online donations or reward-based contributions (in exchange for your money, you are rewarded by the product made by the funded entrepreneur), it is now evolving into a more sophisticated form, which is equity-based crowdfunding. In the latter case, you get shares in the company in exchange for your monetary contribution. A strong push in favor of equity-based crowdfunding has been Obama's Jobs Act, which has favored the development of this mode of financing to kickstart innovation and promote recovery in US employment levels. Other countries, with Italy among the early adopters, have established a new regulatory framework to contribute to the diffusion of equity crowdfunding.
In spite of the enthusiasm of startuppers and politicos around the world, not everybody has welcomed the groundswell in crowdfunding. Venture capitalists, for instance, have felt threatened in their role: by putting entrepreneurs and investors directly in touch with each other, crowdfunding platforms could disintermediate the process and make venture capitalists redundant.
The truth is more complex, as success stories of crowdfunded startups can show. For example, Pebble is a smartwatch created by a fresh graduate in electronic engineering, Eric Migicovsky, who then moved to Silicon Valley to develop his invention. After being turned down by one venture capitalist after the other, Eric decided to raise the $100,000 he needed via a crowdfunding platform. The business idea proved so popular that he raised $10 million in few weeks, ten times more than he had initially hoped. After Pebble's funding success, venture capitalists thought again and have started to compete in the financing the new project: as a result, Eric managed to raise an additional $15 million through traditional venture capital channels.
The number of projects being funded and the amount of capital raised on a global scale point to the fact that crowdfunding is bound to play a larger role in innovation. Rather than undermining existing actors, it widens the range of opportunities made available to startuppers and investors, by creating new ways of strengthening innovation and new relations between business incubators, angel investors, and traditional venture capitalists. That said, crowdfunding is a veritable revolution that is radically changing the way technological innovation gets you get shares in the company shaped, thus overturning established ways to develop this critical function for economic and social growth.