Startups based far away from Silicon Valley and other regional funding hubs have long struggled to attract equity investors. But new crowdfunding rules that took effect on September 23 are likely to change that, some experts predict.
The 80-year-ban on businesses advertising publicly for investors has been lifted, meaning established businesses and startups based anywhere in the U.S. can use the Internet and other means to actively solicit accredited investors. A bevy of web sites and services—from Upstart to JumpstartFund to Uruut— has sprung up to help entrepreneurs in every corner of the U.S. better find and vet potential investors.
The impact of the new crowdfunding rules could be especially powerful in less venture- and angel-rich areas, such as the Midwest, Great Plains and Southeast. While parts of these regions do have rather-active funding communities, access to investors is limited.
Already, crowdfunding sites like Kickstarter—which, until now, could only let businesses provide nonmonetary gifts in exchange for donations—have provided a big funding boost to some businesses outside the Valley. Spark, a Minneapolis-based company that makes thumbsized hardware that connects electronics to the Internet, launched a Kickstarter campaign last spring in hopes of raising $10,000 to manufacture its product. The campaign included a video and offered donors T-shirts and Spark products. Surprising to all, Spark surpassed its $10,000 goal very quickly and earned a whopping $567,968. "We hit $10,000 in an hour and a half,” Spark founder Zach Supalla told Forbes. “We were having a really good time.”
A Richardson, Texas bakery, Reverie Bakeshop, also surpassed its $10,000 fundraising goal using Kickstarter earlier this month by offering donors free baked goods, according to the Dallas Morning News.
While funding experts say crowdfunding is unlikely to replace VC and angel investing anytime soon, it will be especially useful for businesses that need to raise smaller amounts and may be in industries that large equity investors have traditionally shunned.
“The biggest winners in the crowdfunding game,” predicted Slate columnist Will Oremus last year, will be “startups and young businesses that have growth potential, but not on a large enough scale to attract venture capital: the environmentally friendly flip-flop maker in Seattle; the custom candy maker in Boise, Idaho.”
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