In 2012, a successful crowdfunding campaign ran on Indiegogo.com – “Let’s Build a G-ddamn Tesla Museum.” While the group raised the money to purchase a property that was used as Nikola Tesla’s former Wardenclyffe laboratory last year, it took until the end of last week for the non-profit group to successfully close on the purchase of the property. The group raised about $1.7 million through the campaign which included a state grant.
The lab was the site of an early 20th century project to build a transmission tower capable of cross-Atlantic radio communication. One obvious restoration idea is to rebuild the 187-foot wireless transmission tower which was torn down in 1917. The U.S. government thought that it was being used by German spies during World War I.
However, the money used to purchase the property isn’t quite enough to complete the science center. The group is beginning to raise money for the public to learn more about Tesla’s scientific work.
By the way, the campaign was completed in 2012 when Elon Musk, CEO of Tesla Motors, ponied up a big chunk of the money to promote his company’s electric cars.
During the last several months, I have been spending a lot of time writing about next year’s biggest marketing opportunity. My book, Equity Crowdfunding: Transforming Customers into Loyal Owners is based on the premise that the power of social networks combined with the passion of business ownership will provide local companies with a way to accelerate their growth.
I’ve come a long way in my thinking about the impact on equity crowdfunding. At first, I was in agreement with the vast number of people who thought that the provisions of a federal law called The JOBS (Jumpstart our Business Startups) Act were just designed for startups. Like many, I thought that equity crowdfunding was a limited way for startups receive money and validation of their ideas by posting projects online.
But now, it is clear to me that a local small business can turn their customers into something much more than a Facebook “Like” or favorable Yelp review. Instead, the customer could become an owner. And one thing we know about owners: they are evangelists. Owners will go out of their way to promote their own company. This will lead to more frequent business visits, and a much greater use of the social networks developed by each individual customer/owner. Ownership in a local business will serve as a virtual badge representing community involvement for each crowdfunder.
As I was writing the book, we launched our company called Cricca Funding. The company is a consultancy that works with profitable, established local businesses looking to raise up to $1 million online using crowdfunding. But while the law permits equity crowdfunding, the SEC still hasn’t published regulations that will make the law effective.
So why start this business and write the book?
Because I believe that this year is special. Forward-looking marketers will begin to realize the promise of equity crowdfunding. Besides the increasing amount of capital that will be raised for small businesses, the opportunity to transform customers will be extraordinary.
We also think that it is important to be involved as the SEC formulates the regulations that will impact crowdfunded companies. At the same time, we look forward to informing the business community while promoting the marketing impact of crowdfunding.
I would be remiss if I did not encourage you to purchase a copy of my book on Amazon. A link is right here: http://amzn.to/Yo08eY.
I appreciate you following this blog, and I look forward to making connections with those of you who share my vision for this exciting future.
Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.
There is a growing emphasis on the idea of crowdfunding for both startup and established companies. Two new online companies, Pave and Upstart, are making crowdfunding personal.
These sites allow backers to invest in the income stream of other people. The idea is that prospects, generally young people at the front end of their career, can get some upfront money in exchange for future personal earnings. The usual deal exchanges 7-10% of the prospect’s income over the next ten years.
For a young person that needs money now, this exchange seems like a good idea. Throw in the fact that the investors are also going to become mentors (both because it is at the center of both the websites’ models, and because it makes good business sense), and some of these relationships can pay off for everyone involved.
But for at least three reasons, I think that this idea poses a real downside to everyone – backer, prospect and society at large. And in the long run it poses a threat to the success of crowdfunding.
The first reason has directly to do with prospect. When you are young (and most of these prospects are in their 20s), money “feels” so much more valuable. Generally speaking, the income of this group is very low, at the same time they are trying to make their way. Credit card companies target this age group, because quite frankly, young people make terrible credit decisions, making the credit card companies millions of dollars in interest and fees.
Of course, everyone makes terrible buying, investing, love and other decisions in their 20s. But that’s just because young people don’t have the experience to know better. Contrast that with someone who may be a backer (investor). These people are generally older, wiser, richer, more successful – and while they are not necessarily smarter – they are more experienced. And they are more savvy than the average prospect.
The penalty for being younger, more desperate for money, and less experienced is that the average prospect is going to get a bum deal. I don’t like the idea of generational theft, burdening young people who should be buying houses and starting families for the benefit of successful, experienced investors.
The second reason that I am not a fan of crowdfunding people is that it places a premium on betting on young business people, further diminishing the value of lower-income people to the society. It further devalues the contributions of musicians, writers and other cultural contributors. Sometimes these people aren’t financially recognized in their lifetime. The price of art often dramatically increases after the artist’s death.
The third reason is that Pavers will be a lot less likely to get mentorship and guidance that is really in their best interest. For example, if the prospect (and the world) is better off because they decide to backpack Europe, go back to school, or just take a lower paying job for the experience it offers, why shouldn’t they? Well, the backer is not going to suggest that they do things that will pay off for the prospect in 20 or 30 years. The backers want to get a return on their short-term investment. So mentorship will be skewed in favor of the backer’s own personal financial interest.
I strongly applaud Pave and Upstart for being very creative in the crowdfunding space. I also think that it’s valuable to reward mentors with financial benefits. However, if we set up a system where young people are “rented ” for a while, we will all be worse off for it. And if people start thinking that crowdfunding is synonymous with modern-day sharecropping, then the political support for a critical new funding mechanism will completely erode.
Jonathan Frutkin is an attorney at The Frutkin Law Firm, PLC in Phoenix, AZ. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which will be published in May, 2013.
Cricca Funding 