Why Equity Crowdfunding is NOT a Terrible Idea

Jeff Wald wrote a piece that was published in Entrepreneur earlier today. The article is called “Why Equity Crowdfunding is a Terrible Idea“. He argues that the process for raising capital is “time tested” and the current methods assist startup companies that help build our society. He also suggests that there is a great deal of value contributed to these startups by venture capitalists, and by implication, argues that the “crowd” is unable to add the same type of value. Jeff is no stranger to the crowdsourcing market. He runs workmarket.com, a web-based platform for managing labor resources including consultants and freelancers. And while workmarketyou can argue that the crowd is actually able to contribute a much greater amount of value to a startup then a venture capitalist, Jeff has a point. The current structure produces relative stability in the unstable world of startups.

But here is where Jeff (and many are wrong). Crowdfunding isn’t about raising money for startups at all. Let’s face it, if the average venture fund makes ten investments, they would be thrilled to death with one great success and two small winners. An amateur investor doesn’t want that sort of thrill ride; they want predictable returns and the feeling of “investment” that only comes from being an owner. And that’s why crowdfunding is such a huge opportunity for profitable, local companies that benefit from the unique marketing (and corresponding revenue boost) that comes with the crowd.

And it is also the same reason why crowdfunding is a huge opportunity for investors. Instead of being locked into owning the tiniest fraction of a huge multinational conglomerate, the investor gets to become part owners in a local business, and maybe even make an actual impact on the bottom line. They get to brag to their friends and family that they are owners of local businesses that are part of the fabric of their community. And best of all, they get dividend checks that can exceed the paltry returns afforded by some types of alternative investments.

So Jeff gets it half right. Crowdfunding is a lousy tool for startups. But for businesses looking to transform their customers into loyal owners? It doesn’t get any better.

Jonathan Frutkin Jonathan Frutkin is CEO of Cricca Funding, LLC. He’s written a new book called “Equity Crowdfunding: Transforming Customers into Loyal Owners” which was published in May, 2013.

The Brand of “Me”

Online blogs and social media have allowed individuals to define themselves in a way that was impossible decades ago. While joining professional organizations or writing an article for a business periodical was a possible way to establish your credentials, the more likely way that someone would learn about the type of person you were was through other people. If their opinion of you was positive, it was called “word of mouth”. If their opinion was negative, it was called “gossip”.

But now, because of online tools, there is a much easier way to promote yourself (and to have your network promote you too). The emergence of social networks has been the story of the last five years, but the real interesting development to me is the expansion of the FourSquare check-in phenomenon.

Rather than being limited to status updates and photographs, online users are now defined by where they “check-in”. After all, where you visit usually tells more about a person than anything else. What do you think of a person who visits the bookstore, the tea store and the stationery store? What do you think of someone who checks-in on the top of a mountain and then later checks-in from a lake? The new metric is “where” rather than “who”. Because you can tell a lot more about a person based on where they are located than what they say about themselves.

FourSquare has taken that an extra step further by creating “badges” which are virtual rewards for visiting specific locations. An online visitor can see what different locations that user has been, and can quickly glance at the types of badges that user has earned.

A person’s behavior always has defined their true character more than the words that they use to describe themselves. If someone says “I’m honest” but is caught stealing three times, what type of person are they? The same could be said about the places that you choose to own.

Equity crowdfunding is going to be the opportunity for people in the community to choose to invest in the places they eat, the places they shop and with the people that provide them with the services they need to get through their daily life. But instead of being something that is hidden away like an investor’s choice in 401(k) portfolio, a choice to invest in a business is something that will truly define an individual’s connection to their local community.

Once your choice to invest in a company is displayed along with the badges that show where you visited, business ownership will be used to define your brand. Rather than being defined by your hairstyle, you can bet that people will find it at least as interesting to know which hair salon you own.

Jonathan Frutkin
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.

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