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Why Crowdfunding Changes Everything Part 1

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This is the first post in a 5 part series. Check out Part 2, Part 3, Part 4, & Part 5

Why Give a Damn:

 


$30 Trillion.


That number represents what Americans have in long-term investments. Here is the average annual return on investment (historically) for several classes of long-term investment:

  • Savings Accounts: 6%
  • Stock Market: 9%
  • Angel Investments: 27%

What this means is: if you were to invest $10,000 in Year 1, and reinvest all of your returns, then by Year 20 your nest egg would have grown to:

  • $32,000 (Savings Accounts)
  • $56,000 (Stock Market)
  • $1,200,000 (Angel Investments)

So what percentage of that $30 Trillion in long-term capital are held in angel investments?

Zero.

Why? Because for the last 80 years it’s been illegal for entrepreneurs to publicly solicit investment in their company. Just by posting the fact that you are raising money to your Facebook page, you could be facing jail time. So as a result, 90% of startup capital is currently provided by dipping into personal savings, credit cards, and hitting up friends and family.

But in 2012, an historic piece of legislation was passed that will have a profound effect on the global economy over time. In short, the JOBS Act enables you to crowdfund investment in your company, in the same manner you currently crowdfund donations to your creative project on Kickstarter.

Why is this a revolution in the making? It comes down to four major trends which are accelerated by crowdfund investing:

  1. The power shift from professional investors to entrepreneurs and citizen-investors
  2. The democratization of wealth creation through angel investing
  3. The rise of for-profit social enterprise and impact investing
  4. The rise of Personal Investment Contracts

I will address each of these dynamics in a separate post. But for the moment, here are some fun facts to chew on!

  • If just 2% of the $30 Trillion in U.S. long-term investment capital were placed into startups, it would be ten times greater than the amount angels and VCs invest annually.
  • That same 2% would equal 100% of small business bank loans outstanding today in the U.S.
  • 80% of the pentamillionaires (>$5M in net worth) in the U.S. are entrepreneurs who sold their business

And here’s a short video that explains how they did it.

Unreasonable Challenge

If you’ve raised money for your company before, tell us how you did it in the comments below. If you are thinking of raising money, what’s your plan?

I am Senior Vice President of Business Development at Crowdfunder, a leading investment crowdfunding portal. I’m also an angel investor, advisor and friend to many of the people and companies I mention by name. If you’re interested in learning more about my world or want to connect, please visit http://www.rafefurst.com

Rafe Furst has written 6 articles for UNREASONABLE.is

  • Justin Perkins

    This trend towards crowdfunding is becoming more popular on the internet. There is even a website that crowdfunds travel trips. Once ordinary citizens are able to crowdfund with a ROI, it will be very interesting to see how it plays out online.

  • Jake Eckhardt

    The magic of compounding interest gets me every time. Always motivates me to save more and more and watch it grow to more and more.

  • orvisbj27

    This is a great series. Thank you and I know I will read this and other crowdfunding articles repeatedly. Crowdfunding is an excellent way to start up many projects. As a musician and producer I have some but limited experience with crowdfunding websites. We didn’t receive much feedback on our first attempt so we had to kill a Kickstarter project early. Instead we used local donations and private funds for the recording and production of an album. We ended up making a profit and payed back all private funds, but I really wish we could have utilized a crowdfund.

    I am curious to the donators financial security of crowdfunding websites. With some crowdfunds reaching astronomical dollar amounts, is any fund vulnerable in some degree to virtual ID fraud or theft?

  • Katie Lentz

    As someone who has personally benefitted from crowdfunding (for medical bills in recovery from a car crash), I have seen how effective it can be. If crowdfunding was available for use by all companies, it could have a huge impact in the way companies operate.

  • Jonathan

    The internet has been an incredible innovation, it has given us the ability to share ideas, information, and even finances. Being able to invest in people’s ideas has accelerated innovation by an unmeasurable amount. Companies like Kickstarter are busting down walls and creating doors where there were none. Crowdfunding is now developing innovations tailored to specific markets, so although your idea might not be widely expected if just a few people are willing to support you then you are already better of than you started.

  • Sarah M.

    Really interesting idea, not just your idea for the real estate company, but also your image for society investing in one another as opposed to financial institutions. It’s a really beautiful thought, to think of the intricate webs of support that could develop and the ways that we can help one – and the middle/lower middle class as we know it – grow.

  • lpierce34

    I am a huge fan of crowd funding, and I know it is an incredibly powerful took for people to get started, get funding or just get help with an unexpected expense, as Katie said. I think one of the greatest things the internet has done for us as a society is to allow us to connect with and reach people all over the globe. Ideas, photos and videos can be seen by people on every continent in such a short period of time. The internet gives the power of sharing a whole new meaning and I think this is why crowdfunding has become so successful. The internet lets us share our stories and ideas so quickly and to people all over the world so crowdfunding is possible and a success!