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March 18, 2012

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Uri

Hi thanks for this- this is really insightful. I the main takeaway for me are that the challenged you mentioned (e.g. fraud) can be overcome by a good platform - so there is definitely a good business case for developing and promoting such platforms.
Thinking about it - how would you think Facebook would have grown and developed if insted of going public, it would have crowd sourced?

Yvonne DiVita

Great points, Lee. To me, however, I spent time talking with this young lady, we went to her Facebook page, and we did our due diligence, so I felt okay promoting her cause (also know someone else who is doing it). But, I take your words to heart because there is much we don't know, much we can't know, and much we need to learn.

Lee Drake

The fundamental issues with crowdfunding that I see are as follows:

1) If you offer ANYTHING in return, be it a credit, a product, a service or even just "enhanced access" - you have just done a financial transaction. Better be sure it's on the up and up with your tax accountant, that you have all the proper forms in place, and that you're really prepared to start a company. Because many of these crowdfunded startups may well not be at that point and they are risking personal liability.

2) It's incredibly susceptible to fraud. You say you met a young lady at a conference. And she has a facebook page and is looking to raise $5000 for a trip to do good in Africa. There is really nothing to prevent her from taking the $5000 and having a nice vacation on an expensive cruise instead. You don't ACTUALLY know her, and to get to $5000, it's unlikely that all the people donating actually know her either. They trust the friend (like you) who referred them - but who knows how much the original recommendation was trustworthy. (I'm NOT saying this gal is trying to rip you off - I'm just saying there's not a lot of "Fraud control" in these crowdfunding sources.

3) If you are offering any sorts of shares in the company, guarantees of percentages of future profits, or any other non-tangible benefit you're opening up for all sorts of securities and exchange issues. Even Zuckerberg fell into this trap (in a sense much of facebook was crowdsourced from friends and family and others) - he promised all sorts of things that eventually cost him millions of dollars.

4) In India at least, microloans - being unregulated by the banking industry - have evolved into a troubling industry of sort of a mafia oriented loan shark industry where people's lives and livelihoods have been threatened by the organizations running the microloan companies - in the meantime overseas crowdsource members are blithely giving dollars to these organizations believing they are helping the poor. I think there needs to be some banking level of oversight of any company soliciting funds - whether for themselves or others.

That said I think that thinking outside the box is a good thing, and that with proper controls, and proper audits, this could be a source for the low-end of the capital investment strategy. I'm just saying to be careful out there - not everyone is on the up and up. Don't be the sucker born every minute :)

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