NB Financial Health

Thursday
January 30
2014

Alon Goren

More than a Buzzword: How crowdfunding can expand opportunities for low-income entrepreneurs

Long seen as a vehicle for funding independent films and other artistic ventures, crowdfunding is evolving into a potentially powerful resource for low-income people and the organizations that serve them.

In the U.S., new business ventures have long had their access to capital constrained by regulations that limited equity sales to accredited investors (ie: those with a net worth of over $1 million and annual incomes over $200,000). This handicapped many potential entrepreneurs who lacked the strong business connections enjoyed by high-net worth individuals.

But the implementation of the Jumpstart Our Business Startups (JOBS) Act has led to new proposed regulations that would permit non-accredited equity crowdfunding. These new rules (which are expected to pass next month) would open the door to limited investments from non-wealthy investors. The change could allow startups to bypass expensive venture capital money and fund their businesses through large pools of small investors. Coupled with the viral growth of online crowdfunding portals, this would provide unheard of opportunities to existing and aspiring entrepreneurs, which could be a boon for low-income individuals striving to achieve financial stability through entrepreneurship.

But crowdfunding could also impact low-income communities in other ways, as these communities themselves could utilize it to transform their surroundings and improve public services. Crowdfunding campaigns aimed at serving lower-income communities have emerged in cities across the country, and have scored some notable successes. For instance, in the Windy City Hoops Kickstarter campaign, the mayor of Chicago leveraged strong community ties and raised $62,133 to fund parks and recreation programs that reduce violence and give alternatives to at-risk youth. Specialty crowdfunding platforms like Citizinvestor and neighbor.ly have emerged, geared specifically to channeling these efforts – as have a number of platforms that specialize in non-profit fundraising.

Every opportunity comes with its own set of risks and roadblocks, and here I’ve listed a few – along with some ways the crowdfunding industry and the individuals that use it could overcome them.

Challenge 1: Low-income crowdfunders are immersed in communities with fewer dollars to invest

While it’s true that impoverished communities may face more challenges in generating funding internally, members of low-income communities have been “crowdfunding” way before it became a buzz word. Neighbors and local community groups have long joined together informally to support ventures ranging from athletic teams to small businesses that needed a boost. Although their crowdfunded investments may be small in quantity, individuals with limited income are more likely to hand over a portion of their finances to people they know and trust. Tight-knit communities also provide an advantage that can’t be bought: a loyal army of word of mouth marketers. And with the Internet’s global reach, there’s nothing preventing people outside the community from supporting ventures or service projects that capture their imagination.

Challenge 2: Crowdfunded ventures lack the business contacts and advice provided by traditional investing

This concern is not only limited to entrepreneurs from low-income communities, and it’s a valid one. But online general solicitation to investors through crowdfunding portals provides startups with a direct, transparent connection to individuals who are interested in their specific venture. So the experience of crowdfunding itself has the potential to generate the kinds of business contacts and mentorship opportunities that can be instrumental in a new venture’s success. Moreover, in the age of digital information, there is a smorgasbord of free content and learning tools available on the web. For determined entrepreneurs from all backgrounds, a crowdfunding campaign can become a crash course in all facets of online marketing, branding and social media outreach.

Challenge 3: Low-income entrepreneurs have limited access to/knowledge of crowdfunding technology

Not long ago, designing or coding a functional fundraising website would have been a major obstacle for any small business or aspiring entrepreneur. But not anymore. There are hundreds of easily accessible crowdfunding portals online. And for those who don’t want to get lost in the crowd – or conform to the project requirements – on heavily trafficked sites like Kickstarter or Indiegogo, there are a growing number of customizable open-source and proprietary platforms available – some of them designed for equity crowdfunding campaigns. These websites provide a wide range of value and applications, such as built-in social marketing tools that can increase a crowdfunding campaign’s influence and chances for success.

In spite of the challenges, I believe that crowdfunding will become a significant tool for empowering members of low-income communities and encouraging them to participate in various types of business ventures. It has the potential to enable a new generation of low-income entrepreneurs and activists to reduce economic inequality, create jobs and remake their communities.

Alon Goren is the CEO and co-founder of InvestedIn – a technology company that specializes in platforms for equity crowdfunding and lending applications.

Categories
Entrepreneurship, Impact Assessment
Tags
crowdfunding, financial innovation, microenterprise, poverty alleviation, SME finance, social development