Why Crowdfunding is Today's Goldrush

Back in the gold rush days, the smart people were not the ones heading for the hills to dig holes. The smart people were selling picks and shovels. Crowdfunding is like that. With everyone and his brother now founding a startup, the smartest entrepreneurial play could be to set up a crowdfunding site to provide those founders with their essential tool: money.

The JOBS Act changed the game for crowdfunding. It makes it legal for crowdfunding sites to give actual equity to investors - not just thank-you gifts such as T-shirts and coffee mugs - and it’s expected to draw a vast amount of capital to crowdfunding. Some are predicting an influx of as much as $300 billion, 10 times the amount now deployed in the venture sector.

That’s a lot of money.

Any crowdfunding site that can grab even a small piece of it will make its founders wealthy. Of course, this fact has not gone unnoticed in the startup world. Not surprisingly, there is a mob of crowdfunding platforms poised to come online. In the past couple of weeks alone, two new equity-model crowdfunding sites have gone live, Fundable and CrowdFunder.

“Picture a 50-foot dyke with 60 feet of water behind it,” says Kevin Lawton, author of The Crowdfunding Revolution. “It will break open and there will be new platforms coming out the wazoo for a while.”

It’s “a virtual gold rush,” says Scott Steinberg, who penned The Crowdfunding Bible. Although he adds that, like the original gold rush, this one won’t last forever. “Mainstream consumer support will likely galvanize around half a dozen key crowdfunding sites.”

Kickstarter Still Rules

The leader now - and in the future - remains Kickstarter, Steinberg says, with room left for a handful of other large crowdfunding platforms and many niche-focused sites that cater to specific startup communities, such as video game developers.

“We will see more platforms with the equity model,” Steinberg says. “Some will give you reports on the company and try to help you make more informed decisions, and others will cater to microinvestments. This will only continue to accelerate. We’re at the tipping point here. But it’s also the Wild West.”

The SEC has yet to weigh in on regulation. And crowdfunders have yet to prove they’re willing to come up with B rounds and C rounds, to keep companies going once the novelty of a startup wears off. So far, they have not shown much strength in the loyalty department.

Crowdfunding as a Source of Big Data

Another area where crowdfunding sites have great potential is in the leveraging of data from a wide range of startups to forecast what sort of companies will succeed and which will fail.

“A crowdfunding platform can serve as a prediction market,” Lawton says. “A successful platform will aggregate an enormous amount of data. It can then analyze that big data to predict to a higher degree which startups will be successful. You have all these deals on a platform, and layered on top of that you have this black-box algorithm that you can leverage to jack up the success ratio on startup investing like we’ve never seen before.”

Steinberg agrees the analytics aspect of crowdfunding is important. “But if it were as easy as plugging numbers into a spreadsheet, we’d all be rich by now,” he warns. “You will see more equity platforms targeted at entrepreneurial startups, and one of their key selling points will be access to data and the ability to see what types of pitches do best and what are the best ways to mitigate risk.”

So lots of gold in the crowdfunding space but, Steinberg says, “there will not be any silver bullet.”

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