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Considering the Crowdfunding Rage

Does it fail some of the most promising entrepreneurs?

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January 4, 2013

This article originally appeared in The Huffington Post on December 12, 2012.

By Elizabeth Gerber

As aspiring entrepreneurs take advantage of the giving spirit at family gatherings asking for funds to launch their new businesses, someone will surely ask if they've considered crowdfunding, the latest entrepreneurial rage. Crowdfunding -- or asking for funding online, via one of the new vehicles like Kickstarter -- has been touted as a spectacular way to democratize entrepreneurs' funding. But its reach could be much wider.

You probably know how crowdfunding works by now. Consider the story of Dave and Dave, a pair of 25-year-olds who had a great idea for a new coffee bean that keeps your coffee at the perfect drinking temperature -- Coffee Joulies -- but who didn't know any wealthy investors who could help them get going. Thirty days after they posted their idea on Kickstarter, they had raised more than half a million dollars, enough to launch.

For many, this sounds like an updated version of the American dream in action, proof that anyone can succeed with hard work, determination, and an Internet connection. In the past, the only entrepreneurs who could get enough funding to start a business were those who could find a way to pitch their ideas to wealthy individuals or organizations, whether those were rich uncles, venture capitalists, the foundations, or banks. Crowdfunding changes the algorithm. Instead of asking for half a million dollars from one source, a budding entrepreneur can ask 10,000 people for 50 dollars each. It certainly seems as if far more people have 50 dollars to give away than have a half a million.

But some Americans don't know people who have even 50 dollars to give away. With a few fixes, the system could work for far more people, truly enabling the best ideas to rise to the top.

Here's the background. In 2011-2012, my graduate students and I interviewed entrepreneurs and funders for more than 600 projects on the top crowdfunding platforms Kickstarter, Indiegogo, and Rocket Hub. We found, among other things, that people who give money to crowdfunding campaigns consider it to be disposable income, money they might otherwise use to go out to dinner and a movie. What's more, those who use these platforms pitch to people they already know, or to those people's friends. And people tend to be tied with others of similar socioeconomic standing.

So who has an extended network of more than 10,000 people who have at least some disposable income? Not the technical school student who comes from the projects; in her network, a gift of 50 dollars could mean no groceries for a week. However brilliant her idea might be, she'll have a harder time getting funded than the Harvard student who grew up in the well-off Boston suburbs.

She'll also face more hardship trying to find the time to launch her Kickstarter campaign. Our research found that entrepreneurs who seek crowdfunding spend between two to eleven hours a day running their campaign. They write a project description. They film their pitch video. They update contributors and would-be contributors. They reach out to news outlets to feature their projects. They monitor Facebook for potential new contributors. They wait in lines at UPS to send out products to each contributor. If the average crowdfunder added up all the hours he or she had worked on the campaign, our research suggests, most would not have earned minimum wage.

Who can afford to work for less than minimum wage? People who already have savings, or whose families have savings. That doesn't include anyone who is working half-time and going to class half-time, or whose minimum-wage paychecks are needed to keep a roof over the family's heads.

How can we expand the promise of crowdfunding to those who enter the system with less privilege? First, successful crowdfunders should be required to reinvest in the systems that led to their success, keeping in mind that some people have less opportunity than others to ask for financial resources. They can mentor budding entrepreneurs helping them to grow their networks before they crowdfund. And the platforms could select promising projects from under-represented populations, and showcase them to others in high net-worth networks.

Second, platforms should have a progressive fee scale, much like taxes. Currently, platforms take between three and five percent of all funds raised. Why not take more from the people who are able to raise more and less from the people who raise less? That formulation will use the ability to raise money as a stand-in for the socioeconomic standing of that prospective entrepreneur's network.

If we are able to truly democratize entrepreneurs' funding, everyone will be better off psychologically, socially, and economically. Entrepreneurship can give self-confidence and a sense of control to people from under-represented groups. It brings new products and services that improve our everyday lives. It boosts wealth and job creation, improving GDP and everyone's well-being. I'd like to give that gift this holiday season!

- Elizabeth Gerber is the Breed Junior Chair of Design in the McCormick School of Engineering and School of Communication at Northwestern University.

Topics: Opinion