Crowdfunding for Small Business Is Still an Unclear Path

Mr. Caldbeck and his peers on the panel fumbled for a response. The fact is, most private equity investors and venture capitalists won’t touch a consumer products company until it has surpassed $10 million in sales — anything else is too small to bother with.

The best advice the panel could offer was for the entrepreneur to tap his credit cards.

“The purpose of the panel was to help entrepreneurs raise money, but we had no answers,” Mr. Caldbeck remembers. “That’s when I knew that there is a big issue here.”

That big issue caused Mr. Caldbeck to leave his job to start CircleUp, a company that aims to connect up-and-coming consumer products companies with investors.

Right now, the people allowed to invest through CircleUp must be accredited, meaning they have a high net worth. CircleUp hopes that soon not just the wealthy few, but the general public — whether friends, family members, customers, Facebook friends, or even total strangers — will be able to invest in deserving companies through a hot new area of finance known as crowdfunding.

To its advocates, crowdfunding is a way for capital-starved entrepreneurs to receive financing that neither big investors nor lenders are willing or able to provide. To others, it represents a potential minefield that could help bad businesses get off the ground before they eventually fail, and in some cases could even ensnare unsophisticated investors in outright fraud.

Those fears are partly why the Securities and Exchange Commission has delayed rules allowing crowdfunding that were supposed to take effect this month as part of the JOBS Act (Jump-Start Our Business Start-Ups), signed by President Obama last April. The S.E.C. is wary of loosening investor protections that have been in place since the 1930s.

Despite the uncertainty, the outlines of a new industry are emerging as a few crowdfunding start-ups have found ways to raise money within current rules. They include companies like CircleUp and SoMoLend, which lends money to small, Main Street-type businesses that typically wouldn’t interest private investors.

By themselves, of course, a few start-ups can’t completely democratize finance. But they begin to illuminate what the future of crowdfunding could look like, as the debate continues over a vast widening of the private investor pool.

Mr. Caldbeck formed CircleUp last fall along with Rory Eakin, a former business school classmate who was working for a philanthropic foundation. Through their start-up, the two men seek to finance food, personal care, apparel and pet-related companies, often with an environmental or social bent.

CircleUp considers applications from companies with $1 million to $10 million in revenue. Companies whose applications are accepted make their pitches to investors behind a firewall on the CircleUp Web site, offering equity stakes in return for capital. CircleUp, which helps companies raise up to $3 million, takes a small cut of the money.

Under current federal regulations, CircleUp wouldn’t be able to arrange such deals on its own. But it struck a partnership with W. R. Hambrecht, a registered broker-dealer that can handle investments from accredited, or high-net-worth, individuals whom the S.E.C. considers sophisticated enough to invest in private companies.

“Living here in Silicon Valley, a lot of people don’t understand the need,” Mr. Caldbeck says. “If you’re a tech company with a good idea, you can raise money. But it’s a different story for food, agriculture, retail and other consumer-oriented businesses.”

Mr. Caldbeck sees a big opportunity. Consumer goods companies account for a sizable portion of the nation’s businesses, yet very little capital — from private equity funds or from accredited investors — flows to them, he says.

What’s more, only a tiny percentage of those who qualify as accredited investors actually invest in private companies, he says. (These are people with a net worth of at least $1 million, not including their primary residence, or who have earned more than $200,000 — $300,000 for couples — in each of the last two years.)

Amy Cortese is the author of “Locavesting: The Revolution in Local Investing and How to Profit From It.”

Article source: http://www.nytimes.com/2013/01/06/business/crowdfunding-for-small-business-is-still-an-unclear-path.html?partner=rss&emc=rss