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Need Financial Backing: Send in the Crowds

By Kevin Harrington | Forbes

It’s estimated that more than $5 billion in crowdfunding cash will be invested into projects this year – that’s a 500% jump from just three years ago.

If crowdfunding were a product it would be hotter than the Snuggie and just as comforting for the cash-strapped inventor.

Crowdfunding is leveling the playing field for all entrepreneurs. You no longer need a hefty bank account, friends with expendable cash, or a direct line to an angel investor.

The U.S. Securities and Exchange Commission recently voted to propose rules under the JOBS Act to permit startup companies to offer and sell securities through crowdfunding. This will allow unaccredited investors to buy stock in privately-held companies via crowdfunding portals registered with the SEC. Only accredited investors have been allowed to participate in such deals; everyone else has been confined to donations – sometimes in exchange for an eventual product.

In a news release issued after the vote, SEC Chair Mary Jo White noted that the intent of the JOBS Act is to make it easier for startups and small businesses to raise capital from a wide range of potential investors and provide additional investment opportunities for investors.

For those of you who may have been too busy working on your projects, crowdsourcing is “the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations.” (At least that’s the Wikipedia definition.)

Anyone who has ever pitched a product or idea knows that obtaining financial backing is one of the most difficult aspects of starting a new venture. Many entrepreneurs are taking the road less traveled and heading down the crowdfunding path.

For investors, crowdfunding is a chance to get in on the ground floor of something that is going to be hot, new and cool before it even comes out.

For inventors, crowdfunding provides financial support needed to properly launch a project or product. Aspiring inventors are now able to pitch their ideas to the public online, soliciting small financial contributions from large groups of potential customers.

In some cases, investors are willing to open their pocketbooks for a small stake in the product. At other times, they are willing to part with their money simply for the chance to obtain the product before it is available to the masses.

Some companies that have been in the news recently for raising a significant amount of money include Ouya ($8.6 million), inXile entertainment ($4.19 million), Obsidian Entertainment ($3.99 million), all coincidentally in the video game businesses.

When I am investing in a product, the first thing I look for is a mass-market product that will appeal across the board to as many people as possible. I want products that have some kind of magical transformation if possible.

I’m also looking for concepts supported by clinical studies, product tests and testimonials. If it’s strictly an idea, it’ll be a lot tougher for me to move it into a funding stage.

A recent Huffington Post feature delved into the reasons that crowdfunding “rocks” for the investor.

“The traditional methods of funding meant that people with great ideas and creativity were actively looking for the few people with money to spare. Those few would then decide if we, the people, are or aren’t interested in their idea. Crowdfunding skips that step altogether. Why ask one person what the rest of us want when you can just ask the rest of us?”

And that sounds like a fund proposition to me.