The democratization of fundraising through crowdfunding

Crowdfunding began as an online platform to help entrepreneurs get financing from friends and family. Today, it has evolved into a multi-billion dollar industry that increases the supply of seed funding by giving entrepreneurs access to a broader base of capital sources, including accredited investors on places like Microventures and transactional crowdfunding like Kickstarter.

In 2012, crowdfunding platforms raised $2.7 billion and successfully funded more than one million campaigns, according to an Industry Report by Massolution. Coming movement on the JOBS Act that would open equity crowdfunding to anyone — not just accredited investors — is expected to widen the pool.

Wayne Kimmel, managing partner of Center City-ased investment firm SeventySix Capital that invested early in Indiegogo, has called “the democratization of fundraising… an incredible breakthrough for entrepreneurs and nonprofits.”

Crowdfunding lets the general public decide which ideas are initially worth funding, and it gives entrepreneurs who don’t have access their own capital or a network for a friends and family round a seat at the table.

It’s also one of the many reasons supporting the explosion of tech entrepreneurship outside of traditional early-stage investment communities, like here in Philadelphia. Look at the crowdfunding examples locally, and you can see how the act — no matter what platform — is helping Philadelphia develop its ecosystem.

Steve Case, the Aol cofounder calls it “The Rise of the Rest” —whereby entrepreneurs without powerful networks (like first-time entrepreneurs, non-traditional markets and those from developing nations) can get funding for ideas that most likely would have been ignored pre-crowdfunding.

In theory, once an entrepreneur raises money on a crowdfunding platform, he or she will have the financial resources to;

1. Validate Proof of Concept
2. Measure Market Feasibility
3. Build A Prototype
4. Attract Early Adopters (Pre-Orders or Users)

Entrepreneurs generally need to pass this four-step litmus test before they can pitch institutional investors downstream — or even fickle early-stage money.

A successful crowdfunding campaign will increase the chances of landing that “Big Pitch Day,” which will ultimately determine whether crowdfunded concepts evolve into high growth startups.