Crowdfunding: Tool for economic democracy and job growth in Latin America?
BY JUAN PABLO CAPPELLO
When Alan Earle started selling t-shirts for extra spending money in his native Chile, he never thought his part-time enterprise would become a full-time business. Today his web-based company, Manga Corta, not only sells its own t-shirt designs but also those of others who can upload their designs and earn a commission on any orders they generate. Manga Corta’s website even lets them set up their own online store for free.
In less than one year, Alan has given scores of aspiring t-shirt designers a way to start their own businesses and create their own jobs. Thanks to his business model built on what’s called “crowdsourcing,” Manga Corta’s growth required new capital to expand its website’s capabilities. Given his experience with crowdsourcing, it’s no wonder that to find the funds, he turned to “crowdfunding” for the US$4,000 needed.
A NEW RUNWAY FOR ENTREPRENEURS
Crowdfunding, simply put, is the intersection between social media and seed funding. Crowdfunding utilizes the social networks to have a social impact. Now budding entrepreneurs who may only have had the resources of friends and family before, can get their start with the support of their own social networks but also leverage the platform contacts to access modest but vital amounts of capital to get their ideas airborne.
It works by giving the creators of new endeavors in the arts or business a website platform to pitch their ideas to an anonymous public for funding. Amounts can range from a few hundred dollars to several hundred thousand dollars. The public, in turn, effectively measures an idea’s merits with contributions that must meet the minimum set by the crowdfunding website (usually $1-$3), but can go as high as a contributor wishes to give.
Typically a crowdfunding site doesn’t convey equity to the contributors, but the entrepreneur usually provides small but progressive incentives such as t-shirts, honorable mentions and so forth, depending on a contribution’s size. The website itself may take a small percentage of the aggregate contributions to cover its overhead and, if profit-seeking, to build its bottom-line.
In Alan’s case, he raised his US$4,000 in 40 days from 25 contributors. Sometimes contributions can exceed an entrepreneur’s needs; however, if they don’t reach the threshold and timeframe set by the entrepreneur, all the funds collected to that point are returned to the contributors.
In Latin America, where venture funding is just emerging along with a new entrepreneurial ethos, crowdfunding is a timely expansion of capital access, effectively “democratizing” that access across a growing middle class as well as lower socioeconomic levels. Anyone with an idea that a crowdfunding website considers worth pitching can do so.
For the Latin American entrepreneur, the opportunity to pitch comes with the chance to learn more about business. Artists especially suffer from business naiveté, lack of knowledge and sometimes even an antipathy toward business that work against their success. Others new to business may simply have little if any knowledge of private enterprise, much less finance. That’s why a crowdfunder not only needs to invest time in finding good ideas to pitch, it also should take the extra step of providing guidance and know-how to further help the entrepreneur succeed.
Another benefit of crowdfunding for Latin American entrepreneurs is lowering the risk of failure, which traditionally could bring dishonor to both entrepreneurial individuals and their families. Because of crowdfunding’s anonymity and the relatively small size of donations, the loss of capital will be much less apparent compared to having sourced initial capital from family and friends or from wealthy angels who may know a person’s family.
Just as Alan’s crowdsourced business model has allowed scores of people to create their own jobs, crowdfunding can help spur job growth by providing the seed capital for small enterprises that will generate additional jobs as they grow. Crowdfunding has the potential to change the status quo throughout Latin America – if governments embrace the concept in the spirit of providing equal access to capital and building job-creating businesses.
Currently the U.S. Congress is considering a bill that will lift existing legal and regulatory limits on crowdfunding, such as costly periodic reporting and not being able to provide returns on investment to private investors. By fully unleashing the power of crowdfunding in the U.S., the bill’s passage is estimated to enable the funding of up to 500,000 new companies that would create up to 1.5 million jobs.
That’s a lot of economic development Latin America’s country officials should consider, not to mention the enormous increase in their tax base. Crowdfunding is an idea whose time has come. It’s now up to Latin America’s nations to decide how to take best advantage of it.
Juan Pablo Cappello is Co-Founder and Board Member of Idea.me, a platform that helps talented Latin creators realize their ideas through crowdfunding, social networks and value added services.