The future of crowd funding

3/20/2013 10:24:00 AM

Sustain Communications CEO Enzo Villani, MBA ’07, talks about the U.S. JOBS Acts and crowd funding

Enzo Villani, MBA ’07, delivered a presentation titled “US JOBS Act and Crowd Funding: Reforming Capital Creation and Access,” in Sage Hall on March 12 as a part of the Cornell Entrepreneurship Seminar Series (You can view a video of the presentation here). Villani is founder, chairman and CEO of Sustain Communications, LLC, and director of corporate strategies for the SoHo Loft Capital Creation events.

Last year, the S.E.C. passed the JOBS Act, which contains a section about crowd funding for equity. “[The S.E.C.] will need to make rules, not only at the S.E.C. level, but also at the FINRA (Financial Industry Regulatory Authority, Inc.) level,” said Villani in his presentation.

Crowd funding refers to financial contributions from investors, sponsors, or donors to fund initiatives or enterprises, usually via the Internet. It is used to support a wide variety of activities, including charitable donations for disaster relief and other philanthropic causes, such as microcredit, as well as political campaigns, scientific research, and startup funding. Crowd funding models include donation, lending, and purchasing equity. Donations account for around 70 percent of crowd funding worldwide, and equity sales only 15 percent.

According to Villani, current crowd funding is similar to pre-ordering. For example, the developers of Pebble Watch, a “smartwatch” designed to work with the iPhone and Androids, used Kickstarter as their fund-raising platform. They offered consumers the opportunity to pre-order the product before it was actually manufactured and available. Kickstarter enabled these entrepreneurs to raise more than $10 million, which they then used to manufacture the Pebble Watch. “Crowd funding gives you the opportunity to fund things that are really hard to get funded,” said Villani.

On the other hand, there are certain risks involved for consumers. When the Pebble Watch campaign launched, there was no actual product. Later, the watch’s shipment was delayed. In order to prevent some investors from over-investing and risking a large portion of their savings in crowd funding, said Villani, “Regulators have to regulate enough so that they can actually have control over [those behaviors].

“We need to look at what are the next steps,” he continued. “I’m concerned about people who are not able to make what they were planning to make. Another problem is whether these companies need to have audited financial statements. When you start to take away the charity part of the crowd funding and start getting into the investing part, all these rules start popping up.”

Ben Russo, MBA ’14, said after the speech: “Depending on the new regulations on crowd funding, in the next five to 10 years the U.S. could be incredibly good at funding startups, or we could screw ourselves up. Finding that balance is tricky.”

— Yuezhou Huo ’15