Mosaic solar installation atop a building in Chinatown in Oakland, CA (Photo Credit: John Guenther)
Crowdfunding to pay for the Next Big Thing is a hot topic in small business. Just look at Kickstarter.
But, instead of helping to get off the ground someone’s idea for a “top secret burger sauce” or an online TV series about “Awesome Asian Bad Guys“–both noble causes–more and more opportunities are popping up to fund start-ups plus get a return on that investment.
Mosaic is a California start-up that takes the crowdfunding model for raising capital and applies it to something their target investors are passionate about: solar power. The Bay Area company cut the ribbon on its fourth solar installation in Oakland in December and just launched its new site to connect individual investors to solar projects.
“Solar is profitable to develop all over the world,” said Billy Parish, CEO of Mosaic. “But, nobody has made it possible for regular folks to participate in that – to directly put their money into solar projects and to generate good returns.”
The company’s bright idea has piqued interest in not just solar but the booming crowdfunding model. And crowdfunding’s growth means California small businesses that need capital to start, expand or just keep their doors open, have another avenue to raise money in this tight credit market.
“Given the success we have seen already just using the reward model, the opportunity for California businesses to raise capital is tremendous,” said Glenda Humiston, the state director of California Rural Development, U.S. Department of Agriculture. “The other benefit is that this will also give our California citizens a chance to invest in their communities and local economies.”
Humiston is also a member of the California Financial Opportunities Roundtable, which created an “Access to Capital” guide (PDF) for small businesses that included a section on the benefits and pitfalls of crowdfunding for capital.
According to the Crowdfunding Industry Report, $1.5 billion was raised through crowdfunding in 2011 and it was estimated to generate $2.8 billion in 2012. The field of crowdfunded companies was expected to get more “crowded” in 2013 due to the passage of the JOBS Act last year–except that the SEC failed to meet a year-end deadline to come up with accompanying regulations.
The legislation, which was supposed to go into full effect this month, allows raising of up to $1 million from individuals. Previously those individuals could only invest out of personal interest, not as a way to get a stake in the company and gain actual interest, as in returns. The SEC is justifiably cautious about crafting regulations for potentially risky small business investments via crowdfunding. However, the regulatory delay might mean we’ll have to wait until 2014 for final rules for crowdfunding investment to kick in.
For example, the agency needs to figure out whether or not a company can make an unlimited, less-regulated offering for accredited investors (the pros) while taking funding from non-accredited investors (us regular Joes).
For Parish, creating new ways for businesses to raise money, such as through the JOBS Act and removing similar red tape surrounding setting up a business, is vital for boosting economic growth.
“Whatever the government can do to make it easier for people to start businesses, it should look at doing because small businesses account for almost all of the net job creations in the state and across the country,” said Parish.
Last year, Mosaic was already putting into action a “beta” form of crowdfunding to get small, non-profit solar projects off the ground.
One of those solar projects is sunbathing on the roof of The People’s Grocery in Oakland, CA. Nikki Henderson, executive director the nonprofit food co-op, said micro-investment in local businesses will have benefits beyond economics in communities.
“Having a crowdfund model where people can just invest 100 bucks is actually really amazing,” said Henderson. “Even though they don’t get it back for 7 years, it’s a small investment in a way that goes a really really long way.”
Mosaic’s efforts in the Bay Area also seem to align with movements to use crowdfunding not just to the benefit of local business but toward giving urban renewal a boost.
“As far as crowdfunding, it has provided this wonderful opportunity for us to partner with Solar Mosaic,” said Michele Clark, executive director of Youth Employment Partnership, the Oakland nonprofit which is the site of Mosaic’s latest project and its first return-on-investment project, expected to yield 6.38 percent for investors.
“While I see crowdfunding supporting international investment, green investment and individual investment, I don’t yet see crowdfunding reaching poor communities and the organizations that support these families. Hopefully this is the next horizon for crowdfunding,” said Clark.
— Jamie Henn (@Agent350) December 11, 2012
Not that the crowdfunding strategy is all sunshine, since any investment has some risk, as shown by the crowdfunding caveats written up by the California Department of Corporations. Investing in any small business is risky enough, when 1 in 2 small businesses are still open after four years of operation.
Micro-investors will probably have very limited liability if and when crowdfunded companies go belly up. And the people running brand-new web portals for crowdfunding investment could end up being inexperienced or even running scams.
“For the foreseeable future crowdfunding will work best for smaller projects that require relatively small amounts of start-up capital – not large ventures or a rapidly expanding business,” said Humiston. “As the forthcoming SEC rules are implemented and the market begins to experiment more with crowdfunding as an investment tool, we will have a lot of unknowns to work through.”
But, the crowdfund model wasted no time moving into the public realm in the form of civic action websites. Individual “investors” have plunked down $1,694 to pay for a Philadelphia tree-planting project on Citizinvestor, a civic project and petition site.
As crowdfunding becomes more common, it will be key for small business and civic crowdfunding efforts to take advantage of innovative campaigns and social media marketing to mine for the passion of potential investors, especially during a time of tight credit markets for businesses and tight budgets for governments.
“People love solar,” said Parish. “They want to be a part of it and they’re frustrated that they haven’t been able to be a part of it because they haven’t owned their own home or they’ve got trees shading their roof or all sorts of reasons they haven’t been able to participate. They’re hungry for an opportunity to do so.”