This article was first published at The McAlvany Intelligence Advisor on Friday, November 1st, 2013:

When the Act (Jumpstart Our Business Startups Act) was signed into law in April 2012, it was designed to create a “regulatory exemption” for crowd funded securities – a crack in the 6-inch thick slab of concrete the government are determined to pave over every manner of entrepreneurial activity in the country – so that entrepreneurs could meet with capital largely free of under Dodd-Frank, Sarbanes-Oxley, and other noxious restrictions on freedom.

It was highly controversial at the time, with the New York Times leading the way in an article entitled “They [the lawmakers who recklessly offered the bill] Have Very Short Memories” in which the cases of Enron, the dot-com crash, and the mortgage meltdown were cited. It was the nasty unbridled , of course, in the eyes of the Times (with little regard for historical accuracy or understanding), that caused those disasters:

[The bill] would permit “crowd funding” – raising money from small investors through the – without requiring those companies to provide meaningful disclosure and without adequate oversight by the Securities and Exchange Commission.

The Times even found an “expert” to provide a sound byte for the Act: he called it the “Boiler Room Legalization Act.”

None of those portended disasters came to pass, of course. Last week, Kickstarter, one of many crowd funding platforms that leaped at the chance to connect entrepreneurs with clever ideas together with small investors, reported it had successfully funded 50,000 startups since its inception in 2009, raising more than $800 million. When their website was accessed on October 31st, that number had increased to 50,844, with $852 million raised from more than five million small investors. And that doesn’t count the 4,000 projects currently in the process of being funded. They might go over $1 billion by the end of the year!

Roberto Torres of Tampa, Florida, owns a company with an elegantly simple business model: find a designer with high fashion flair, find a retailer to put his line on its shelves, and take a commission. Wash, rinse, repeat.

But when Torres decided to approach Macy’s Department Store with the idea, he realized that if Macy’s said yes, his company was too small to handle the job. He needed more infrastructure and more people to help him. In a word, he needed more money. But borrowing was out of the question. Torres had seen other small companies get buried in debt, so he went to Kickstarter. He set a goal of raising $20,000, and raised $30,000. And he did it without giving away any of his company. Instead he gave away designer jeans and other accessories to his investors.

There’s Eric Migicovsky, the developer of the Pebble E-Paper Watch. It downloads messages from a smartphone and runs apps for bicycle enthusiasts that show time, distance, altitude, speed, and cadence, as well as for golf enthusiasts measuring distance to holes on 25,000 different golf courses. Migicovsky started backwards, obtaining $150,000 from a venture capitalist. But when that money ran out, Migicovsky found that the well was dry: “Hardware [like mine] is much harder to raise money for. We were hoping we could convince some people to [support] our vision, but it didn’t work out.”

So he went to Kickstarter, which approved his idea. He offered each investor the opportunity to buy his $150 watch for $115. By the end of the first day, he had met his $100,000 goal. Within six days, he had raised nearly $5 million, and when the offer closed 30 days later, nearly 70,000 investors had pledged over $10 million to his project.

And so: how’s business? As of July, more than 85,000 Pebbles have been sold, generating nearly $13 million in revenues for his company. And he’s just getting started.

The most astonishing success story, however, is that of Chris Roberts, who developed a video game called Star Citizen. It’s an interactive online game that can be played simultaneously by users across the internet and around the world. His Kickstarter program is still open, and, at last count (October 28th), he has raised $25 million and expects to have raised more than $27 million when it closes. Said Roberts:

This milestone also means that October has been our biggest month for crowd funding yet. That’s truly astonishing.

Extra alpha slots [thanks to the funding] not only means more Star Citizens will travel the ’verse at launch, but that we will receive more feedback…. This in turn will allow us to better balance and enhance the Star Citizen experience.

Worldwide the numbers are breathtaking, and reassuring. In 2010, nearly $1 billion was raised through crowd funding, which increased to $1.5 billion in 2011. In 2012, it increased further to $2.7 billion, and is expected to exceed $5 billion this year.

Not every fundraiser is successful, nor does every funded project become profitable. But Kickstarter has a better than 40% success rate, and many, if not most, of the startups succeed. For the investors, they are motivated not so much by possible financial returns but by having the chance to help entrepreneurs like Torres, Migicovsky, and Roberts get their projects off the ground. Some just like to support causes in which they believe. Some just like the chance to get designer jeans, watches, and video games at a discount.

It’s amazing, and comforting, to see what happens when a crack in the sidewalk opens up to sunlight. From that crack springs forth remarkable, even history-making, businesses that otherwise wouldn’t even exist.

—————————

Sources:

Kickstarter passes 50,000 successfully funded projects thanks to 5 million backers

Kickstarter stats

Seven things to know about Kickstarter

The Pebble

The crowd funding concept

The New York Times: They Have Very Short Memories

The JOBS Act

The Star Citizen video game

Star Citizen reaches $25 million in funding

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