Crowdsource + Fundraise = Crowdrise

This is a post by Transcapitalist co-founder and contributor Anita Gardeva.

Unsurprisingly, one of my most embarrassing moments took place my freshman year of high school.  My dad had motivated me to run a fundraising campaign at school for the Heifer Foundation and I was full of enthusiasm and ideas about fun dances and bake sales that would help our class raise enough money to donate the exciting Gift Ark to a poor African village of our choice. (The Gift Ark donates $5,000 worth of livestock to a poor village so that the villagers can breed, sell, eat, milk, shear, or otherwise use it productively.) 

As it turns out, in order to start my fundraising campaign I had to present my idea to the Student Council—a body of older, much cooler, juniors and seniors.  Needless to say, after my undecipherable mumbling about dancing and buying cows and chickens, the perplexed student council body did not vote to approve my campaign and my idea wafted away.

A decade later I am happy to see that a new site called Crowdrise can make it so that the story above never has to take place; Crowdrise combines social networking with crowdsourcing to provide an innovative fundraising platform.

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More alternative funding options for entrepreneurs

40billion.com is trying to fix a problem: the $40B gap between the total funds aspiring entrepreneurs require and the total seed funding currently available to them. By tapping into the social networks of the entrepreneurs, the hope is that additional funders can be found.

This is essentially a crowdfunding platform. Their pitch is that if your business requires $40,000 then you just need to convince 40 friends to lend $40, each of whom in turn just needs to convince 40 of their friends to lend $40. The first step is certainly plausible (Kickstarter is a great example); while I'm less convinced of the feasibility of the second step, this network approach may help you bring new people into the fold. The site allows you to put together a private network of potential donors who have access to your business plan and other supporting documents to make the case for why they should lend to you (anywhere from $40 to $10,000). It also can set up webinars for you to make your pitch to the crowd.

Probably the greatest benefit is that it takes care of the dirty work of formalizing the loan process between you and your friends and family members. It also probably saves time -- you can invite everyone to view your information in a single e-mail -- but while this impersonal approach may score you $40 from your aunt, I doubt that it would land any major loans. And then you need to rely on the second ring of your social network, where the ties are considerably weaker. Maybe you have a brilliant business plan that your dad's colleague is willing to get behind, but then why would he loan to you on this site rather than say, make an investment?

Which leads to the major point which is that this idea is fun and a good way to raise from your friends and family in a more efficient way, but start ups are extremely risky and I would bet that someone with means would rather invest than make a traditional loan. 40billion makes no comment anywhere on the site about the terms of their loans, but they do make it clear that they do not facilitate equity investments.

The bigger gap to me is the inability of amateur investors to invest in, not loan to, startups. When someone figures out how to legally facilitate micro-investments, that will be a game-changer.

Taking crowdsourcing to the next level at Trampoline

Finally, a successful application of crowdsourcing as an alternative to venture capital investing. Trampoline Systems, a UK-based social analytics business is relying on "crowdfunding" for its series B investing -- soliciting smaller investments of a minimum of £10,000 each to collectively total £1 M.

Trampoline has navigated the difficult waters of regulation to enable this creative approach. We've seen crowdsourcing in action for project financing before at Kickstarter, but there backers are donors, rather than investors, without any share in the future value of the projects that they support. Just as with social lending, it is far easier from a legal perspective to make Kiva work (where loans are interest-free donations) than Prosper (where loans are interest-bearing). With Trampoline's model, nearly anyone can become a mini-VC of sort, funding projects at small amounts and sharing in the returns.

The crowdfunding model lends itself to better investment diversification, although investors likely have little to say about how the company is run. Maybe that is for the best from the company's perspective; when funding is distributed across many investors, each investor has less power and in the end, the company may likely have more freedom of action.

Trampoline isn't sharing the details yet of how they are making this work exactly, but lessons learned from this experiment may be invaluable for both startups looking for alternative financing options in a tough VC climate and for smaller time investors looking to get involved in the VC space.