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Winners and Losers in the Coming Crowdfunding World

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This week, the President is expected to pass H.R. 3606 - the Jumpstart Our Business Startups (JOBS) bill, which includes provisions that for the first time legalize investment-based crowdfunding.

While the crowdfunding portion of the bill still needs to go through SEC rule-making, the die is clearly cast that a whole new social networking – based world of start-up and small business investing and financing is coming fast upon us.

So who will the winners be and who will lose ground once the new rules are fully live?

Well, the first group of winners will undoubtedly be the tens of millions of American entrepreneurs - and eventually hundreds of millions of worldwide - that for the first time in human history will have access to on-demand capital for their creative and future-focused projects and initiatives.

To envision this, visit (or revisit) Kickstarter.com, and browse through the incredible diversity of cause and passion - based projects, from charitable to design to artistic to technological, crowd funded on a donations basis on the site.

Then, layer in elements of the kinds of companies funded by angel investment groups and early stage venture capital firms – i.e. focused on hot technology spaces like mobile commerce, healthcare information technology and possessing fast-scaling revenue and thoughtful “Porter Five Forces-Friendly” business models.

Doing so will give you a good feel for what the first turn of investment-based crowdfunding will be.

But quickly following these early adopters will be the best of the best of U.S. small and medium-sized companies.

These businesses - think of the Inc. 500 list of America's fastest growing companies - are home to the most talented, hardworking, and just nose to the grindstone, money making and job creating entrepreneurs and executives in the world.

And, sadly and embarrassingly, these best and the brightest among us have been mostly abandoned by the U.S. banking system when it comes to funding their growth initiatives.

Why?

Well, for starters the very unfortunate “derivatives-focus” of the U.S. financial markets this past decade has resulted in an entire banking industry generation to simply not even know how to do the hard diligence work of equity and fundamentals-based investing in growth businesses.

Add to this mix banking industry consolidation causing smaller capital investments to just “not be worth the trouble” for way too big a swath of the industry and the sad reality is that banks are really no longer meaningful funding players in the small business communities in which they allegedly live.

Liberatingly, crowdfunding will allow smaller companies to simply bypass and disintermediate these broken financial sources altogether.

And to do so for such simple and each to grasp purposes as inventory and receivables financing, capital expenditures with shorter payback periods, and my favorite, for the kind of high ROI, Internet-based marketing and customer acquisition campaigns about which traditional bank underwriters wouldn’t even know the right questions to ask.

The result will be that American small business will innovate and grow faster, and oh yes have the wherewithal to create the jobs and pay the taxes that fuel our whole way of life.

And smaller investors will be winners too.

No longer will the best entrepreneurs with the best ideas and growth prospects only be available to be backed by the "1%" - the cadre of institutional and super high net worth individual investors that under current rules have a veritable monopoly on entrepreneurial investing.

With fully functioning crowdfunding markets, this high return world will be open to anyone with a few hundred dollars, an appetite for intelligent risk-taking, and an abiding belief in the power of entrepreneurship and innovation to improve our world for the better.

And as a bonus, won’t it be nice for the media to cover just a little more about entrepreneurial and fundamental investment successes and a lot less of the tawdry, “give them bread and circus” spectacle of our state-sponsored lottery cabals?

And points to who the losers will be in this soon to come crowd funding world.

Let’s start with the aforementioned banks and other questionably value-adding financial intermediaries (think travel agents in the late 1990s).

But really, all those trapped in cynical, pessimistic and legacy – based financial thinking and being will find these democratized and re-vitalized markets quite threatening.  

Yes, financial market change for the far better is coming.

Not as fast as any of us hope, but coming inevitably nevertheless.

So let's thank those few brave souls that have made it happen.

They are the new drum majors for justice and progress on whose shoulders we will all stand.

And oh, yes, profit from too.


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