Crowdfunding and MBA Entrepreneurs

Crowdfunding allows entrepreneurs to get capital for their business by allowing individuals to make financial contributions through the Internet. Given the increased interest MBAs have in entrepreneurship, it's not surprising that more MBAs are using crowdfunding to build their businesses. Crowdfunding may become even more prevalent if new crowdfunding legislation gets passed.

Crowdfunding MBAs

Several MBA entrepreneurs have used crowdfunding sites to help launch a business. Crowdfunding allows them to get money from people in their network, including business school classmates, instead of having to go to a Venture Capital firm. Another important benefit of crowd-funding is that it allows entrepreneurs to get support for their ideas. Crowdfunding allows entrepreneurs to know that there's a demand for their product, allowing them to combine market research with raising capital.

A recent Financial Times article provides several examples MBA entrepreneurs who were able to successfully crowdfund their projects. Saïd Business School student Stephanie Getson wanted to start an all-natural bodycare product line as a way to create jobs in conflict-affected communities. Getson used the social enterprise crowdfunding site Buzzbnk to raise the £8,000 she needed to launch her company Sahara Botanicals. Buzzbnk allowed her to request funding from her friends, family and business school classmates. 77 of Getson's classmates donated a total of £3,530.

After seeing the sucess of Sahara Naturals, some of Getson's Saïd classmates used Buzzbnk to help launch their startup mDiagnostica, a company whose mission is to improve healthcare services in developing countries. Buzzbnk allowed them to raise £2,800.

Crowdfunding isn't just for social entrepreneurship. Joey McMahon, a first-year student at Duke's Fuqua School of Business, is using crowdfunding as a fundraising tool. His website, the Monday Life, raises money for improvements to the Duke Children's hospital through collecting $1 donations every Monday. McMahon has raised $50,000 and plans to extend his crowdfunding model to hospitals in other cities. INSEAD graduate Adrian Johnson has also created his own crowdfunding website in order to finance a film called The Laughter Clinic.

Crowdfunding Restrictions

Despite the fact that funding contributed to the successful launch of Sahara Naturals and mDiagnostica, founders of both companies say that would not use the crowdfunding model again. US Government regulations prevent companies from using crowdfunding to sell equity in their business. Since crowdfunded businesses can't provide their financial backers with equity, crowdfunding campaigns don't last very long.

These regulations also make it difficult for crowdfunding websites. Two MBA-created crowdfunding sites ProFunder and CoFundit decided to stop their crowdfunding due to legal limitations. Cofundit, a website founded by two IMD EMBA graduates, shifted its focus to helping startups find quality talent. Stanford grad and Kiva co-founder Jessica Jackley started the crowdfunding site ProFunder with another Stanford MBA grad. ProFunder shut down in February, since government regulations prevented the founders from pursuing innovations they felt would best serve their customers.

Crowdfunding Legislation

The US Crowdfund act, an amendment to the Jumpstart Our Business Start-ups (JOBS) Act, would let companies raise up to $1,000,000 from nonprofessional investors through crowdfunding on "registered Internet websites". This would allow US startups to issue shares of their businesses in exchange for equity.

Companies with 500 investors have to make their funding information public. The requirement will be increased to 2,000 investors if the act is passed. The US Crowdfund act was passed in the US Senate and is awaiting approval from the House of Representatives. President Obama is expected to sign the law later this week.