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Crowdfunding: bust or windfall?

By Joyce M. Rosenberg

Associated Press

Published: Wednesday, April 24 2013 6:55 p.m. MDT

FILE - In this Tuesday, April 16, 2013, photo, a worker assembles a vehicle on an assembly line at Ford factory in Chongqing, China Tuesday, April 16, 2013. Ford Motor Co. reports quarterly financial results before the market opens on Wednesday, April 24, 2013. (AP Photo/File)

Associated Press

NEW YORK — Small businesses looking for a windfall of investor money from crowdfunding may find that it's more of a bust.

President Barack Obama and members of Congress have touted a law that makes crowdfunding, a method of soliciting money over the Internet, as a way for startups and other small companies to raise money and create jobs. A year after the law was passed as part of the Jumpstart Our Business Startups, or JOBS, Act, entrepreneurs wanting to raise as much as $1 million annually from online investors are still waiting to get going. The Securities and Exchange Commission is in the process of writing rules to regulate the process.

But business owners anticipating their chance to solicit online investments may not want to count on crowdfunding to finance their entrepreneurial dreams. People involved in small business investing warn that many entrepreneurs will find that potential investors aren't interested in their ventures because they don't have an attractive track record or look like they'll provide a good return.

"I think there's going to be an enormous amount of companies that go online, and nothing happens," says Brian Cohen, chairman of New York Angels, a group of angel investors. Angel investors are individuals who are willing to invest in very small or young companies.

There's likely to be a fundamental difference between the expectations of entrepreneurs and investors, Cohen says. The entrepreneurs will want money to build their companies, and may not be thinking in terms of returning the cash to their investors. Investors will want to see their investment grow — so they can sell and take a profit.

"These are nice businesses, a lot of mom and pops, but there's no clear method in which an investor can get a return," Cohen says.

Crowdfunding isn't expected to be a jackpot for investors because even the savviest investors — those at venture capital companies — don't have a great success rate. Three-quarters of U.S. companies that get venture capital investments don't return their investors' money, according to Shikhar Ghosh, a senior lecturer at Harvard Business School. The National Venture Capital Association, a trade group, estimates that between 25 percent and 30 percent of companies that receive venture funding fail.

The JOBS Act allows companies to raise up to $1 million a year.

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