THE BLOG
12/13/2012 05:35 pm ET Updated Feb 12, 2013

With Equity Crowdfunding, You Can Play Venture Capitalist

I just spent three exciting days as an official blogger for LeWeb, Europe's largest tech conference. As a tech blogger and entrepreneur, I look forward to LeWeb, which is held in Paris every December, as much as I ever did to Christmas as a kid. The conference gathers a global cross-section of the Internet entrepreneurial scene, from idealistic college students whose apps won start-up competitions a month earlier, to some of the world's most powerful investors, to founders and executives of household names like Google, WordPress, and Instagram. There is no place, no moment, like LeWeb to get your finger on the pulse of the tech scene and see where it's going before anybody on the outside even has an inkling.

One of the start-ups I met with at LeWeb was FundedByMe, a Swedish company that will soon be launching in six countries. FundedByMe is a crowdfunding platform that allows entrepreneurs to offer equity in their companies to the people who contribute money. To test the platform they'd built, FundedByMe put their own company on their own platform, opening up 10 percent of it to investments, and made over $1 million in no time.

If you've ever donated to a project through a crowdfunding platform, you may wonder why you were offered notecards instead of a piece of the pie. The answer is simple: In the U.S., companies aren't (at least for the moment) allowed to offer equity to anyone who isn't an accredited investor. That was going to change at the end of this year, when the crowdfunding provision of the JOBS Act Obama signed in April 2012 was supposed to go into effect, but now it looks like it could be months before U.S. entrepreneurs will be able to offer equity through crowdfunding platforms.

Crowdfunding is not only for tech or Web-based companies! If you're a young shoe designer trying to get on the radar, or a retiree opening a doggy salon, you"ll be able to benefit too. This change could be huge for small businesses of every stripe, since it's so hard to get something going without a chunk of cash up front, and it's really hard to find that chunk of cash (even though Mitt Romney thinks we should all just ask Mom and Dad for the money).

I love being able to help a young company or a cool project that inspires me, and I've supported a couple. I can see how it might be very tempting to contribute more and have a stake in a project. But investing through one of these platforms could also be a bit risky for armchair investors.

You see, investors take the time and -- importantly -- spend the money to closely examine every potential investment (this is called due diligence). They attend conferences like LeWeb and have many ways of gaining an intimate knowledge of the market, the trends, the competitors, the founders and their strengths and weaknesses, before they invest in something. But consider the "little" people who invested in FundedByMe. What are the odds that they knew that the start-up could soon face serious competition from established American crowdfunding platforms because our laws were about to change? Slim, I'd say.

FundedByMe does have an interesting fail-safe mechanism built in to their funding process that is designed to protect both the investors and the entrepreneurs. Entrepreneurs who want to raise funds have to go through a "pre-round" phase to get feedback from the crowd and see what kind of interest they can generate in their project. If they're not ready for prime time, they find out soon enough. This could help prevent that awkward moment where you've given a start-up your kid's college fund and it fails to thrive (which is what happens to most start-ups). And the entrepreneurs are allowed to choose who they allow to invest, which could help keep the whackjobs off the board.

Not that the risk makes a difference. There will always be gamblers who play Texas hold 'em and manage their own little stock portfolios online, and now they'll be able to play Silicon Valley too. This can only be good news for start-ups and small business. And who knows? Maybe you'll get a piece of the next Google...