Artists, inventors, writers and even entrepreneurs in need of cash to fund their next big project are turning to the masses on the Internet. Crowdfunding-requesting small cash infusions from many investors-is gaining steam, with more than 100 crowdfunding websites coming online since IndieGoGo and Kickstarter.com, well, kicked things off in 2008 and 2009 respectively.
Being a patron of the arts is a centuries-old concept, but the Internet has given it a way to cast a wider net. However, before hopping on the crowdfunding bandwagon, make sure it's the right funding path for you.
New Territory
According to crowdsourcing.org, the crowdsourcing and crowdfunding industry website, crowdfunding is: Financial contributions from online investors, sponsors or donors to fund for-profit or nonprofit initiatives or enterprises. It is a way to raise capital for new projects and businesses by soliciting contributions from a large number of stakeholders following three models: donations, lending and investment in exchange for equity, and profit or revenue sharing.
This is like the democratic version of the angel and venture funding that has been going on for decades, says Jeffrey Sohl, director of the Center for Venture Research at the Whittemore School of Business at the University of NH in Durham.
On many sites, people don't invest in projects for an equity stake, but rather to support the person's vision. In return, they might receive a product or experience, such as an autographed comic book they funded or an advance CD of a band they supported. Often projects can only be posted for a certain period of time and with a set fundraising goal.
The crowdfunding sites make money by collecting a predetermined percentage of what projects raise-some only if the project meets its goals while others have a sliding scale depending on how much was raised.
Cashing In
While there is no equity stake and pledge amounts tend to be small, the total amount being raised is impressive. Since it began in 2009, Kickstarter has seen more than 11,500 projects successfully reach their funding goal, with more than $85 million pledged by more than 900,000 backers.
Kickstarter has been growing every year since we launched, says Justin Kazmark, a member of its communication team. The amount of money pledged continues to grow. IndieGoGo.com, founded in 2008, claims it has helped to raise millions of dollars for more than 35,000 campaigns in 201 countries.
The most successful crowdfunding entrepreneur is Scott Wilson, a Chicago designer of a kit allowing people to convert their iPod nano into a watch. The project attracted thousands of backers on Kickstarter, raising nearly $1 million and the attention of Apple itself. Wilson's story is definitely the exception, but it shows crowdsourcing's potential.
In NH, Thomas Young, an electrical engineer and serial entrepreneur in Durham, was inspired by Wilson's success.
Young's fourth and fifth business ventures-Legendary Time, a 10-year-old company that makes specialty wristwatches, generates about $1 million in sales, and AcousticForge.com, a startup that makes Iron Buds (modular and rugged ear buds)-both found success through Kickstarter.
Legendary Times raised $40,000, enough to make 450 watches, and AcousticForge.com raised $61,000 from 1,078 people, allowing it to go into research and development. Both projects exceeded their fundraising goals.
Law and the Masses
With more small businesses seeking smaller investments from larger pools of investors, the Securities and Exchange Commission is examining whether to ease constraints on share issues for private companies, says Alan L. Reische, a shareholder at Sheehan Phinney Bass + Green in Manchester whose practice is focused in part on debt and equity financings.
If this happens, it could open the door for crowdfunding sites to allow people to offer equity shares instead of just accepting donations for unique rewards. (Offering equity through crowdfunding now could lead to a business violating securities regulations).
Offering equity stakes
opens the door to a host of potential problems for businesses, experts say.
Sohl warns that companies that use crowdsourcing could run into trouble later
if they pursue additional funding with angel investors. Big investors, Sohl
says, do not like deals littered with
smaller investors.
While venture capitalists and angels probably won't mind if donations were accepted in exchange for a product, service or experience, Reische says they will steer clear of any deal involving several small investors who make investments that violate SEC regulations. What you have is a client that is issuing a security without registering and without checking if there is an exemption available, Reische says.
A bunch of people who put in $100 or $200 could grow unhappy with lack of profitability or information and seek rescission through a class action lawsuit, he says. In the end, Reische says he would advise clients against using crowdfunding. It's too bad. We really need innovation in capital formation for small business, he says.
Giving a Project a Kick Start
Kickstarter is focused mostly on creative endeavors in 13 categories: art, comics, dance, design, fashion, film, food, games, music, photography, technology, theater and writing.
Justin Kazmark, a member of Kickstarter's communication team, says Kickstarter is neither investment nor lending. Rather, it sits at the intersection of commerce and patronage, he says, explaining project creators retain full ownership of their ideas. Kickstarter prohibits offering financial incentives, such as ownership, financial returns or repayment. The site does not allow people to fundraise for charities, causes, nor fund my life projects like paying tuition.
While 44 percent of projects launched on Kickstarter reach or exceed their funding goal, Kazmark warns people should not make the mistake of thinking all they have to do is post a project and people will fall in love with it and money will just appear.
He says most of the money people raise on Kickstarter comes from a person's network of family, friends and acquaintances and their outreach efforts. You have to work smartly and have to work often to get the support that comes through the site. Kickstarter is one tool in a creator's tool belt to bring a project to life, Kazmark says.
While the site is aimed more at the creative community, entrepreneurs are also using the crowdfunding sites. Young of Durham asked for $77 to $107 donations to Legendary Time in exchange for receiving a watch. The wristwatches that he funded on Kickstarter had a Star Wars theme.
Crowdfunding for me was a validation technique, Young says. I did a couple [more projects] to test the marketplace (another specialty wristwatch and customizable computer mouse) and they were dismal failures. What I took from that was these products don't get traction, ditch them'.
Young says Kickstarter allowed him to get products off the ground that he otherwise would not have had the capital to do so. The enthusiasm I have garnered on Kickstarter is unbelievable, he says. Young says he is now looking to angel investors to take his businesses to the next level.
Kickstarter is less of an entrepreneurial playground and more a place for creative projects. There are several sites doing crowdfunding and some are better for entrepreneurs. Each has a different flavor, Young says.