Working the crowd

New funding model kick-starts projects online


Scott Lininger relishes the feeling he gets when he supports someone’s creative project on the crowdfunding website Kickstarter, one of many online platforms that allows people to pool small amounts of money with others across the country to fund a stranger’s idea.

“I love it when I get my reward in the mail. It feels so personal,” he says. “The envelope’s usually hand-licked, and they come in these crappy packages that usually come from some guy in Canada, and it’s neat to have that connection. I didn’t just order a product from Amazon. I helped support this thing, and they shipped it to me.”

Lininger, a software engineer at SketchUp, which until just recently was owned by Google, is one of the many people participating in crowdfunding platforms, which as an industry raised nearly $1.5 billion in 2011, according to a report from Crowdsourcing, LLC. He participates on both sides of the spectrum, as a contributor and a project starter, and he recently raised $2,758 through the site to fund a publicity campaign for his soon-to-be-released novel, Guesswork: A Prim and Odin Murder Mystery.

But it’s not the money that most interests Lininger.

“The thing about Kickstarter, beyond just raising money, is that you can find out if your idea is worth anything before you have to invest anything,” he says. “If you have enough energy to put together a video and a pitch, you can find out whether it’s going to resonate.”

It works like this: Someone posts a listing asking for a set amount of money on a website, like Kickstarter, MicroVentures, LendingClub or IndieGoGo.(There are more than 500 crowdfunding platforms total, according to the Crowdsourcing, LLC report.) The users of that website then decide if the listing, which could be asking for money for anything from venture capital to credit card loans to charity, is a worthy destination for their dollars. Then — on most platforms — if the listing meets its fundraising goal, the money is transferred. If not, the person asking for the cash doesn’t get a dime.

Crowdfunding is one of the many ways the Web is changing business. For decades, the only way businesses were able to raise money was to pitch to wealthy investors or get a loan from a bank. Barriers to entry on the lender side were high: Only those with access to tens to hundreds of thousands of dollars could invest or make loans. Now, thanks to crowdfunding, in the same way that Amazon’s user reviews turned everyone into a literary critic, anyone with an extra $50 can be a venture capitalist.

One company, Pebble Technology, started a campaign to raise $100,000 to fund the production of a wristwatch that syncs with iPhones and Android phones. By the time the campaign ended, the company had raised more than $10 million.

But what exactly were people buying? This wasn’t like stock, where investors were buying a share of the company. It wasn’t exactly for charity, either — the company is clearly for-profit. What the listing was, essentially, was a discounted presale, with more than 65,000 people donating $99 or more in exchange for one or more watches when they become available.

“They were going to get the first dibs on the product when it rolled out into the market, and so that became a huge incentive,” says University of Colorado at Boulder business professor Bret Fund, who researches how companies raise startup money. “So what I really think with this crowdfunding, getting the incentives right is going to be key for the companies raising money.”

With the passage of the Jumpstart Our Business Startups (JOBS) Act earlier this year, Congress essentially gave crowdfunding the go-ahead by loosening rules to allow platforms to start selling equity in companies. For an industry that grew 72 percent from 2010 to 2011, the floodgates might have been opened for even wilder growth.

But so far, one of the biggest beneficiaries of crowdfunding has been the arts. Crowdfunding offers a brand new way for artists to raise money and fund projects, and Kickstarter, which, number-wise, funds more creative projects than business ones, raised $150 million last year. Kickstarter co-founder Yancey Strickler pointed out a few months ago that the National Endowment for the Arts (NEA) has a budget of $146 million. Though Strickler’s insinuation that Kickstarter did more for the arts than the NEA might have been a little misleading — as some of the biggest Kickstarter projects are business- and tech-related, areas the NEA doesn’t fund — the gist of his point is clear. Crowdfunding has enormous potential for artists with the right pitch and the right audience to raise money.

Boulder filmmakers Cathy Gurvis and Eliza Karlson raised almost $10,000 for a documentary called Dance Class, about the women over 50 who dance in choreographer Nancy Cranbourne’s troupe. Ninety-five
percent of donations for her project, Gurvis says, came from people
with some sort of personal connection to the project.

“Our product is really different. These
types of projects [documentaries] are very different than putting in a
donation, and getting back a watch,” Gurvis says. “People are really
feeling close to it, which is exciting.”

question remains: will companies that usually looked to angel investors
for funding turn to crowdfunding instead? It depends on what they’re
looking for. Fund says one of the reasons the platform is so popular
with businesses now is that before crowdfunding, entrepreneurs had no
way of gathering small donations — it makes little sense to arrange a
meeting to ask someone for capital if you’re only going to get $50 from
them. Crowdfunding allows entrepreneurs to ask hundreds, maybe
thousands, of people for money by investing only the amount of time it
takes to make a video.

if startups eschew angel investors for crowdfunding, they might hold
onto their equity, but they also forgo the positives angel investors
bring to the table.

get really sophisticated angels and what you call ‘dumb money,’
[investors] who don’t bring anything to the company besides money,” Fund
says. “A lot of times you go to angels because they bring more than
dollars. They bring a network with them; they can also maybe introduce
you to your next round of investors. With crowdfunding, the advantage
would be you don’t necessarily [have] to give away equity.”

with the new changes with the JOBS Act, crowdfunding sites might soon
be selling equity as well. Fund, who oversees the Deming Center Venture
Fund, an investing fund managed by CU students, says he thinks selling
equity to the crowd is probably not a good idea.

“Truthfully, from an investor perspective, you’ve
got a company that has chosen to be crowdfunded, and if they hadn’t
touched their equity as part of the crowdfunding, we would absolutely
look at them and think … they were really bright to do that. If they
had given away some equity or something, it would be a complete
turn-off because it messes up the capitalization table,” he says. “What
you would want to do as an investor is that you’d see that and basically you’d want to dilute the heck out of those shares.”

In other words, invest at your own risk if you’re doing it through crowdfunding.