By Carl Weiss
Back in the bad old days, entrepreneurs searching for funding had three choices:
1. Friends and Family
2. Banks
3. Angel and Venture Capitalists
For many this meant that starting a business was nearly a Mission Impossible. Then in 2007, all that changed when Prosper.com launched the first peer-to-peer lending service in the US. Since that time a number of other crowdfunding sites have popped up, including Kickstarter, which in 2012 raised more than $10 million for the Pebble Watch.
Before you decide to quit your day job, understand that not all projects get funded. Some pitches are flawed, while others are deemed unfundable due to the rules of various crowdsourcing portals. But for a staggering number of well thought out and executed proposals, the world wide web can your oyster when it comes to jumpstarting a business. However, as you will soon find out, crowdfunding comes in a number of different flavors.
Microloans a Big Deal to Start Ups
Prosper is America's first microloan marketplace, with more than 1.6 million members and over $400,000,000 in funded loans. While few banks will offer loans to start ups, sites like prosper connect with the public to form a funding pipeline that offers loans between $2,000 and $25,000 to businesses. Individuals can invest as little as $25 per selected business. Both Prosper and the public profit from these microloans and Prosper discloses credit scores and histories as well as servicing the loan on behalf of the matched borrowers and lenders. You can even invest your IRA funds in Prosper.
While prosper started the microloan revolution here in the US, they are far from alone. Other microloan sites have sprung up, with names like captap.com, kiva.com, as well as federal (the SBA has a microloan program) and municipal lenders, such as Los Angeles’ microloan.org run under the auspices of the Valley Economic Development Center. Just like traditional “loans,” microloans require that the borrower pay back the amount borrowed plus interest.
The Real Gamechanger
Kickstarter.com on the other hand isn’t based on the concept of the microloan. This means that
once funded, project creators are not required to pay back the amount raised. Other than a consideration that can range anywhere from a thank you to actual merchandise, Kickstarter backers do not expect to receive any other compensation. Sounds great from the creator’s viewpoint, doesn’t it? But there are a few caveats:
1. Everything on Kickstarter must be a project. A project has a clear goal, like making an album, a book, or a work of art. A project will eventually be completed, and something will be produced by it.
2. Kickstarter does not allow charity, cause, or "fund my life" projects.
3. Kickstarter cannot be used to fund e-commerce, business, and social networking websites or apps.
4. Kickstarter cannot be used to buy real estate.
5. No contests, raffles, coupons, or lifetime memberships.
6. No bath, beauty, and cosmetic products; electronic surveillance equipment; eyewear (sunglasses, prescription glasses, and others); firearms, weapons, knives, weapon accessories, and replicas of weapons; medical, health, safety, and personal care products; or infomercial-type products.
More importantly. Funding is an all-or-nothing proposition on Kickstarter. What this means is that if you set your goal at $50,000 and raise $49,999 you get nothing. On the other hand, if you set the goal at $10,000 and raise $100,000 you get to keep it all. What Kickstarter gets out of the proposition is 5% of the money raised by successful creators. Payment is processed via Amazon Payments in the US, from which an additional 3-5% in processing fees is collected.
So how effective has Kickstarter been? Since its launch on April 26, 2009, over a half billion dollars has been raised from more than 3 million individuals which was used to fund more than 35,000 projects. Furthermore, Kickstarter states that of the projects that have reached 20% of their funding goal, 82% were successfully funded. Of the projects that have reached 60% of their funding goal, 98% were successfully funded.
In 2012, crowdfunding totaled $2.7 billion. This year it is quite possible that those numbers will double. The
reason that this phenomenon is so popular is due to the fact that it turns funding on its head. Where in the past entrepreneurs had to go hat in hand from one institution to the next begging those with deep pockets to fund their project. With crowdfunding, instead of trying to raise $50,000 from a bank or angel investor, it is now possible to raise the same amount of money from thousands of sources a few dollars at a time. It’s all about being able to wow the crowd.
Creating a successful proposal isn’t like writing a business plan. Funders aren’t going to pore over your projections. They want to see what you are bringing to the world and how capable you are of running your company. Therefore you will need to provide drawings, videos and even animation that show what your product does and why it should be funded. The best way to get a bead on what works is to peruse Kickstarter, Indiegogo and RocketHub, along with other crowdfunding sites to review projects that have been funded.
What is considered fundable? Everything from music cds to inventions, games, medical devices, and publishing houses have been funded. There are even several space-based projects currently being shopped around, including a moon-base and a space telescope. So with the number of crowdfunding sites growing by leaps and bounds, this is now literally an industry where the sky is the limit.