Crowdfunding, it's a Game Changer

By Carl Weiss

Courtesy of Flickr

Back in the bad-old days, entrepreneurs searching for funding had three choices: 

1. Friends and Family 
2. Banks 
3. Angel and/or 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. 

Kickstarter.com, The Real Gamechanger

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; eye-wear (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.

Kickstarter Banner (Photo credit: kittybabylove)

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.

Hhow Effective has Kickstarter Bbeen?   

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 82% of the projects that have reached 20% of their funding goal 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, the success of raising money for your idea (project) is based on it’s perceived merits. 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 individual sources, a few dollars at a time.  It’s all about being able to wow the crowd.

What's it Take to Get Funded?

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, how capable you are of running your company and can you deliver on your promise.  Therefore, you will need to provide drawings, videos and even animation that show what your product does and a compelling reason 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. Review projects similar to what your trying to do that have been funded.

What is considered fundable?  Everything from music cds to inventions, games, medical devices, books, comics and even 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.

In this article, I discussed the evolution of Crowdfunding. I have listed, summarized many of the features and benefits of several Crowdfunding sources and I have explained how KickStarter.com and other sites have turned the world of raising investment capital on its head. If you enjoyed this article, pass it on to your friends. If you have a comment, share it in the comment section, and please do not hesitate to post it to your social nets.

If you like this article, you can find more by typing “crowdfunding" in the search box at the top left of this blog. If you found this article useful, share it with your friends, families and co-works. If you have a comment related to this article, leave it in the comment sections below.  If you would like a free copy of our book, "Internet Marketing Tips for the 21st Century," fill out the form below.

Thanks for sharing your time with me.

Since 1995, Carl Weiss has been helping clients succeed online.  He owns and operates several online marketing businesses, including Working the Web to Win and Jacksonville Video Production. He also co-hosts the weekly radio show, "Working the Web to Win," every Tuesday at 4 p.m. Eastern on BlogTalkRadio.com.

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