Funding the 21st Century: Crowdfunding to the Rescue by Elise (Redlin) Gould
For many start-ups, the most pressing problem they face is financing. The issue is compounded for those early start-ups that lack a record of profits. President Obama signed the Jumpstart Our Business Start Ups (JOBS) Act in April of last year, which offered a new avenue for entrepreneurs to raise the required funds. The JOBS Act allowed certain qualifying entrepreneurs to offer an equity investment to the general public using crowd sourcing without requiring the costly registration which the SEC that had impeded them from doing so in the past.
This gave way to a flood of activity online, and social communities cropping up around Start Up Business funding and Cause funding using a technique called ‘crowd sourcing’. In this context, crowd sourcing for funds (a.k.a. crowdfunding), equity crowdfunding or hyper funding, allows an entrepreneur to offer an investment in the new business to the public through an online listing. Investors can then act on the opportunity seamlessly through the crowdfunding network or website, and in some cases are donating their money to the cause or business venture with no promise of financial return.
The top 3 most popular crowd funding sites:
1.) Kickstarter – Since its launch in 2009, it has reportedly raised $568 million in crowd-sourced funding. Currently only open to US based projects, It has been highly successful in jumpstarting numerous projects. It’s restricted to creative projects and not causes or charities, and the start-up only receives the funding if they reach their pre-determined funding goal. Users are charged a 5% fee for every successful project.
2.) Indiegogo - Operates on a ‘Fixed Funding’ and ‘Flexible Funding model’. Fixed Funding, essentially a carbon copy of the Kickstarter model, operates on an “all or nothing” system, wherein, if the project doesn’t meet its goal, no fees will be assessed and the funds are sent back to contributors. Flexible Funding chargers a 4% fee on successful campaigns, or 9% for campaigns in which goals are not met.
3.) Rockethub – This site has an easy three-step process to get your project uploaded and you can easily track the progress. A 4% service charge is accessed for projects that reach their goal, and 8% for ones that do not. Rockethub also charges a 4% transaction fee for contributions made through their site.
When it comes to getting their dreams and business ideas off the ground, entrepreneurs are finding that these crowd-funding networks are a key catalyst in accomplishing those goals.
Like most things, these sites aren’t without their pitfalls; the services fees, rewards set-up, and sometimes-controversial funding policies are things to watch out for. In fact, last year, Kickstarter was criticized for allowing would-be entrepreneurs the ability to be a little fuzzy about their plans – and for providing little to no recourse to contributors who become unsatisfied with the project/product they’ve backed. They promptly addressed the issues and made revisions to their site policy.
Crowdfunding has seen a steady rise in recent years, and has become the go-to platform for creators and entrepreneurs worldwide. It’s only a matter of time before it becomes the primary catalyst for all future creative and charitable endeavors.
Entrepeneur Kate Milliken used Indiegogo to raise funds for her online community concept geared towards the chronically ill (called Mycounterpane.com, it’s launching this summer). “I had read an article saying it takes 3 people 11 full days of prep work to run a successful campaign, and the moment we launched, it became clear how important the prep work was. Even with friends, you need to be continuous and it’s a full time job. There’s also psychology of how much to ask for. You don’t want to be too low, and I realized, through the math, that I only lost 2% more with flex funding if I didn’t make my goal, so I went big”. Kate made it to $61,000 out of her $75,000 ask.
Mind you, the merit of the project, invention or cause must still stand on it’s own and entrepreneurs shouldn’t make the mistake of thinking the crowdfunding site will do all of the marketing for the up and coming start-up. They don’t alleviate the need to pound the pavement, but instead give another powerful channel to do that in.