Published May 11, 2012
| Business on Main
From politicians to charities to entrepreneurs, crowdfunding is the hottest new way to raise money — and awareness — by tapping into a network of virtual strangers.
What if I told you there was a way to fund your business that didn’t require you to either (a) take out a loan, or (b) give up equity in your business? You might say that’s a fairly remarkable concept, and you would be right.
It is remarkable, and it’s called crowdfunding — the hottest thing in the funding world right now. Here’s how Time Magazine put it:
“Politicians do it. Charities too. And now for-profit entrepreneurs are tapping the Internet to get small amounts of money from lots and lots of supporters. One part social networking and one part capital accumulation, crowdfunding websites seek to harness the enthusiasm — and pocket money — of virtual strangers.”
You know how the more traditional ways of funding a business work, of course. You might ask Aunt Jane for a loan and pray that you’ll be able to pay her back, or you can hope to get a bank loan, or you can pound the pavement (or keyboard) in search of that elusive angel investor. All of which have their downsides.
Now consider the new kid on the block, crowdfunding. With crowdfunding, you seek to raise your capital a little bit at a time from a lot of different people — the crowd — and then instead of giving away equity or interest, you agree to pay back your investors with some small perk related to your business.
Let’s say you want to fund a sandwich shop. You’d list your business on one of the various crowdfunding sites (see below) and offer to name a sandwich after someone for a month in exchange for, say, $100. Do that 50 times, and you’ve got $5,000. A filmmaker looking to finance his movie might offer a credit at the end in exchange for an investment of, say, $250. One woman in need of a new boat hull for a trip around the world promised investors a postcard from each of her many stops, and even that worked.
Here’s a real-life example: Kieran Masterton started a website for indie movies called OpenIndie that has a unique business model for movie distribution. Instead of a “push” method, where distributors push movies out to different locations, OpenIndie uses a “pull” method, where people go online and pull the movies they like to their area. So Masterton and his team offered a chance for 100 filmmakers to get listed on the site in exchange for crowdfunding payments of $100. One hundred dollars from 100 filmmakers equals $10,000.
With crowdfunding, investors usually are given the option of different levels of patronage. They may get X for investing $50, Super X for investing $100, and Ultimate X for investing $250. Crowdfunding is unique in that it seeks to raise a lot of money, a little bit at a time.
Now maybe you’re wondering whether this is legal. The answer is a qualified yes. Essentially, since a crowdfunding campaign solicits not an investment but rather a payment in exchange for a perk given by the business, the transaction doesn’t really constitute the sale of a “security” for Securities and Exchange Commission purposes. (That said, there is currently an effort to get the SEC to specifically exempt crowdfunding from securities laws. You can learn more about that here.)
Where to tap into the crowd
Since it’s such a cool and interesting way to fund a business or project, it’s no surprise that crowdfunding has taken off. A slew of sites have emerged online to facilitate the teaming of dreamers and believers. Some sites are geared toward specific industries or particular creative endeavors, while others are more broadly applicable to all sorts of projects.
Here are two of the top choices:
Kickstarter. Kickstarter is one of the better-known names in the crowdfunding game. While listing a project is free, Kickstarter retains 5 percent of all money raised, as well as a small portion of all credit card processing fees.
One of the unique things about Kickstarter is that projects must raise 100 percent of their goal, or they get nothing. For example, if you are looking to raise $10,000 for your new studio, you need to raise all $10,000 before the funds are transferred from Kickstarter. The reason for this is? Well, what if you only raised $1,300 for your studio and couldn’t execute? That wouldn’t be very fair to those who invested in it, now would it?
IndieGoGo. IndieGoGo doesn’t require 100 percent funding to move forward, but if you don’t raise the full amount, you’re charged more — 9 percent as opposed to 4 percent if you get fully funded. Otherwise, the idea is the same:
1. You create, customize and publish an online funding campaign.
2. You raise awareness of it by sharing it with others on the site and elsewhere.
3. You collect contributions.
4. You track contributions using the site’s dashboard.
Steve Strauss is a lawyer, author and speaker who specializes in small business and entrepreneurship. He also writes a weekly column for USA Today.