Crowdfunding: Just for Kicks or Serious Business?
The Internet, which has revolutionized so many aspects of business, is poised to do the same for the world of venture capital. Traditionally, independent entrepreneurs have not had an easy time of it when it comes to funding their ideas. Venture capital firms are too much of a reach and angel investors are growing more cautious with their money.
Thatâ€™s why people with creative concepts in mind but no way to fund them are increasingly looking to crowdfunding. Basically, writes Scott Steinberg in his bookÂ The Crowdfunding Bible, â€œcrowdfunding is the process of asking the general public for donations that provide startup capital for new ventures. Using the technique, entrepreneurs and small business owners can bypass venture capitalists and angel investors entirely and instead pitch ideas straight to everyday Internet users, who provide financial backing. (At the same time, you will also gain early validation of project concepts and the projected scope of target markets.)â€
Million Dollar Projects
Something pretty significant has happened along the way, though. What was thought to be a method of raising a fairly modest amount of money has suddenly become a legitimate source of big bucks. Take these two recent examples of projects on Kickstarter, the leading crowdfunding platform:
- The Pebble smartwatch, a watch that features smartphone interconnectivity, managed to generate $10 million in startup funding,Â the largest amount ever for a Kickstarter project. Close to 69,000 people pledged anywhere from $1 to $10,000 or more.
- Multi-talented musician/performer/artist Amanda Palmer just finished raising over $1 million to fund a new record, art book and tour, after setting a project goal of $100,000. Over 24,000 fans pledged money.
While these two examples are the extreme, Kickstarter has helped just as many tiny projects as large ones. Since Kickstarterâ€™s launch in April 2009, over 2 million people have pledged $200 million to projects, 20,000 of which have been successfully funded. The projects run the gamut. For instance:
- Â $95,000 pledged to create a graphic novel
- Â $59,000 to create â€œatheist shoesâ€
- Â $60,000 to build a teaching kitchen at a Washington, DC elementary school
- Â $37,000 to publish a coffee table book featuring the people of Burning Man
- Â $67,000 to fund â€œOne for My Baby,â€ a Broadway musical.
Fad or Sustainable Funding?
The capital raised through crowdfunding is truly tantalizing for most any idea generator, enough so for Steinberg to call crowdfundingÂ â€œa virtual gold rush.â€ He predicts that â€œWe will see more platforms [in addition to Kickstarter] with the equity model. Some will give you reports on the company and try to help you make more informed decisions, and others will cater to microinvestments. This will only continue to accelerate. Weâ€™re at the tipping point here. But itâ€™s also the Wild West.â€
Of course, generating the kind of cash raised by a Pebble or Amanda Palmer could be a rarity. Pebble was created by a team with a track record: it had already achieved success designing the well-received inPulse watch for the BlackBerry. Amanda Palmer had a substantial base of fans and had recorded for a major label before using Kickstarter to do her own thing.
So the question becomes, is crowdfunding really a sustainable funding model that will work across a broad spectrum of businesses? Right now, Kickstarter positions itself as a funder of â€œcreative projects.â€ What will happen if someone with a more mundane idea tries to raise capital? It is likely that ideas spawned by unknown or little-known entrepreneurs will have a much more difficult time attracting the capital needed to fund a budding idea.
Still, given Kickstarterâ€™s success, and the inevitable spate of look-alikes now springing up, it would seem that crowdfunding is a business model that has legs. In fact, crowdfunding is effectively an extension of crowdsourcing, which has been around for some time and proven to be popular. Thereâ€™s a cautionary optimism that even the tiniest, most obscure startup could find gold in them there hills.
Â Itâ€™s Not Just About the Money
There is another important benefit of crowdfunding that goes beyond money raised, however: the ability to see whether an idea is viable in the marketplace. Most of the time, someone with an idea has to build a prototype, find a way to get it to market, and test the ideaâ€™s acceptance with a target audience. That takes time and costs money. Crowdfunding offers a faster, less involved route with a potential pot of gold at the end.
Kevin Lawton, author of The Crowdfunding Revolution, tells ReadWriteStart, â€œA crowdfunding platform can serve as a prediction market. A successful platform will aggregate an enormous amount of data. It can then analyze that big data to predict to a higher degree which startups will be successful.â€ Steinberg adds that a key selling point of crowdfunding platforms â€œwill be access to data and the ability to see what types of pitches do best and what are the best ways to mitigate risk.â€
So it seems that crowdfunding may actually have a leg up on venture and angel investors â€“ because it generate funds from the very same people who actually want to buy the product theyâ€™re investing in.