Crowd Funding, Crowd Sourcing, Crowd Financing or Crowd Capital by any other name looks to be the new best way to raise money for your tech start-up.
If you aren’t familiar with this angel investing for everyone, it’s how entrepreneurs can reach out through the internet to solicit money in small amounts from a large group. It’s not just limited to the tech world and start-up companies (although that’s what we’ll focus on here) but also for non-for-profits, charities, political campaigns, arts projects, movies and a whole host of often strange home made handcraft items.
The process is pretty straight forward and uncomplicated. The number one site for all US technology ideas that have been funded is at Kickstarter (yes, if you reside in the US you must be a US citizen over 18 with a drivers license and bank account – after all, the money has to go someplace!). Kickstarter also has a UK version, with slightly different rules and regulations.
There are a couple of great books on this topic, and we would like to recommend:
Step by Step Crowdfunding: Everything You Need to Raise Money from the Crowd for Small Business Crowdfunding and Fundraising Kindle Edition by Joseph Hogue – It’s a free Kindle Unlimited download, or about $5 for paperback.
Crowdfunding Basics In 30 Minutes: How to use Kickstarter, Indiegogo, and other crowdfunding platforms to support your entrepreneurial and creative dreams Paperback by Michael J. Epstein, about $10 for paperback
A Crowdfunder’s Strategy Guide: Build a Better Business by Building Community by Jamey Stegmaier, about $15
Here’s the basic process for getting started:
On the Kickstarter site, you create an account, write up your profile / description and select a funding target. To get your funding, you’ll offer “pledge incentives” for different contributions levels from $1 on up. You can also limit the number of “backers” for each incentive. The funding target is nearly as critical to your success as the idea itself since it’s an “all-or-nothing” type engagement. Their rationale for this is actually quite sound:
On Kickstarter, a project must reach its funding goal before time runs out or no money changes hands. Why? It protects everyone involved. This way, no one is expected to develop a project with an insufficient budget, which sucks. Remember you set your own funding goal, so aim to raise the minimum amount you’ll need to create your vision. Projects can always raise more than their goal, and often do.
Funding on Kickstarter is all-or-nothing in more ways than one. While 11% of projects finished having never received a single pledge, 81% of projects that raised more than 20% of their goal were successfully funded.
That’s it – now you promote your idea and see how it is received. In the last 3 years, over $450 million has been pledged by more than 3 million people, funding more than 35,000 creative projects out of 85,000 total projects launched. This translates to about a 40% success rate for concepts which met their funding goals. It’s important to keep in mind that some goals are a very modest hundreds of dollars to the stratospheric $100K’s and $1M’s.
Related – Kickstarting Electronic Products: How Crowdfunding Works
The crowd funding model obtained a lot of attention when “Pebble” came on line. This concept / company is the most successful Kickstarter project of all time, raising more than $10 million from nearly 70,000 backers. The concept is a watch using e-ink that works in conjunction with your smartphone. The idea is to make it easy to see who is calling, control your music and receive notifications. Even better, app developers can build Pebble support into their apps, extending the watch’s capabilities even more. After initial production delays, the first watches have started shipping to the first people to fund the company.
Which brings us to an important distinction in crowd funding from typical investing – as someone that funds the concept, you are not an investor, shareholder or otherwise participant in the company equity. As the project owner, you keep 100% of the ownership of your idea along with the cash.
For the would-be entrepreneur the cost to use Kickstarter is reasonable. If a project is successfully funded, Kickstarter applies a 5% fee to the funds collected. If it doesn’t meet the goal, the money is returned to the contributors at no cost to the any of the parties. There is an additional 3% ~ 5% fee to the money processing agent, which is Amazon Payments in the US. So, the total cost to fund your project is under 10%.
Similar to being “Liked” on Facebook, reaching a funding goal is a validation that the community likes the idea. The social networking marketing that is part of a Kickstarter program is also a low cost and low risk way to test the market. It’s often at least as important to a successful product launch as is raising the capital.
There are a number of crowd funding sites and reviews for ideas. In addition to Kickstarter, another is Mashable which profiles the recent and most notable ideas.
With the ability to draw funding from a wider pool of investors with much fewer restrictions, it’s expected more ideas will make it to market. Do you have a product or concept or company that will pass the crowd funding test? Perhaps you’ll be the next tech millionaire or the first billionaire (see related article Billionaires In Tech ) to come out of crowd funding.
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