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If you really think about it, it was only a matter of time before the awesome power of a digitally connected world would give way to a phenomenon that allowed budding entrepreneurs and inventors to attract millions of dollars from thousands of small investors. Crowdfunding sites, such as Kickstarter and Indiegogo, have helped launched exciting new technologies such as the Oculus Rift virtual reality head mount display (which has since been acquired by Facebook), and they have raised tens of thousands of dollars for such outrageous innovations as a watermelon holder and new potato salad recipes.
With the early success of thousands of would-be Thomas Edison’s, crowdfunding is definitely here to stay! For entrepreneurs, or just about anyone with an idea, it’s a quick, easy way to raise funds. For anyone with a few dollars to invest, it’s a great opportunity for getting in on the ground floor of the next big thing.
How Crowdfunding Works:
Crowdfunding has actually been around for a while in a more pedestrian form, in which entrepreneurs or product innovators would network among prospective investors to attract funds for their venture. However, crowdfunding as we know it today, with the potential to raise tens or hundreds of thousands of dollars from completely anonymous people, came about through the power of the Internet to connect thousands of like-minded individuals. Essentially, crowdfunding websites bring together entrepreneurs with people looking to invest in their ideas.
Anyone with an idea can package their plan to be presented on a crowdfunding website. In addition to a written plan, many people create videos or slide shows to present their ideas in the best possible light. Potential investors comb through the site by category looking for ideas they might find interesting. Some sites allow for investments as small as five dollars, and you would be amazed at the types of projects they will support. Incredibly, one individual who broke a front tooth and was without dental insurance, raised enough money from 183 individuals to pay for a cap.
How Much Money Can I Raise?
The sky is the limit as far as the amount of money that can be raised. The developer of a new video game, called Star Citizen, raised more than $70 million through a crowdfunding campaign. Producers of the movie, Veronica Mars, crowdfunded the production with $5.7 million raised through movie buffs. It’s not uncommon for crowdfunding campaigns to set a fundraising goal only to blow right through it. The inventors of the Pebble Watch, a less-sophisticated precursor to the Apple Watch, set a goal to raise $100,000, but ended up collecting more than $10 million from excited technology geeks.
What’s in it for the Investor?
Remarkably, many crowdfunding investors don’t expect a return on their investment. Some take their satisfaction in knowing they helped to launch a big idea. Others are satisfied if they are able to participate in the early launch of a big idea. For instance, a video game maker might offer the opportunity to be among the first recipients of a new game. Many crowdfunders are happy to receive any sort of non-cash reward that recognizes their contribution.
Larger and more sophisticated crowdfunding projects might offer an equity position in the new venture. Although the percentage of projects that fail to launch is pretty high, investors who understand the risks and are able to diversify their investments among several projects, could participate in the next billion dollar acquisition somewhere down the road.
Is Crowdfunding for Me?
In 2012 Congress passed the JOBS Act legitimatizing crowdfunding. Since then, it has become a multi-billion dollar source of funding for entrepreneurs, business owners, movie producers, inventors, and yes, even people who need dental work. So, why not for you?
As crowdfunding has exploded in popularity, it has become somewhat specialized. For instance, musicians and artists can go to Patreon.com to connect with people who support the arts. There’s even a crowdfunding site for T-shirt entrepreneurs called Teespring. The bigger, more established sites include Kickstarter and Indiegogo. It is important to do your due diligence with any of these sites, especially in determining the costs you will incur. Most sites charge a certain percentage from the funds raised. That can be a starting benchmark to use for comparison.
As many entrepreneurs and business owners see it, crowdfunding can be an alternate or supplementary source of funding for just about any aspect of their business. Although it can never fully replace a solid relationship with a bank, which is critical for many business needs, it can be the additional source of funds that can keep unwanted venture capitalists, investment partners, and even family members away, thus enabling you to maintain greater control of your business.