The other day a buddy of mine mentioned Kickstarter, an online crowdfunding business. But what exactly is crowdfunding, and how does it work?
Let's say you're ten-years-old and you want to open a lemonade stand. The problem is you need money to buy lemons, a pitcher, plastic cups, a table, and materials to make a sign.
In the traditional model, your parents supply all this stuff, so they are responsible for your startup costs. After you sell enough lemonade, maybe you can pay them back. Or a thunderstorm comes, you pack up and go inside, and your sales are less than your parents' costs.
In crowdfunding, you ask people to front you the money for your supplies. They pledge money in different amounts, and after you get your stand set up, you owe them a cup of lemonade, or two cups, or however much they paid for.
People use crowdfunding for everything from art and movies, to cell phone applications, video games, political campaigns and medical costs. The one thing in common is that these are all projects, not long-term businesses.
Kickstarter is probably the most well-known site, but there are many others. The way they make money is by charging fees (such as fees for processing credit card transactions), and by taking a percentage of the money you raise. Indiegogo says on their site that they have the lowest prices, and their cut is 4%. (I haven't checked every site, so I don't know who has the lowest fees.)
Next time someone asks you if you're interested in crowdfunding their private space trip to Mars, you may want to ask what service they're using and what fees they're paying. And if you get a seat on the ship.
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