Wednesday, July 11, 2012

What is Crowdfunding?

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.

(This wiki about crowdfunding was helpful.  It lists 10 sites ranked by their web traffic, and explanations of many others.  The pic is from:

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  1. A company called Fundable emailed me that it is different from the other crowdfunders because Fundable helps businesses get started rather than temporary projects.

    They wrote: "Fundable receives many applications from entrepreneurs across the U.S.; however, not all are ready for crowdfunding. Startups go through an intensive interviewing process in order to identify those most ready to launch their business.

    Selected startups then receive step by step training, advice, and guidance for each stage of their crowdfund (and beyond). Whether it be social media, networking, or business plan writing, Fundable’s goal is to aid new businesses in not only obtaining seed capital, but developing skills that will keep the business going long after the initial funding has been received."

    So whether you seek funding for a one-time project or a long-term business, there are companies out there to help you with crowdfunding.

    Thanks to Fundable for letting me know about this.

  2. Interesting. I don't think you included that they don't get the money if they don't reach their initial goal to begin with (so it is even less painful to attempt to donate, b/c most of the time they don't reach the goal anyhow).

  3. On Kickstarter, I think 44% of the projects reach their funding goal. As you pointed out, if they don't, then they don't get the money. But with other crowdfunders, the model may be different.

    Thanks for commenting.