Crowdfunding 101: How Rising Startups Use the Web as a VC Firm

It all starts with an idea. An idea that could not only change the lives of consumers, but could make you a ton of money. But even if you manage to turn that brainstorm into a prototype—whether it’s a killer app or a game-changing gadget—you still need funding and guidance to take your company to the next level. Previously, the only legitimate route for a startup was to seek out a venture capital firm. But today’s Apples and Googles in the making have powerful new tools at their disposal.

A host of unconventional services such as Indie GoGo, Kickstarter, Peerbackers, and ProFounder promise to help ambitious startups quickly raise funding via the web, with little risk and plenty of creative freedom. Are these new methods for building a successful company really better than working the venture capital circuit?

Getting a Kickstart

Since launching in April 2009, Kickstarter has taken off with a bang. The founding idea was to provide a forum for creative entrepreneurs to develop and fund their projects. The concept is simple: Sign up, start a project, and if the idea is compelling enough, Kickstarter members worldwide will pledge funds. Startups can offer incentives for pledging money, ranging from free T-shirts to actual copies of a project’s product. The funding goal and time period to raise it is entirely determined by the project’s creator. And it works.

Studio Neat, a design company founded by Dan Provost and Tom Gerhardt, used Kickstarter to successfully fund two projects. The first, a miniature iPhone tripod called the Glif, raised $10,000 in just 30 days. In fact, the Glif project scored a windfall of nearly $140,000 in total, far exceeding its original funding request. This enabled Studio Neat to ship the Glif to eager customers within a month and a half after the funding period ended.

Astonishingly, the entire Glif product cycle—from raw idea to first product shipment—took a brief five months. The Glif is now on sale for a flat $20 via Studio Neat’s web storefront, and Gerhardt acknowledges that Kickstarter helped speed things along. “That was really compressed and fast, partially because we pushed pretty hard since it was the holiday season,” said Gerhardt. “The Glif’s design was pretty simple, and there weren’t many manufacturing challenges.”

Studio Neat’s second project, also fully funded through Kickstarter donations, is a pen stylus for the iPad called the Cosmonaut, expected to become available this summer. This project also raised close to $140,000, ex-ceeding the original $50,000 goal. When asked why he chose Kickstarter originally, Gerhardt explained, “If Kick-starter wasn’t around I don’t think the Glif, or projects like it, would have even gotten off the ground. It’s probably naive, but we had more fears and perceived more risk going the traditional [VC] route.”

Dan and Tom are modest about their success, despite having enjoyed the luxury of quitting their day jobs. “We didn’t go into it with the goal of starting a business,” said Provost. “We went into it with the goal of making a cool product.”

Other Crowdfunders

Kickstarter’s biggest rivals in the new crowd-sourced funding space are IndieGoGo, Peerbackers, and ProFounder. Like Kickstarter, IndieGoGo allows users to create campaigns (similar to Kickstarter’s projects) and provides the tools for fund collection. As with Kickstarter, campaign founders choose the fundraising time limit and amount they hope to receive. Founders also retain ownership of all of their intellectual property rights.

IndieGoGo’s funding structure is a bit more complicated than Kickstarter’s, but it offers additional flexibility. The service charges 4 percent of funds raised if a campaign meets its funding goals within the allotted time, slightly less than Kickstarter’s 5-percent fee. If a campaign fails, however, the service will take a 9-percent cut of unmet funding goals. However, IndieGoGo provides more ways for contributors to invest, with options including PayPal, credit card accounts, and old-school checks. What also sets IndieGoGo apart is that campaign owners get to keep the funds they raise even if their stated goals aren’t met. This differs from Kickstarter, where funds are only transferred at the end of the fundraising period and only if the specified financial goal is achieved.

Judging from the campaigns listed, however, IndieGoGo doesn’t appear to be quite as popular as Kickstarter—especially with startups promoting technology projects. Still, there are success stories here. One is the Satarii Star, an ingenious robotic cradle for smartphone cameras that keeps subjects constantly in frame. IndieGoGo users have recognized the Star’s potential, contributing nearly $25,000 to the campaign. Another notable example is the social-networking/educational game Tribal Pride, which achieved its $1,000 goal. Interestingly, the project’s owner Louis Blondet pitched the idea to Kickstarter too, and has successfully raised more than $3,000 there, exceeding the original goal of $1,000.

Peerbackers, the newest service on the block, works much the same way as Kickstarter and IndieGoGo, except that potential companies are vetted for their level of commitment and professionalism before the fun-draising begins, and the service incorporates video and photos into a company’s pitch for cash. ProFounder, another competitor in the crowdfunding arena, will also help get fledgling companies off the ground, but this service sets itself apart by walking a startup through the entire business plan process.

Bottom Line

Crowd-sourced funding is becoming a big business, with a steady parade of services joining the fray. And that’s great news for entrepreneurs. Startups with the dream to create the next big technology product have never had more ways to find funding. With these companies serving up the practically limitless power of the Internet, the good will of individuals, and the viral quality of social networking, the state of entrepreneurship is brighter than ever.

LAPTOP Senior Writer