Entrepreneurs flock to crowdfunding websites

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By Charman-Anderson /  31 Aug 2011 , 19:47

Since it began, Kickstarter* has been home to musicians and film makers looking to fund their projects. It has now become a hotbed of innovation as designers, inventors and entrepreneurs tap into the vast “crowdfunding” community to realise their ideas.

The concept of crowdfunding is simple: If lots of people chip in, a project can raise the funds it needs to go ahead. It’s an idea that has seen considerable success in music and film, possibly because such artistes often have a close relationship with their fans. Independently-minded musicians such as Ani DiFranco, for example, have been building direct relationships with fans for years.

The LunaTik iPod Nano watch strap
The LunaTik iPod Nano watch strap

Crowdfunding sites make that process much easier than ever before. Project owners decide on a goal for how much money they want to raise, a deadline, and then provide a series of rewards at different price points for supporters to choose. It’s then a case of persuading people to back the project.

Artists are already talking about Kickstarter as being better than the traditional arts grants system because it’s less tedious than filling in all the grant forms and, at the end of the process, the artist retains full creative control. Plus Kickstarter’s all-or-nothing set-up means that it’s a low-risk strategy for newcomers. If a project doesn’t raise enough cash, well – no harm, no foul – it’s cancelled.

Just recently, though, I’ve noticed a class of project that’s beginning to give the musicians and film makers a run for their money: Inventors. From camping hammocks to iPad/keyboard stands, to bicycle lights, the inventors have arrived and they are doing rather well.

The benefits to product designers of this fundraising model are huge. For many creators, the biggest cost is time and overheads such as renting a studio. Creators focused on digital products such as MP3s can cut costs even further, allowing them to achieve a lot with very little money. But for physical objects, there is often a disproportionate up-front cost to creation. Machine tooling, minimum orders, and R&D can all eat through large sums of money before there is anything to actually sell.

Using a crowdfunding site allows inventors to test the market to see if there is enough demand for their idea before committing to these huge overheads. In doing so, they also test their marketing skills and come to understand the depth and breadth of their community.

Although funding a project before production begins reduces initial risk, there is always the risk that a runaway success will force businesses to scale rapidly and before they are ready. This is where poor financial planning can prove detrimental. Underestimating the cost of a reward is not such a big deal if there’s only ten to send out. Selling 1,000, on the other hand, can turn a small discrepancy into a disaster.

When it comes to runaway successes, though, the big daddy of them all is Scott Wilson’s TikTok and LunaTik, two wrist straps which take an iPod Nano and turn it into a watch. With 13,512 backers, Wilson raised $942,578. That’s a sum similar to amounts raised from seed or angel investors, but without having to sign over any equity. Not bad, given he only asked for $15,000.

Wilson’s not alone. Plenty of other projects are raising significant sums. The Kammok camping hammock has so far raised $192,092 from 1,755 backers, with just a few hours to go. The WingStand raised $58,869 from 1,485 backers. And Revolights, which has about 27 days left on its project, currently has raised $90,337 from 677 people.

These aren’t sums to sniff at. If I was a VC, I’d be watching Kickstarter like a hawk. It’s easy to assess design, marketing and planning skills, as well as get some idea of team cohesion – all important factors in making a business viable. As a proving ground, Kickstarter is second to none, in all of its categories.

The downside to Kickstarter is that it’s based on Amazon Payments, which means that although supporters can be anywhere around the world, projects can only be started by someone with a US bank account. Kickstarter say they are working on opening up to other countries but, if you can’t wait, there are many other sites doing the same thing that are more inclusive.

These other sites split roughly into two categories. The All Or Nothing model used by Kickstarter, French site Ulule, British site CrowdFunder, and Australian site Pozible. The other option is the Keep What You Can Raise model where even if you don’t reach your goal, you still get to keep as much as you have raised. This model is used by up-and-comer IndieGoGo, RocketHub and Italian site Kapipal. The problem with this approach, of course, is that it can be hard to complete a project if it is underfunded.

These other sites don’t quite have the huge community of funders that Kickstarter has built up over the last three years, which means projects tend to be smaller. But with the social web to help entrepreneurs to get their word out, and the problem of aggregating and processing lots of small payments solved, suddenly barrier to innovation is dramatically lowered. Got an idea? Got good communications skills? Got a post box nearby? Then you’re good to go.

Whether you’re looking for inventive tech and creative projects to fund, or want to start raising money yourself, crowdfunding opens the door to innovation. It’s not about financial capital anymore, but creative skills and social capital.

* Disclosure: I have used Kickstarter to fund my own creative projectand have supported a number of other Kickstarter projects.


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