How Kickstarter Is Changing Fundraising for Startups--and for Us

How Kickstarter Is Changing Fundraising for Startups--and for Us

Eric Migicovsky had what he thought was a great idea: the Pebble, a watch that would display information from an iPhone.

Unfortunately, venture capitalists disagreed.

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So Migicovsky and his partners listed the project on crowdfunding site Kickstarter with the goal of raising $100,000 to build their creation.

In two hours, they reached their goal ... and eventually raised over $7 million for the project.

Because it eliminates the middleman (the investor or venture capital firm), crowdfunding has created a new, streamlined model for entrepreneurs to get their creations off the ground. We'll look at how Kickstarter gets new ideas by the dozen off the ground, plus explore what crowdfunding does for a contributor (like you).

How Kickstarter Works--and Helps Entrepreneurs

Kickstarter is the premier crowdfunding site, meaning it lets ordinary people pitch projects like new films, restaurants and technologies to the community. Said community then rallies (or doesn't) to raise enough money to reach the proffered goal. If they don't, everyone goes back to square one, and you haven't lost the money you promised. If there is enough money, however, it's given to the brains behind the invention/project/idea to bring it to life.

Although Kickstarter is specifically for projects--a completed version of the project or discount on the eventual product is usually offered to contributors as an incentive--those projects can go on to become very lucrative indeed. For example, just this week, people who donated at least $95 to Ouya Console (makers of a video game console) would get a free console in exchange, should the idea be fully funded. Indeed, it raised a record $4 million on Kickstarter.  To date, over $200 million has been raised on its site to finance more than 20,000 projects, The New York Times reported.

But only 44% of projects posted will make the money they need. A few surpass their goals like The Elevation Dock, which raised $1.46 million after asking for $75,000, or the Tiktok Watchband, which asked for $15,000 but raised over $942,000.

What happens in the case of surplus funds? Those who went on Kickstarter to fund a project, find, with the windfall, they may be able to launch an entire company.

Kickstarter entrepreneurs also enjoy benefits they wouldn't enjoy with funding from venture capitalists and seasoned investors: They retain full ownership of their enterprise (they pay Kickstarter 5% of what they earned, and another 3-5% to Amazon for use of its credit card service). They don't have to meet investors' funding criteria or have the financial background required by bank loans.

If they can manage to raise the funds they need from the crowd, they retain much more autonomy than they would going through more traditional channels. This is especially helpful for the more gadget-minded, as investors often shy away from funding hardware because of it is more complicated nature.

What Crowdfunding Means for the Funders

So what's so special about crowdfunding for those of us clicking the mouse? Not much. Contributing to a crowdfunded project isn't like investing: You are promised no return on your money. In fact, raising the money a project needs isn't a guarantee the venture will work out--it could easily go under, and that's the end of your money.

It's similar to the problem faced by investors who will take advantage of the JOBS Act, which we discussed here. The Act will lessen regulations around investors, essentially moving funding further from the venture capital model and closer to Kickstarter. That, in effect, will make it easier for everyday people to fund new projects and businesses.

But people who invest in Kickstarter projects do get something out of it, too: first dibs on the completed project or a discount code. That, and the idea of getting in on the ground floor of something wonderful, are the main reasons given for contributing. Helping finance a dream in such a dour financial climate is what The Times calls "aspirational voyeurism"--watching the big dreams of the little people come to life.

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