My plunge into crowdfunding

Crowdfunding – the notion of funding “something” by collecting funds from the crowd, is not new. Philanthropy has many such examples and 3 years ago, Barack Obama’s campaign for presidency was an astonishing example of how it could become extremely effective. By some accounts, there are over 150 web sites that support various forms of crowdfunding.

My plunge into crowdfunding occurred a few months ago.

Let me tell you the story:

The Story

At 9:52am on November 25, 2010, I was sitting in my office and got a glimpse of a status update from one of my friends on Facebook. He had shared an article titled “iPod Nano Watchband Breaks Kickstarter Funding Records”. This caught my attention as it sounded like a cool idea and I didn’t hear of Kickstarter yet. As it turns out, this project managed to secure nearly $300,000 of funding within one week – but only from the crowd. No traditional sources investments such as angels or VCs were involved. I followed the link.

At 9:53am I learned what Kickstarter was and what the TikTok project was, in particular. I never thought of taking an iPod Nano and using it as wristwatch. Which itself was a cool idea. I learned of the concept of Kickstarter in which anybody can become a “backer” of a project by pledging various levels of funding to a project. At Kickstarter, there’s a minimum funding required that’s specified and all funds pledged are held in escrow until the minimum funding is reached. Once it is, the project is deemed funded and continues to attract backers for 21 days from its inception.

This crowdfunding was different than normal investment opportunities – instead of the backers becoming shareholders in the company, they are attracted to back projects by being offered something in return that they would value. In this case, it was pre-purchasing the watchband that would later be sold at retail at a higher price. So it was basically a discount and early access for early adopters.

I was growing even more curious. I tried to see if there were alternatives out there. By 9:54 I discovered two other Kickstarter projects trying to do essentially the same thing. However, their promotional material and videos were much less professional done. Scott Wilson was a professional and he created not only a professional product, but also professional material to promote his project fundraising.

By 9:55 I was convinced I would back it. I looked at the levels of project backing. There were levels between $1 and $500. By now, the $500 tier was already sold out to 100 people – this tier’s reward included a limited edition red watchband hand-laser-inscribed by Scott, 10 watchbands to gift, and even one iPad Nano. So I settled for the $50 level, entitling me to what would later be sold at retail for $65. Not such a great savings – but at this point I wanted to contribute to this effort. I felt thoroughly engaged and excited.

I registered for the site and pulled out my credit card and used Amazon check out to pay the escrow funds (it was clear the project would be funded as it had by then raised over $300,000 – well over the $15,000 minimum it needed for funding).

At 9:58 after fumbling with payment means, I was proud backer of the Tik Tok project on Kickstarter! That was 6 minutes from becoming aware to chucking $50 for something I never needed before…

I had to leave my office for a team meeting, but a moment before doing so, I shared the excitement with all my friends on Facebook, connections on LinkedIn, and followers on Twitter, and left for the team meeting.

At the 10:00 am team meeting, I showed to my team the video that had convinced me to back this project and introduced them all to this fun and amazing concept of crowdfunding. It was a great topic for discussing the innovation in fundraising it enabled.

Back to my room at 11:00 am I had a meeting with some colleagues. One of which was a known gadget-lover, so I told him of my discovery. He was so disappointed that all the limited edition red watchbands were sold out. Within an hour, he too was a backer.

So, within 2 hours of receiving a Facebook status update, me and a colleague “invested” in something we never thought we needed…

What happened next

Following my funding I became subscribed to all the updates from Scott Wilson about the production, shipping, and many other exciting (and less so) interactions. There was a clear community created and lots of interaction direction with Scott and many of the backers (now thousands). Eventually this project secured $941,718 that came from 13,512 backers. That’s from a project that would have settled for $15,000 to get off the ground. Obviously, one of the great things about crowdfunding is that if you are trying to create a new product, you’re pretty much guaranteed there’s a buying public for your product if you got it crowdfunded.

I’ve seen some amazing Kickstarter projects since – some truly inspiring. One that I particularly liked was the Loog Guitar but I also liked the vinyl record 3D puzzles and the GoPano 360 degree camera for the iPhone 4.

This raised for me a few questions:

  • Who else is doing this and how do they differ from each other?
  • Is crowdfunding more broadly applicable or is it just good for these sort of consumer-oriented projects?
  • What will this mean to traditional VC/angel investors and entrepreneurs?

So, let’s take them one by one:

Who else does this and what are the differences?

Well, it turns out Kickstarter is not alone. Believersfund, Crowdcube, Sokap, Indiegogo, Wikipedia and many others are doing crowdfunding. So what’s the difference between all of these? Let’s check’em out:

  • IndieGoGo has been around since 2008 and is primarily focused on art and entertainment. It now has over 23,000 projects and has been able to raise thousands and tens of thousands of dollars per project. These are mostly film, theater, food and other ventures. The concept is similar to Kickstarter where the backers (now called “contributors”) get something in return for their contribution based on the level of contribution. In fact, the website is so similar to Kickstarter that it’s very likely they have some common roots or are borrowing ideas from each other. The idea is also that the contributions here might be tax deductible for the contributors. One thing that’s different is that there’s no minimum – so all money raised goes to the project.
  • SellABand.com allows bands to receive money from fans that would go towards funding their album. In return the investors get the CD that would be produced as well as share in some of the profits generated by the band and various customized experiences proposed by each band. Transactions are complete if and when target is reached.
  • Kiva.org has famously been connecting over 573,000 borrowers with lenders at $25 per transaction since 2005. Over $206M have already been transacted with over 98.6% of the loans being repaid and at a pace now reading nearly $1M per week.
  • Crowdcube works like traditional investments except that’s it’s designed for micro-investing. It’s equity-based – that is each investor has a “piece of the action”. So far it’s limited to British businesses, but it looks very cool. That said, results aren’t clearly visible. I haven’t been able to see a single funded project featured and the most I’ve seen is 21% of a project having been pledged.  I think it might work much better if the pitches were public rather than requiring registration.
  • GrowVC.com’s vision is to create a virtual and global Silicon Valley where physical location is meaningless. Therefore, it works to connect entrepreneurs, experts, and investors in a dynamic marketplace for ideas and incubation with projects funding at the early-stage startup level. It has over $16M in capital and 73 startups are active out of a total of 1,758 registered. There are transparent term sheets. I couldn’t figure out how successful it is as not much is public without registration.
  • Believersfund seems focused primarily on App developers. It’s so tough to get noticed in the various application stores. It doesn’t seem though that they’re taking off. The narrow focus seems to be a double-edged sword. So far, it only managed to fund 13 projects with a total of $25,000. A far cry from Kickstarter’s wild success.

These are merely some examples. There are many other noteworthy sites. The Chicago Tribune recently had some good coverage of the landscape and here’s a whole book chapter up for peer review as well as another article about the topic.

Is crowdfunding more broadly applicable?

What I’ve learned is that thus far crowdfunding has been applied primarily to donations, to philanthropic causes, and to consumer-oriented products/offerings. It mostly involves getting “something” in return for the backer/contributor/investor. Often, it’s something tangible, but there are cases where the contributor gets the satisfaction of contributing to a cause he deems worthy. Crowdcube and GrowVC are the exception of equity-based investment. However, I haven’t seen strong evidence this model works. Also, it might be limited due to different legal and regulatory frameworks that would prevent ownership of interests being offered like this. In the US, for instance, I believe such an effort would be a form of an Initial Public Offering (IPO) and would be subject to significant regulatory obligations (and implications on the venture itself).

What are the broader implications of crowdfunding?

The level of investment that Tik Tok has managed to secure of nearly $1M rivals venture-backed initiatives. While Tik Tok might have been an exception – it’s not alone. This gives yet another opportunity for entrepreneurs to consider for getting their ideas funded. If you are an entrprenuer and you have an idea that you can sell “pieces of” in terms of end product to consumer, you should consider crowdfunding as an approach to raise you capital. My advice would be to very carefully plan your campaign, however. Because while Tik Tok got thousands of backers, other similar projects failed to secure nearly any funds, let alone reach their minimum required funding.

The end of the story

In January I received my LunaTik watchband after tracking the whole process creation by getting frequent updates from Scott. Ironically, I have yet to get an iPad Nano to use it as a watch… I promise I’ll have it on my wrist by the summer!

 

Update on May 22, 2011: I received a gift of an iPod Nano from a generous friend and now have the “watch”. It is cool! But it cannot be my only watch because it is not waterproof, requires recharging, and I’m afraid to damage it.

Update on June 7, 2011: If this topic is interesting for you, you got to check my responses and additions as comments, below, with more information/links I’ve discovered.

19 thoughts on “My plunge into crowdfunding”

  1. The idea seems great, and I love the implications. I saw it a different way and perhaps I am wrong in my thoughts. I set up looking for funding to get the tools that I needed for a game that I am developing and although I get a lot of visitors to the site, it seems that without being able to offer ownership no one is looking to support projects like that because the tangible isnt a product they get in a box. I’d love to know what your thoughts are on this type of funding for startup artists (even game designers like me that arent that artistic)

  2. The crowdfunding thing is awesome. How didn’t I think about this?…

    I wonder if this can be used for things that are not cool-gadgets or good-will things (what can attract a regular Facebook-oriented person that is willing to put even just 3.99$ on something – since this is like buying an app in an app-store BEFORE it was developed…)

  3. Good to know about crowd funding this is like a ray of hope to many entrepreneurs who find it difficult to get VC funding . The kind of intiatives taken by Kiva like organization is much impressive.

  4. In my opinion, the common trait between philantropic causes, art and cool gadgets is that people have a passion for them and find them inspiring. That’s why they value having things like the limited edition red wrist-band; special mention or recognition from the people behind the venture; or being part of an exclusive gala evening when a new gallery / line of products / music album is launched.

    What they’re “buying” when they invest in the new initiative isn’t the end product – which may or may not be “worth” investing in from a purely financial and rational point of view – but the emotional reward they expect to receive if and when the initiative is successful. If you can find / create an emotional reward you can provide to your backers and which would be commensurate with their level of investment – I think you’ll be able to crowd-source your project.

  5. This was nice introduction to ‘Crowdfunding’, something definitely very different and unique form of raising funds for Non Profitable projects or even for some small projects which can attract mass crowd with its offereing but can fail to get attention from tranditional investors. With the boom of social networking and the way people are getting virtually connected , i believe this crowdfunding will play significant role in supporting lot more social-political activities and will definitely also play role to raise people’s voice with strong financial support.
    Do you have any thoughts though, if this kind of concept would ever be useful for companies like Amdocs? Is there a way some innovators within Amdocs can propose some projects to employees and call for crowdfunding and upon success, the investors will get some share or other forms of benefits..not sure..just would like to hear your thought..Nice Blog .Keep Writing..

  6. Dror, I agree with you completely… My own experience has been less then inspiring becauseof the lack of attention my project got. I think the value of this is when you already have a core group of ardent fans. Coming in as an unknown means a lot of crickets..

  7. Great article, but perhaps a bit too long 🙂 I try to keep them shorter on my blog, seeing how people have short attention span these days.

    Specifically about Kickstarter – I backed PadPivot project myself about a month ago. Was Really impressed with the design and the designers, and it ended up being funded Many times over (but not as high as yours). Right now, still waiting to receive mine, but constantly getting updates from the founders, including details about manufacturing process in China with Videos even! Interesting stuff, can’t wait to get mine!! Now I just need iPad 2 to go with it 🙂

  8. That’s sounds great, thanks to share this. I thought of it long ago but I don’t know how to monetize my skil in Morphopsychology as it is valuable and can interests many and especially those who want to find “who they are”, “what kind of job they are made for”, but also everybodys concerned whith personal relation, personal dev. and so on.

    I can offer a digest of one’s personnality whith a bargain as to build a community af M’psy lovers and offer this service even to those who cannot afford it themselves…

    What you think?

  9. Tal,

    As usual, I love the transparency that you bring to the discovery process. I think that this has tremendous potential, particularly with smaller consumer facing projects.

    It reminded me of what used to be called “the netscape phenomonon”, which was that consumers tried new things, decided it had changed their life, so invested in it. It is just taking it earlier into the process. I am going to dabble in this space and do my best to share my experiences with it.

    Thanks again.

  10. Thanks for the terrific feedback and the response! Here are responses to some of the comments:

    Timothy, it’s great to hear from people actually trying to use crowdfunding to get their projects off the ground. I took a quick look at your blog and at your project. If I were you, I’d invest more time at defining what the project will be when it’s done – so that the possible contributors will want to be a part of your project and cherish in your success and get “something” in return. Satisfaction in this case might not be enough. In fact, I’d think about more tangible rewards to the contributors rather than various versions of “thanks and appreciation”. If I’m not mistaken, I didn’t see that even at the $250 tier you were offering the end product of what you will develop. I don’t think you need to offer equity ownership – just the end result in a variety of forms. Once the message is crystal clear (verify this with a few critics), plan and execute a social media blitz with as many folks you can – you need thousands of people to not only get to your page, but actually quickly understand how they WANT to become part of your project. Consider. Still thanks so much for your feedback. Keep us posted how this evolves.

    Derek, thanks for the reference to ProFounder. Terrific indeed. It offers several equity opportunities such as rev-share, equity, or even dept. It’s primarily for up to 35 investors “in the community” to invest a minimum of $100. Very cool indeed. But it does sound like early days. as of April 4, 2011 they had funded 11 projects from 262 investors with total funds of $343,000. Still very interesting to look at how this will shape up. One of the nice things about crowdfunding is leveraging a high number of small investors – this doesn’t apply here due to the limitations of the number of investors in many states in the US.

    Ronen, I think it can. Creative people will be able to put this to work for a variety of things. I think we’ll see a whole bunch of models in the years to come.

    Dror, I agree. However, if you can sell something more physical/tangible, people feel good in two domains – they feel like they got a bargain AND feel good about contributing to something they are a part of. These reinforce each other and help accelerate the crowdfunding. It’s clear there are more projects that don’t get funded and more sites that aren’t successful than there are successful/funded ones – so this is a critical factor in a competitive marketplace for any sort of investment/buying.

    Kshitij, great question. I hadn’t thought of it. There are internal “idea markets”. In Amdocs there are innovation spotlight events where anybody can contribute ideas into the innovation system and these get bubbled up (also thanks to their peer reviewers, comments, and votes). The reward for the idea contributor is possibly working on developing your idea and getting recognized as a result. I can see how someone could leverage these to offer the people that vote and comment and contribute to the implementation / funding of their ideas some benefits and recognition. If someone with an idea in Amdocs (or other corporations that might have similar processes) hears me – they might figure out how to use this to fund their ideas!!! Can more be done to cultivate these ideas markets, perhaps. But within a corporation, equity-based and rev-share forms of motivations are not easy – particularly for the small investors 🙂

    Adi, true, my posts are too long. I know… I haven’t been effective at cutting down. Usually I start short with one concept/idea and then do more research and feel compelled to add the angles I discover… PadPivot is cute and professionally marketed as a Kickstarter project. The rewards are “okay”. I’d probably pledge $25 if I had seen it in time 🙂

    Gilbert, frankly, I never even heard what morphopsychology was before you mentioned it. If you do figure out how to crowdfund what seems to be a very one-on-one personal service, I’d be intriguted.

    Don, let us know what you’re trying to crowdfund – would be interested to track and learn.

    Btw, I just saw a nice blog post about crowdfunding exclusively for book publishing – so if that’s your domain, check out this TELL Fleur blog post.

    All, thanks for the encouragement!

  11. What serendipity. In my usual multi-tasking manner, I read your blog as I was reinvesting my donations to Kiva.org. Isn’t crowdtasking fun?

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