Crowdfunding is a strategy for raising capital that has quickly gained popularity for startups and investors. Rather than trying to attract a few wealthy venture capitalists, startups attract many investors that contribute small amounts of money to fund the startup. The recent Jumpstart Our Business Startups Act, commonly referred to as the JOBS Act, was passed by President Obama on April 5, 2012; it loosened restrictions for startups to raise capital and created new provisions to protect investors investing in startups.
More capital than ever is gravitating toward crowdfunding sites. According to research compiled by Crowdsourcing.org in 2011, roughly $1.4 million were raised through crowdfunding platforms (CFDs) and that number is expected to almost double in 2012. As a result of the massive increase of money flooding in, the number of CFDs is also expected to spike about 60% in 2012 to approximately 530 platforms. Let's take a look at look some of the current top crowdfunding platforms.
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Founded in 2009, Kickstarter, as of June 2012, funded over 22,000 successful projects, with nearly 3 million backers and about $197 million pledged. Projects funded include albums, Apple accessories, clothing, films, video games and much more.
Kickstarter works on an all-or-nothing philosophy, meaning that the project must be fully funded before the allotted time expires or no money exchanges hands; this is to protect both parties involved. If the project does not receive enough funding, then there is no obligation for the investor to follow through. The investor is allowed to pledge money without the risk of the project not receiving the full amount needed to launch, and the investor subsequently losing his or her investment.
Kickstarter makes revenue through charging a 5% fee of the funds raised. The fee is only charged on successful projects, meaning that if your project is not successful you do not pay anything. Kickstarter's top funded project is currently the Pebble, a watch designed to connect with iPhones or Android phones to transmit data across Bluetooth so your watch can display messages, calls and emails. Pebble had a $100 thousand goal, but ended up raising over $10 million dollars from nearly 69,000 backers.
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Claiming to be "the world's largest global funding platform," Indiegogo was launched in 2008 and is definitely a veteran in the industry. The company has two different funding methods: Flexible funding charges 4% if you reach your funding goal and 9% if you don't reach your goal, but you get to keep the funding you raised. Fixed funding charges the same 4% to successful campaigns or no fees if you don't reach your goal, but all contributions get refunded to investors. This method allows more flexibility when starting a campaign.
Another popular aspect of Indiegogo is that it is one of the few crowdfunding sites that are global. Since launching, the site has had over 100,000 projects from over 196 countries. With a recent round of financing for $15 million, Indiegogo's growth may be just beginning.
AngelList is a social network designed to connect startups with investors that has taken a different approach to crowdfunding. Rather than creating a site for people to invest directly with the startups, AngelList has created a free network for startups to create a profile on the site. The startup's profile is visible to all, but only the investors of their choice are able to view the fundraising section.
AngelList has a large network of potential investors made up of some high-profile venture capitalists, including Reid Hoffman, co-founder of LinkedIn and investor in Facebook, Zynga, Digg and more, as well as power venture capital firm Andreessen Horowitz, which has provided capital for Airbnb, Groupon, Instagram and some other successful startups.
Since launching in 2010, AngelList has roughly 2,500 investors with 13,000 startups registered. Investments generally range from $50 thousand to $1 million and approximately 400 companies have received investments from about 750 individuals. Successful startups that have used the site include Pinterest and BranchOut.
The site currently does not charge anything to the startup or investors for using the service.
SEE: When Selling Your Startup Makes Sense
The Bottom Line
Being a successful entrepreneur is the dream for many. With startups like Instagram being acquired for a $1 billion after being in business for only two years, one can definitely understand why. Although many other successful crowdfunding platforms do exist, the latter are a few of the most popular. If you have a great idea or wonderful cause, crowdfunding may be a great method to obtain capital.