It’s not hard to define or even explain crowdfunding, but it’s a lot more difficult to pinpoint when it began.
Merriam-Webster’s Collegiate Dictionary was a little tardy in adding the term to its pages in 2014, defining crowdfunding as “the practice of soliciting financial contributions from a large number of people, especially from the online community.” The entry came two years after President Obama signed the JOBS Act, which allowed companies to get funding through online portals from non-accredited investors (about 97 percent of the U.S. population).
One of the most famous examples of early crowdfunding came in the mid-1880s, when New York World owner Joseph Pulitzer led a campaign to raise $100,000 to pay for the pedestal on the Statue of Liberty. Kickstarter, one of the major crowdfunding websites, has noted other crowdfunding campaigns dating to the early 1700s. As for online crowdfunding, many sources say that the first recorded successful instance came when British rock band Marillion funded its reunion tour through online donations from fans in 1997.
Industry statistics say that crowdfunding raised more than $34 billion in 2015, the last full year for which statistics are available. The three most common types are equity crowdfunding, a heavy risk/reward option in which investors get a stake in the company in exchange for investing in the idea; donation-based crowdfunding, in which most investors get nothing in return for donating (often tied to charities); and reward-based or lending crowdfunding, in which investors get different levels of rewards—often in the form of retail discounts or receiving the product before its general release—based on the amount of their donation.
Savvy innovators realize that although crowdfunding is a multi-billion-dollar industry, it isn’t just about raising money. It shows public proof of your invention or concept; provides free publicity and press; can create a community of evangelists; can generate important feedback; could help locate potential partners, and more.
The best crowdfunding success stories aren’t necessarily those that involve raising the most money. Successes are often improbable, ambitiously creative, impactful and inspirational.
An Innovative New Kitchen Utensil By Any Measure
Polygons is a classic risk/reward case study, and not just from the standpoint of the inventor. When Ragul Agarwal approached Enventys Partners—a Charlotte, North Carolina-based digital marketing company that markets Kickstarter and Indiegogo campaigns—about his idea to reinvent the spoon, management had to get creative about making his dream become reality.
The industrial designer from India “came to us with really no capital whatsoever and was barely able to pay an upfront fee to us,” said Roy Morejon, Enventys Partners president and founder. “Over the year and a half or two years of working with him and helping him with this process, finally getting him to come onboard as a client, we took a big risk on him and just took a commission-only structure with his contract and worked with him on all of the branding, video, concept, design, outreach and building up his database of customers.”
Morejon said Agarwal may now be the only person from India to raise $1 million on Kickstarter after the 2016 Polygons campaign raised a little more than $1,022,000—not bad for a product that had a goal of $10,000. Funding reached $100,000 in the first 24 hours, and Polygons is one of the 30 highest-funded campaigns ever on Kickstarter.
Crowdfunding Social Justice
When a video went viral that showed middle-school students bullying and verbally abusing bus monitor Karen Huff Klein to tears, Max Sidorov felt he had to do something. His donations-inspired “Lets (sic) Give Karen … A Vacation!” crowdfunding campaign in 2012 garnered national attention.
Eventually, three videos were shot that showed the abuse of Klein, a widowed, 68-year-old, partially deaf employee of the Greece Central School District in upstate New York for 23 years. The Indiegogo campaign by Sidorov—a Ukrainian immigrant in Toronto who said he was bullied as a child—sought to raise $5,000 so that the bus monitor could get away for a while. But it topped a half-million dollars in its first few days on its way to amassing just over $700,000.
Klein’s funded vacation became permanent; the amount of money allowed her to retire later that year. She said she planned to use $100,000 of the money to establish the Karen Klein Anti-Bullying Foundation.
Klein said she didn’t want to press charges but that the offending students should be punished in some way. They were suspended from school for one year and ordered to perform 50 hours of community service.
Bee The Change You Seek
Flow Hive enabled a young Australian family to escape debt, but more important was the impact on the world environment and current and future beekeepers. Australian father-and-son team Stuart and Cedar Anderson developed a reinvented beehive system that avoids “smoking” the bees and disorienting them. Flow Hive uses simple construction and gravity to harvest honey from pre-constructed beehives without disturbing bees in the hive. Simply twist a knob and the honey falls out, as from a tap.
To the family’s astonishment, the product’s campaign launched in 2015 raised more than $12 million—a close second on Indiegogo’s list of highest-funded projects. Flow Hive was the fastest to reach $1 million in funding in the first 24 hours; was the fastest ever to reach $2 million; and is the highest-funded campaign launched outside of the United States. Up to then, Cedar Anderson told Indiegogo, the family was “running on a shoestring and just scratching along” to pay the bills. Then, in the middle of the campaign—as the family-dominated company was scrambling to meet the overwhelming demand for Flow Hive and get it shipped to the public—his wife had a baby.
The tumult has been well worth it, and not just for the family: Flow Hive has bigger-picture importance in the context of threatened bee populations. The world’s approximately 25,000 species are responsible for pollinating about one-third of the food we eat. In addition, the family hopes that Flow Hive will attract people to the noble art of beekeeping like, well, bees to honey.
“Crowdfunding is amazing because it’s allowed us to really maintain the ethics, views and values that are so important to us,” Cedar Anderson said.
A Museum By The People
Rest assured it’s a compliment: On the website The Oatmeal, created by Matthew Inman, he says inventor and innovator Nikola Tesla “was the greatest geek who ever lived.” Inman’s contention that Tesla is vastly overlooked as a historical figure fueled a 2012 crowdfunding campaign that sought to raise a highly ambitious $850,000 to save the site of Tesla’s incomplete lab, the Wardenclyffe Tower, and create the Nikola Tesla Wardenclyffe Science Center (now named the Tesla Science Center at Wardenclyffe).
Apparently, at least tens of thousands of others feel strongly about Tesla’s impact. The funding goal for Let’s Build a … Tesla Museum on Indiegogo was reached in nine days; the grand total was $1,370,461 on the strength of 33,253 backers. The nonprofit Tesla center purchased the land at the site in May 2013.
Those who donated $1,000 or more via the crowdfunding campaign were to receive a signed poster from Tesla’s last living relative, William Terbo. There were also rewards, though less tangible, for those who donated a nominal amount.
“Tesla loves the number 3,” it says under the Perks section. “And if you donate $3, Tesla will love you too. If we were alive today he’d totally high-five you and compliment your haircut and/or mustache.”
Crowdsourced Potato Salad
How many different approaches are taken for crowdfunding? Lettuce count the ways. Zack (Danger) Brown was anything but specific when he launched a Kickstarter campaign during the 2014 Fourth of July weekend that sought $10 so he could make a bowl of Potato Salad. “Basically I’m just making potato salad,” said the Kickstarter text. “I haven’t decided what kind yet.”
Somehow, the project gained worldwide momentum. Brown added stretch goals that included haikus written for donors, signed jars of mayonnaise and inviting backers to a potato salad party, giving more than 1,000 people a bite of the salad. Nearly 600 of the campaign’s 6,911 backers contributed an ingredient by the time the campaign ended with $55,492 in contributions.
Another impulse decision during the campaign had a longer-term impact. Brown said that while he was at a bachelor party, he followed a suggestion to add a cookbook to the reward tiers without stopping to think how much work that would require. Last year he finally finished the combined cookbook/memoir that was to be sent free to backers who pledged $50 or more during the campaign. The book is also available to the general public for $16.95.
Brown reportedly spent most of the crowdfunding money on a free PotatoStock 2014 festival in Columbus, and made a big contribution to an organization that is working to end hunger and homelessness in Ohio.
8 best crowdfunding sites from DigitalTrends.com
- Kickstarter: Perhaps the best known of all crowdfunding sites, Kickstarter was involved in two of the highest-funded campaigns ever (the Star Citizen video game, at $141 million and counting, and the Pebble Time smartwatch, at more than $20 million). The funder’s credit card isn’t charged until the project meets its goal.
- Indiegogo: Works much like Kickstarter but also allows for “flexible” funding. The site has less of a focus on physical products versus initiatives. Indiegogo has deals with companies such as Amazon and Brookstone to help them manufacture and bring products to market.
- GoFundMe: Falls outside the “gadget” spectrum, largely devoted to fundraising for social change and advocacy. More than $5 million was raised to support families affected by the mass shooting in Orlando last year.
- YouCaring: This is one of the biggest sites to support grieving and distressed families and individuals. YouCaring allows the user to set goals but operates on an “anything helps” system. The sites allows for daily access to funds, which is especially important when it comes to medical bills and final expenses.
- Crowd Supply: The focus here is on more obscure or geeky ideas: maybe a french press made out of a mason jar, a budged-based stick PC.
- Crowdfunder: Instead of getting rewards for different funding levels, you get a stake in the company itself. The site requires a minimum investment that can reach four or five figures.
- Experiment: This site funds scientific research. As with Kickstarter, if the project doesn’t meet its funding goals, there is no charge. Before the proposal goes on the site for crowdfunding, it’s reviewed to ensure the science is sound and the project is viable.
- Chuffed. The focus is groups working on a variety of social issues. The site asks for a pitch of 50 words or fewer before approval for crowdfunding.
5 highest-earning crowdfunding projects
- The DAO, $160 million: The record total was amassed last year. Meant to be a standard-bearer for online currency measures, the Decentralized Autonomous Organization is a venture capital firm. The platform was Ethereum.
- Star Citizen, $141 million and counting: As the calendar turned to 2017, Forbes magazine said “one of the most ambitious sci-fi video games of all time” has a “practically unlimited budget thanks to a never-ending army of crowdfunding backers buying virtual spaceships that either don’t exist yet, or can’t be used in a fully-fledged game.” It launched on Kickstarter and later began a crowdfunding campaign on its own site.
- Elio Motors, $102 million and counting: A low-cost, high-mileage vehicle with three wheels drives the funding on an independent platform. Elio is the first equity-crowdfunded company to list its shares on public markets.
- Pebble Time, $20 million: When Kickstarter’s campaign for this ground-breaking smartwatch closed in March 2015, it was the highest-earning crowdfunding effort ever for that platform. No solely Kickstarter-backed campaign has topped it.
- Prison Architect, $19 million: Independent distribution platform Steam Early Access led the 2015 crowdfunding, meaning two video games are in the top five richest campaigns.
Strategy and planning
Crowdfunding is never one-size-fits all, and it’s very nuanced. Strategy and psychology are an important part of the process, especially when setting a funding goal.
“There’s a little bit of an art and science to setting the funding goal,” said Roy Morejon, president of digital marketing company Enventys Partners. “For every project it’s unique, because every start-up is in a different position in terms of where their product is. Has it been manufactured? Has it been prototyped? What are the steps they need? What is the actual cash they need to push them over the edge and get this product into the market? That’s where we discuss and review their assets, their cost per acquisition and the cost to actually manufacture the goods.”
From that point, the company will determine how much capital must be raised in order to calculate a funding goal that can be reached in the first day. “We know that if we hit the funding goal on Day 1 that our projection will be much higher, much greater than if we had set the funding goal at a much higher number and waited to get that in Week 1 or Week 2.”
This is all part of the psychology.
“People want to see that the campaign is successful,” Morejon said. “No one wants to be the first one on the dance floor. Once there’s a party, they want to join in.”
The amount of money needed for start-up capital varies. “There are some companies that we take equity in where we have no upfront fee,” he said, “those products that we truly believe in and potentially have a longer-term relationship with those companies. Other companies need capital—whatever it is, up to $50,000—to not only run the project correctly but advertise it correctly to different online communities.”
If you have an invention or innovation that you’re considering for crowdfunding, choosing the right platform is essential. Thechanger.org says you also must identify whether you’re crowdfunding or crowd-investing, and your main user group. Once the campaign is underway, it’s not enough for inventors to sit back and watch; managing is essential. Who will respond to phone calls, emails and more? Who will address issues as they come up? If you go with a company that markets or assists with your crowdfunding, you need to know where they will help and where they won’t.
Morejon said that after a crowdfunding campaign is over, “there are companies that we still continue to manage—let’s say, social media for them because we’ve been their voice throughout the entire campaign and built their entire community of brand evangelists. But in terms of structuring their business, that’s on them.”
Are you a good fit?
Though crowdfunding can be exciting and sometimes lucrative, not everyone is a good candidate for it. Virtually every business enterprise has expenses and risks. Many crowdfunding sites charge a commission, and there are credit card fees. Crowdfunding also comes with its share of hype that doesn’t deliver, shipments that don’t go out on time, and the occasional scam. And the funding success rate for Kickstarter and Indiegogo campaigns is a less-than-guaranteed 35 percent.
For charitable efforts, donordrive.com warns about risks for larger nonprofits: You may get donations via crowdfunding, but you may not get much information about who gave to you. You can have little or no control over your branding, messaging or the giving process. You can lose up to 30 percent of donations to the platform’s commissions. Many medium and large nonprofits set up their own third-party programs, which give donors the chance to give and fundraise for your organization only.
Nonprofits and for-profits alike have the option of angel investors, though a lot of circumstances have to be just right for them to pan out.
Consider whether your venture is in a category that typically thrives in crowdfunding. “We love physical products, tangible goods,” said Enventys Partners President Roy Morejon. “We see a lot of success with technology—companies that are bringing new tech to market through crowdfunding, and the early adopters wanting access to that technology before it comes to the shelves of Best Buy. … The right design characteristics are also important.
“What doesn’t work well for us is software, unless you have a pre-existing database and you’re launching version 3, 4 or 5 of that software. You have to have a really big community behind it in order to back it and potentially get that discount instead of paying full price for it that next time around. … Software is also tough because it’s potentially not proven yet. All of the bugs aren’t worked out yet. Mobile apps are extremely difficult to crowdfund as well because people would rather wait for it to get in the apps store and have, say, Apple, say ‘Yes, it’s been approved’ before they start putting capital down on an app that they haven’t been able to play with and try.”
Some companies or inventors don’t reach their funding goals because “either they reach their goals and waste the money away due to delinquent founders, or those who don’t know how to run a business: shipping and logistics, sourcing and manufacturing it, putting all of these things together to actually start a business.”
In an industry that seems inextricably linked to tangible goods, crowdfunding will continue to be associated in some way with the hottest product trends. The recent Consumer Electronics Show in Las Vegas was a veritable robotics showcase, possibly providing a peek into a new crowdfunding frontier.
One of those robots was unveiled at the CES, sparking considerable media buzz. This month’s Inventors Digest cover subject, Professor Einstein—a 14.5-inch-tall, Wi-Fi-connected robot with more than 50 facial expressions and gestures—is designed to teach kids about science and be a kind of “grown-up” friend. Professor Einstein’s crowdfunding was scheduled to begin on January 23.
Roy Morejon of Enventys Partners, marketers for the Professor Einstein crowdfunding campaign, said there are opportunities for everything to be crowdfunded. “Now we’re seeing a more localized effort with not only reward crowdfunding but equity crowdfunding. With the Jobs Act being passed, there’s the opportunity for the small pizza shop to try and open a second location with their small community of fans getting involved in owning that next shop that opens up.
“On the reward side, it could be anything that people are going to be passionate about that fills a need and makes that current product seem old, that this is a new version of what’s out there. There’s also a huge opportunity with the larger enterprise companies, the Fortune 5000 and 10000 companies needing to be innovative and needing to bring new product to market. Crowdfunding is that way to test a new idea in the market to see if it’s going to succeed before they spend millions of dollars on R&D. We’re starting to look at a lot more of those.” Morejon said corporate behemoths aren’t late to the crowdfunding party; “they’ve just been sitting on the sidelines and watching.”
Business sectors that have recently begun crowdfunding—including retail, real estate and even insurance—will continue to expand those efforts. British website businessadvice.co.uk predicts that this year, crowdfunding will “cement its position as a mainstream route to funding.” According to the World Bank Report, global investment via crowdfunding could reach $93 billion by 2025.
This soaring wave will increase the importance of inventors, investors and companies being educated and current on all crowdfunding aspects. Platforms will have to educate investors on the latest crowdfunding-related rules and opportunities in order to win their business as marketing competition increases.
Experts may differ on what will be the biggest future trend in crowdfunding, but most agree that the industry isn’t going away. Ron Suber, president of online lender Prosper Marketplace, told the University of California, Berkeley: “I promise you that it’s not a fad; it’s a mega trend. The amount of benefit that borrowers and investors are receiving is unprecedented in financial history.”