Crowdfunding for Startups

Posted by: John Tozzi on July 3, 2008

I’m fascinated by crowdsourcing and the new business models it enables. Companies have been tapping crowds for product design and customer service for some time now. It’s much trickier to tap the crowd for money, but here are two new startups trying to do just that:

  • Nvohk, which has more than 3,000 people who pledged $50 each to have a hand in an eco-friendly clothing company, and
  • BeerBankroll, which offers members a chance to help run a brewery.

These companies can’t give the crowd equity without filing with the SEC, so crowdfunded ventures are structured as membership organizations — your $50 gets you into the club, with the agreement that the crowd will vote on business decisions and be rewarded with points (redeemable for products) instead of profits. It’s basically a fan club built around the business.

Other crowdfunding ventures include Swarm of Angels (members fund a movie), and MyFootballClub (in which members bought and manage the British soccer team Ebbsfleet United). And last year we wrote about Sellaband, a site that lets bands crowdfund their recording costs.

So crowdfunding seems feasible for businesses that people are passionate about — bands, movies, sports clubs. Beer and T-shirts could also lend themselves to that kind of fan-based financing. But what about other businesses? Will crowdfunding ever grow beyond the novelty stage to become a mainstream way for startups raise money?

Reader Comments

Jeff

July 18, 2008 5:56 PM

Fascinating concept - I've never heard of it. Is there a ceiling for how much each individual can pledge before before the company has to file with the SEC. I would think people could each pledge thousands of dollars if its similar to joining an elite membership club. At one point would these individual contributions get taxed? Great resources and tips for building a business here... www.readtheanswer.com/index.php?RTA=web2

Brian

September 16, 2008 3:40 AM

Crowdfunding is a popular trend, especially in the entertainment industry. Sites like Sellaband in the music industry or the Band of Angels venture employ the crowdfunding idea.

Another site that does this is IndieGoGo.com. On their site, filmmakers can connect with film lovers and get their films financed and made. Its a great way to increase the quantity of independent films that are made today.

Jaeger

October 17, 2008 6:21 AM

I hear here's this site that's trying to do something similar with property investments --> cheggit @ www.everyonesharesit.com

KK

December 3, 2008 5:36 PM

Help ! I am creative but not business savy ! Someone HELP me through the steps in crowdsourcing-funding PLEASE ! Thanks KK

Dawnea Adams

February 23, 2009 8:06 PM

I am partner in a jewelry design business...Aphrodite Jewelry. The artist is amazingly talented...constantly reinventing her designs and the line is thriving with a minimal amount of stores/clients despite the economy but it is time to take it to the next level. We are looking for an investor/investor's...
please advise...

CouchTycoon

June 23, 2009 8:31 AM

if you like crowdfunding, you maybe want to cover us too :)

jeff

August 12, 2009 8:23 AM

There is are several people that tried this in the 1990s and it does run up against SEC solicitation laws. There are potential ways around the laws but you can't just put something on the web and say send me money to invest. People have to be accredited investors and you have to have a preexisting relationship with them before you can solicit money from them. The SEC laws are antiquated but they are the law.

Daniel

January 7, 2010 7:00 PM

If you’re interested in successful crowdfunding you should definitely check out IndieGoGo.com. Its a crowdfunding website that just opened up its platform to support businesses.

valto

February 22, 2010 6:59 AM

Related to this, on feb 15th we launched the www.growvc.com crowdfunding model "everyone funding startups"

Luci Temple

February 22, 2010 7:57 PM

KK - You might want to check out my blog for many case studies of different content creators who have used some form of crowdfunding.

Depending on which country you are from there will be different laws, but in general, the various ways to gain money from a "crowd" include:
- micro investments
- membership fees
- presales
- merchandise
- donations

There are a number of established online companies like Kickstarter, Chipin, IndieGoGo, etc that can take care of the payment system - but the real work is in understanding how to create a community around your project, giving them reason to fund you.

http://yetanotherstrugglingwriter.blogspot.com

Will

March 10, 2010 6:29 AM

There are a number of challenges facing Crowdfunding. Research needs to be conducted on how to build an effective model for dealing with regulatory bodies, marketing the company to a qualified audience and avoiding any negative PR to Crowdfunded companies that fail. We have a poll that is driving research into the topic and welcome input at www.crowdfundingcentral.com

cameron

April 23, 2010 7:52 PM

The Market is maturing. Check out podiumfunds.com

In order for the crowdfunding market to hit a critical mass it needs to have reporting mechanisms that are simple and transparent. I think the membership model is cool but to be a force in finance the model will have to address and adhere to the regulatory guidelines of security jurisdictions

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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