Guest post by Jon Emge

Years ago, back in the day, if you had an idea for an invention or gadget, or if you wanted to start your own business, you only had a few options when it came to funding your start-up company, or build your idea.

You could use personal finances and savings to fund the company or idea, or go to the bank and hope to get a loan.

Using your own money is risky, if the business or idea fails, you may lose your life savings.

Borrowing the money can be a good idea, but most lenders will probably require you as the business owner, to guaranty the loan. If the business doesn’t generate any money, you’re still on the hook for the loan.

Today there is another alternative or option in attempting to get the cash needed to either start-up a business, or fund a project, and that is crowdfunding.

Crowdfunding is basically raising money for a “project or venture” with contributions from various individuals, and is usually done through the Internet.

$5.1 billion was raised through crowdfunding in 2013.

Forms of Crowdfunding

There are various ways an individual or company may structure the way they ask for people to invest in their project. Yes, they are all asking for money or funding, but depending on the project, the structure may be different.

Reward Based: This is a popular crowdfunding method for musicians and other artists. The artist sets a goal for a certain amount of money and a date to reach that goal. The artist outlines what the money is to be used for, in this example we will say to record a new CD of music. The artist then tiers donation points, £25, £100, £500, £1,000 and so forth. At each of these tiered points the artist then has rewards attached to that donation. A £25 donation will give you a copy of the new CD when completed, and it will be autographed by the artist. A £50 donation may get you the CD and a band t-shirt. A £100 may get you the autographed CD, a band t-shirt, and also your name mentioned on the CD’s notes. You can see, the more a person donates, the better the reward.

KickStarter is one of the largest web sites for this form of crowdfunding.

By the end of 2013, the site had 5.4 million people back projects, had $928 million pledged, and 54,233 successfully funded projects.

All or None (AON): Again a project is defined and a financial goal is set. The difference here, even if there are rewards involved, is that if the goal is not met by the deadline, all the individual donations are refunded; either the goal is met, or nothing.

Keep it All (KIA): This form of crowdfunding is the opposite to AON. A financial goal is set and a deadline, however, if the goal is not met, the person seeking the funding keeps what money has been raised and applies it to the project. This works if the project can be completed in phases, and also funded in phases. 

Debt-Based: Debt based crowdfunding is basically peer-to-peer lending. An example of this is Funding Tree and other p2p lenders. Investors pool their money and it is used to lend to borrowers seeking loans. The loans can be for personal or business reasons. It is hoped that the investors get a better rate of return on their money, and the borrow gets a better deal or interest rate.

Risks and Issues

While on the surface crowdfunding appears to be a great way to fund a project or venture, and it has been very successful, there are some risks and potential issues, legal and otherwise, that need to be looked at.

* Crowdfunding falls outside of some regulations and laws: In some instances a company using

this funding method does not have to disclose financials and are not regulated.

* The project could fail: The money raised is used/spent, and the venture falls a part.

* The project is poor: In the instance of a film maker or musician, they may make their film and

music, but the film and/or music is just bad and not of good quality and does not generate sales.

* Potentially high failure rates: New companies and start-ups carry a high risk as many new

companies fail in the first few years.

Just a few potential areas anyone looking to be an investor needs to be aware of.

Success Stories

While there are risks and pitfalls with crowdfunding, there also have been many successful projects completed.

The Coolest Cooler: This little gadget became the highest funded project on Kickstarter as of 2014, with over $13 million being raised by over 62,000 backers. It is a cooler that includes “a blender, a Bluetooth water-resistant speaker, a USB port to charge electronics such as cell phones, a built-in bottle opener with magnetic cap catch, built-in plates and ceramic knife, and a removable divider that can also be used as a cutting board. The split lid design is made with steel hinges, and has a built-in LED light and cup-holders.” Pretty cool.

Pebble: The Pebble Watch is a smart watch that works with applications on your mobile phone to notify you of calls and emails. The initial funding for the project was through Kickstarter and raised $1 million in the first 28 hours, and then went on to raise a total of more than $10 million.

Veronica Mars: The film Veronica Mars staring Kristen Bell was funded though crowdfunding at Kickstarter. It started out as a $2 million project, that ended up with over $5.5 million. The film’s Director Rob Thomas said, “I had seen a friend of mine raise $10,000 to fund an album he was making and I started wondering what would happen if we tried to raise a couple of million dollars to fund the ‘Veronica Mars’ movie. At the time the largest Kickstarter project ever was $900,000 and my fear was that $2 million was a ridiculous amount of money to ask for.”

However, as with many things, all did not go completely well. Yes, the film was a success, and yes, it spun off a TV series, but some backers were not happy with some of the rewards.

It would appear that those backers that invested $35 were to receive a digital copy of the film. The backers felt the quality of the film of not good, and also that it was only available as a stream online. Warner Bros is offering refunds.

Crowdfunding is successful and an alternative to fund a project, however, with so many investors, it may be difficult to please them all.