Starting a new business that has up-front costs can be one of the most frustrating things about being an entrepreneur. I suppose there are many people out there who don’t mind going to friends and family, begging for money, promising great returns, and ignoring the risk inherent both in starting a business and in borrowing money from people with whom there are established personal relationships.
The same is true for artists, who often have trouble funding the work they’d like to do. With banks being less willing to fund new businesses since the credit crunch and recession, business owners are encountering the same obstacles artists have been faced with. This is why musicians historically turned to record labels; a company would fund the production and distribution of a record in return for virtually all the rights and most of the profit. With the record industry dying, there’s a new fundraising model gaining popularity, and it works for both artists and would-be entrepreneurs.
In many ways, crowdfunding is better than raising money through traditional channels such as loans and private investors.
With crowdfunding, start-up companies can offer gifts in return for a “donation,” much like non-profit organizations do when they solicit their own tax-deductible donations. When I give to an established charity, I can often choose between premiums or thank-you gifts, which increase in value as my donation increases.
For example, look at this campaign on Kickstarter: Kitchen Passports: Trinidad and Tobago Children’s Cookbook. The entrepreneur behind the campaign, Nicole Furlonge, established a goal of $6,000. If the goal is not reached, contributors might receive their money back or re-pledge to a different project, but those who do pledge “donations” can receive a gift of anything from a PDF of the project’s final product to a signed copy of the book with all the kitchen tools necessary for putting the cookbook into action.
Unless you’re giving through a charity crowdfunding agent, like DonorsChoose, your “contribution” isn’t going to be tax-deductible.
Start-ups do not have to promise a piece of the company. If you approach a potential investor through traditional channels, they might only give money to an investor if there is a promise to pay back the investment or if that investment is made in return for a percentage ownership in the company. Some investors want that ownership to include control, as well. With crowdfunding, all you would need to do is to dangle semi-exclusive items.
Amanda Palmer, the musician formerly of The Dresden Dolls and wife of master storyteller Neil Gaiman, recently used Kickstarter to fund her new album. With a goal of $100,000, she raised more than $1 million from almost 25,000 fans. She offered tickets to exclusive performances and limited-edition vinyl albums as gifts for her backers. No one opted for the most expensive gift; for a donation of $10,000 a lucky fan would receive a private photography shoot with Amanda’s band (the Grand Theft Orchestra). All of these one-time gifts offer something special for fans while avoiding the classic investor trade-off, a cut of the profits in perpetuity.
You can raise money even if you have the money to do it yourself. When you approach investors and banks, they will often ask whether you will be investing your own money into your business or project. If you have an established base of fans, they don’t seem to care about that. I don’t pretend to know the finances of one of my own favorite musicians, Ben Folds, but I do know that he’s had a successful music career, has had three seasons of a television show recently behind him, and operates a music studio that attracts great musicians.
He decided to get Ben Folds Five back together and to fund the reunion album through PledgeMusic, a website similar to KickStarter, but focused more on musicians and their needs. PledgeMusic no longer shows dollar amounts for projects, but the New Ben Folds Five album has reached 360% of its target by offering fans a chance to snag exclusive vinyl (which I did for myself), t-shirts, and a chance to hear the contributor’s name in a song. Ben likely could have funded this project himself, but if you can use other people’s money, you might as well.
In the above two cases, crowdfunding worked because these artists have an established fan base. A new musician or entrepreneur might have a hard time raising $1 million. The press is more likely to help famous people attempting to raise money with this method of funding by giving them a voice than they would help a relative stranger, like the entrepreneur in the first case. If the start-up capital needs are small, it may not be much effort at all.
Crowdsourcing doesn’t need to be so different than the traditional method of raising cash for start-up businesses. AngelList matches angel investors or early venture capitalists like Mark Cuban, Jason Calcanis, Kevin Rose, Marc Andreessen, and Ashton Kutcher — and non-famous investors, as well — with business owners who have the ideas needing funding. This could be an option if as a business owner, your idea focuses on technology. Some of the projects funded through AngelList include Uber, Taulia, Rally, Voxer, and other companies you’ve most likely never heard of.
If your exit strategy is for your tech project to be acquired by a larger company, like Google or SanDisk, AngelList might be a well-respected option for finding the right investors.
I’m looking to do three things now, as my role at Consumerism Commentary continues to diminish. My plan is to do something along the non-profit route in finance, possibly pertaining to financial literacy. At the same time, I’m looking for potential investments that range all over the map. Third, I’m looking to start my own new projects and businesses that are relevant to my interests, passions, and talents. All three paths are chances to get behind exciting projects and create something new. Crowdsourcing may come into play if the strategy fits the projects I choose to pursue.
Photo: Photos by Mavis
Updated March 18, 2013 and originally published August 21, 2012.