Pebble Technology had a product, but it needed money. The idea: a watch that connected wirelessly via Bluetooth to smartphones, and would be able to run apps. It would also have an e-ink screen, like the ones found on many e-readers.
The goal was to raise $100,000 in 30 days. They not only reached their goal, but raised $10,266,846 to date. The most remarkable feature however, is that the capital came not from a venture capitalist firm, but from 68,929 different people, using crowdfunding.
In crowdfunding, investors pledge typically small amounts of money towards a project. What the money is then used for is up to the owner of the project. Crowdfunding is seen as a new way of raising start-up business capital, creating and financing charities, and supporting different projects or goals.
The goal for the entrepreneur or project manager is to attract as many investors as possible, rather than rely on a venture capital firm. The more investors the project has, the closer it comes to its goal.
Kickstarter is the world’s largest funding platform for creative projects, according to Kickstarter employee Justin Kazmark. The website provides the setting for creators to get the word out about their projects, in order to attract “backers”.
“Every week, tens of thousands of people pledge millions of dollars to projects from the worlds of music, film, art, technology, design, games, fashion, food, publishing, and other creative fields,” he said.
Kickstarter gives every project a deadline. Projects can go over their funding goal if they achieve their target within their deadline. However, if they do not meet their goal by the deadline, the project is scrapped, and no one is charged.
The main difference between Kickstarter and a venture capitalist firm is that people who pledge money to Kickstarter projects are not looking for a financial return.
“It’s up to the project creator to decide what the return goals will be. That’s how they entice investors. For example, a pledge of $25 may be pre-purchasing an artist’s CD or movie,” Kazmark said.
“It’s not a donation and it’s not an investment.”
Sprott School of Business professor Francois Brouard said he agrees that there are differences between investments and what crowdfunding sites like Kickstarter do.
“It’s not a ‘real investment’, but more like philanthropy or a gift. You may get something in return, or not,” he said, adding that there were also unique challenges to crowdfunding.
“[It’s] easier and more difficult at the same time. Usually the investment is regulated and protected. [With crowdfunding], there is less protection,” Brouard said.
Given the recent spike in crowdfunding trends, the US government has created new legislation to regulate investments and assist small businesses raise capital. The Jumpstart Our Business Startup Act (JOBS Act) was signed into law on April 5, 2012 by US president Barack Obama. The aim of the Act is to encourage funding of US small businesses by alleviating some of the pressures of security regulations. This helps legitimize crowdfunding and the businesses that utilize it.
However, the profits gained from crowdfunding can go towards a great deal more than just projects or businesses. Charities have embraced crowdfunding as a new method of gaining capital to put towards their work. The website Kiva is a crowdfunding platform devoted to raising money for various charities.
Embodying the philosophy of micro-finance, Kiva uses crowdfunding to help impoverished individuals and groups in various poorerparts of the world, according to their website. By loaning small sums of money through Kiva, lenders can give people the chance to get ahead in their daily lives. However, what makes Kiva different from other crowdfunding platforms is their return policy. Once the loan is paid back, it can either be withdrawn or put towards a different Kiva project to help someone else.
Small loans of an average of $25 can add up to a lifetime of change for many Kiva participants. Loans gathered through crowdfunding go toward buying livestock and feed to bolster farms, as well as buying products to re-sell in small retail businesses.
“There’s not a huge amount of money involved,” Brouard said.
“For someone who invests, it’s like a gift. With Kiva, you can give money to a project, and then get it back, or give it to another project after.”
That being said, if the campaign is successful, the rewards are substantial.
The future of crowdfunding is uncertain, and only time will tell if this new investment procedure is truly successful in the long run. Speculators fear crowds over-investing in this newly popular industry and creating a bubble that will pop once the trend fades. However, for the time being, crowdfunding provides an avenue for the ordinary citizen to get their project off the drawing board and into reality, while giving other ordinary citizens the chance to be a small part of it.
