Are Celebrities Crowding Small Businesses Out Of Crowdfunding?

Crowdfunding seems like a hidden pot of gold for entrepreneurs who have no effective way to raise money for their startups. But with big names asking for handouts too, little guys are worried about getting overlooked.
August 14, 2013

Crowdfunding website Kickstarter got its start as a place where scrappy underdog entrepreneurs could turn to the public to help finance their projects. But lately, Kickstarter has been at the center of a controversy that's pitting small-business owners against some very big names.

Entertainment industry bigwigs like actor Zach Braff, director Spike Lee and the creators of the TV series “Veronica Mars” have started a wave of outrage by soliciting funds on Kickstarter. (Read more in this PolicyMic article.) Why are people who could easily finance their own projects or turn to wealthy friends for help soliciting on Kickstarter? Aren’t they siphoning attention—and money—from smaller, more deserving projects?

“I feel these larger projects with big names that are using Kickstarter when they clearly have other options violate the spirit of Kickstarter,” says entrepreneur Dan Perkins. Perkins’ company, Couch Guitar Straps, manufactures guitar straps and other fashion accessories out of vintage upholstery vinyl in its California workshop, but Perkins also fronts a band, California Lions, that used Kickstarter to raise money to master a CD. “I just saw a Kickstarter from a successful producer who had his Kickstarter video narrated by an Oscar award winner and hosted by another A-list actor,” Perkins says. “They have the connections and financing for this but need to resort to me for cash? That rubs me the wrong way.”

Eric Corl, president and co-founder of Fundable, a crowdfunding platform for startups and small businesses, who tweeted about the trend, doesn’t share Perkins’ outrage. “What can be more fair [than] the crowd voting with their dollars?” Corl says. “People have a misconception that there is a finite amount of ‘gold’ out there and that if someone is backing Spike Lee’s project, they aren’t backing theirs. The truth is that the majority of crowdfunding campaigns are funded by a team’s existing support network—friends, family, fans and customers.  Celebrities just tend to have larger ones.”

Raising Awareness—And Money

In fact, rather than sucking financing from other projects, celebrity crowdfunding seems to do the opposite, as Kickstarter’s founders reported in a response to the backlash: “The Veronica Mars and Zach Braff projects have brought tens of thousands of new people to Kickstarter. Sixty-three percent of those people had never backed a project before. Thousands of them have since gone on to back other projects, with more than $400,000 pledged to 2,200 projects so far. Nearly 40 percent of that has gone to other film projects.”

Celebrities on Kickstarter could also turn entrepreneurs’ attention to other, more business-oriented crowdfunding sites. While Kickstarter is probably the best-known of the crowdfunding sites, its focus is actually creative projects like film, dance, music and the arts. “Their [terms of service make] very clear that the site is not for businesses, whereas sites like Fundable.com are focused exclusively on startup and small businesses,” Corl says. “The backer demographic tends to be very different. [Kickstarter] tends to attract affinity backers; we tend to attract customers and investors.”

But raising money without studio strings attached isn’t the sole reason celebs turn to crowdfunding to finance projects. Crowdfunding also has value as a marketing tool—value that may even outweigh its ability to raise money. The Chicago Tribune highlighted one entrepreneur who used Kickstarter to raise money for a bar, although he already had enough backing to launch without it. The Kickstarter campaign, he told the Tribune, was part of a strategy to build excitement and grow an audience.

His move raised the ire of some in the local business community, but should it have? “Crowdfunding is about more than just raising money,” Corl says. “We have companies on Fundable every day using it to help test market demand before they invest their life savings, find business partners and find retailers interested in carrying their products.”

That ability to connect was a big positive for Perkins. “I loved using Kickstarter because it allowed us to communicate to our fans and state an intention to get a project done. We made our goal, and more importantly, our audience seemed to feel a connection with us and our project by committing upfront to its completion.”

A Handout, Or A Hand?

It seems there’s a fundamental disagreement about what crowdfunding sites like Kickstarter should be. Are they semi-charitable organizations where companies that can’t get financed any other way go for a mercy handout? Or are they competitive environments where the best idea (and the best-marketed idea) wins? As the JOBS Act is implemented and the ability to solicit equity, not just donations, from investors becomes a reality, crowdfunding is going to grow up—and so must entrepreneurs who want to succeed at the crowdfunding game.

“Competition for capital, human and financial, is fundamental to capitalism,” says Lauren Flanagan, who runs two angel funds—BELLE Capital USA LP and Phenomenelle Angels Fund. “Crowdfunding initiatives will become increasingly more professional, with offerings from celebrities and well-known brands competing for mindshare and money, and ultimately with investment banking firms jumping into the fray. Opportunities remain for worthy newcomers, but they will have to up their game.”

“We all need to recognize that the ‘celebrity’ element is at play in most crowdfunding campaigns in one way or another,” producer Jonathan Goodman Levitt commented on PolicyMic. Perhaps entrepreneurs who complain about celebrities’ unfair disadvantage are really just worried that they don’t have the marketing savvy that successful crowdfunding requires.

“The power of crowdfunding is that it is empowering the world to fund what matters to them,” says Danae Ringelmann, cofounder and chief customer officer of crowdfunding site IndieGoGo. “Whether it’s a celebrity raising money for a new film or your neighbor down the street who needs funds to start a bakery, anyone can launch a crowdfunding campaign, and it’s ultimately up to the crowd to decide whether or not to fund it."

Read more articles on funding your business.

Photos from top: Getty Images, Thinkstock