Crowdfunding: What Are Your Options?

Here's a primer on the new crowdfunding law as well as existing online sources.
April 30, 2012

Sites such as Kickstarter and IndieGoGo have been helping entrepreneurs raise money by tapping into the power of the crowd for several years. And now there's a new method for finding funds. In March 2012, the U.S. Congress passed the Crowdfund Act into law. This act, which was part of the larger JOBS Act, allows U.S. based startups to issue shares in their businesses in exchange for equity. Put simply, companies can now raise up to $1,000,000 per year through crowdfunding. The new law is good news for small businesses looking to raise capital, as it raises awareness for crowdfunding in general.

The key distinction between the Crowdfund Act and the Kickstarter/IndieGoGo model is that the latter is based on donation-based funding as opposed to the new law's investment-based funding (in which you own a part of the firm as an investor). When you donate to a startup via Kickstarter or IndieGoGo, you generally receive a promise of a good or service in return, should the project achieve its funding goal.

If your small business is not yet ready to offer an investment structure to potential funders, Kickstarter and IndieGoGo are both great options for raising money, but they are not exactly the same. Here are the differences.

All or Nothing, or All or Something?

With Kickstarter, it’s an all-or-nothing proposition, meaning that your campaign needs to successfully reach full funding before the deadline or you do not receive any of the money raised. If you are successful, Kickstarter charges a 5 percent fee on the total raised.

IndieGoGo, on the other hand, allows users to keep any funds raised whether or not the campaign reaches its funding goal. However, they take 9 percent of the total earned during an unsuccessful campaign. Successful projects that receive full funding on IndieGoGo are charged a 4 percent fee.

Getting Noticed

Both platforms strongly encourage active involvement from users in order to help their campaigns reach full funding. Video promotions are encouraged, as are social media promotion efforts. For example, Anne Richmond and Emily Floyd ran an IndieGoGo campaign to fund their web series “This Is Art,” tapping into a feature of the platform called the “GoGo Factor,” which measures the activity and effectiveness of a campaign. The higher the GoGo Factor, the more exposure a project receives from IndieGoGo through the website and its social channels. According to Richmond, “How invested you appear to be in making your campaign fun and interactive has a direct effect on how much your contributors help you spread the word and find more supporters.”

Another recent project on IndieGoGo that enjoyed a huge level of success, thanks in part to the GoGo Factor, is the short film “Life Doesn’t Frighten Me.” Project creator Stephen Dunn recognized that “getting featured on the main page of Indie GoGo is really what helped us break out into the online global community.” The project reached its funding goal of $9,000 within 12 days and went on to receive a total of over $12,000 by the end of its run.

And Jessica Swift, maker of a line of patterned rain boots, raised over $22,000 with Kickstarter, far exceeding her original goal of $18,000.

“I was scared to raise $18,000 on Kickstarter to fund the production of the boots," Swift says. "But now that I’ve done it, it makes my big crazy dreams seem not quite so big and crazy.”

Justine Grey is a Web entrepreneur who runs Hype Content for businesses looking to grow their digital presence. You can find her on Twitter at @JustineGrey chatting about life, work and her pop culture obsession.

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