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Creating Alternative Financing

Creating Alternative Financing

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Published by Crowdsourcing.org

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Published by: Crowdsourcing.org on Jun 04, 2011
Copyright:Attribution Non-commercial

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02/03/2013

 
Creating Alternative Financing
 –
Crowdfunding & Crowdsourcing: PartII. What is Crowdfunding and Three Crowdfunding Models
Posted by 
05/11/2011 08:30:00 AM EST
Crowdfunding is a method of raising funds for a business venture or a project byrequesting a small amount of money from a large number of people (typicallythrough the Internet). An average amount of money raised is between $2,000 and$10,000.Crowdfunding is not a new phenomenon. We have seen it used by charities doingfundraisers, politicians, asking for contributions to their political campaigns(during his campaign for the US presidency, Barack Obama raised $137 millionfrom small donors), and musicians accepting contributions from their fans for anew album.We now see proliferation of crowdfunding because of the advance of socialnetworks that have enabled people to reach out to their communities andnetworks more effectively. Over the past five years, users of websites like Kiva &Kickstarter have "donated" over $350M to crowd fund projects including art,films, software development and books.In my opinion, there are several models or approaches to crowdfunding. First,platforms like www.Kickstarter.com offer the opportunity to raise money that is not directly repaid. Recipients instead may offer their contributors a specifieditem or service in exchange for contributions, such as a free sample of theirproduct or an advance copy of their CD. Since investors do not expect a return ontheir investment, the contributions are not securities, and therefore no securitieslaws issues are raised. Examples of these platforms include www.rockethub.com,  www.peerbackers.com
 
 The second category consists of platforms that enable founders to solicit andreceive funds in exchange for some expectation of return (profit sharing, equity).In this case, founders issue securities, and have to be very careful aboutcompliance with applicable federal and state securities laws. A good example of such platforms is www.Profounder.com.The third category includes companies that use internet platforms andcrowdsourcing/crowdfunding methods to actually produce products. The exampleI want to use here is www.quirky.com, but there may be other similar sites outthere.Category One: Donation-Based CrowdfundingBelow is a brief overview of some of the platforms offered in the first categorywhere contributors do not expect any return on their investments.1. Kickstarter (www.kickstarter.com)Kickstarter is a platform that prefers to get funding for ideas or projects ratherthan companies. They offer an "all or nothing" funding: in order to receive thefunds, a project must reach or exceed its funding goal or no money changeshands. Once the project is announced, pledges can be made by credit card(through Amazon processing), but contributors only need to pay if the projectmeets the funding goal within the allocated time (1-90 days). Recipients areexpected to offer rewards to the contributors. Kickstarter charges 5% of theamount received on successful raises and Amazon charges 3-5% credit cardprocessing fee. Although typically people raise up to $10,000, I have also seenraises of over $900,000.2. RocketHub (www.rockethub.com)RocketHub is a platform that, similarly to Kickstarter, supports the community of 
 
"independent artists and entrepreneurs". It is not limited to creative projects, butencourages them. The platform offers an opportunity to raise money as well as to"take creative products and endeavors to the next level", referred to as"LaunchPad Opportunities" that allow community to discuss and vote on thepresented ideas. I liked the language they use: all who initiate fundraising arecalled "creatives" and those who donate money are called "fuelers". Participantsalso receive virtual badges for their contributions to the site. RocketHub charges4% of the money raised if the financial goal is reached. If it is not, then the feegoes up to 8% of the total funds raised. This is done to encourage creatives to setrealistic funding goals. There is also a 4% transaction fee. Successful investmentstypically range between $1,000 and $10,000.3. Peerbackers (www.Peerbackers.com)Peerbackers distinguishes itself by the fact that it enables businesses to easilyreach out to their online communities and networks. This crowdfunding site is notlimited to funding creative ideas. Anyone with an idea, project, business orinvention can apply to post on the site from anywhere in the world. Businesses inneed of funding create profiles, describe the business and the purpose of thefundraising, the target financial goal and the length of time to reach it (should bebetween 15-90 days). Businesses also upload a photo or video and informationabout the rewards they are offering in exchange for the contributions. Then,businesses campaign for support by reaching out to their networks on Facebook,Twitter, LinkedIn, etc. and ask everyone to send the campaign to their networksas well. Funding is released if the project reaches at least 80% of the funding goal.Fees are: 5% + 1.9-2.9% PayPal fee.4. IndieGoGo (www.indiegogo.com)According to the information on the website, www.IndieGoGO.com platform hashelped raise millions of dollars for over 25,000 campaigns, across 177 countries.This site allows to raise capital for any type of venture, including a for-profitbusiness venture, non-profit cause, or a creative project. Recipients can easily

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