Funding 101 – Part 8: Crowdfunding

The viral nature of the Internet helps founders secure a larger amount of investment. In the 8th part of her insightful series about funding, Elizabeth Crowell examines crowdfunding as a source of investment. To read Part 7 of the series, about sourcing investment from friends and family, click here.

Founders who plan to crowdfund their new business are about the only thing more common than frozen yogurt franchises these days. But what is crowdfunding, and how does it work? Simply put, crowdfunding is using the Internet to raise capital from crowds of interested people.

The viral nature of the Internet helps founders secure a larger amount of investment than their personal networks would otherwise yield. Think of how President Obama outraised the Republicans in the last two presidential election cycles by reaching out to millions of small donors, and you can understand why founders are so eager to pursue this method of fundraising. With more than 30 crowdfunding sites out there, it's important to understand the differences among them.

Raising Equity

If you are offering equity (ownership in your business), sites such as AngelList, CircleUp, FundersClub and MicroVentures can connect you with accredited investors. Essentially, these platforms offer founders exposure to accredited investors beyond their immediate networks. The disadvantage of these sites is that as an ever-growing number of companies post, there’s little-to-no curation of deals. This makes it easy for yours to get lost in the shuffle.

Funding Projects/Pre-selling Product

Most likely you are already familiar with the name-brand crowdfunding sites, such as KICKSTARTER, indiegogo and ROCKETHUB. Rather than offering equity, you exchange rewards (such as a Producer credit in a movie) or incentives for cash contributions (typically between $5-$500) from your "backers". Some businesses have funded product development this way, with the payout being the new product.

In essence, this pre-selling of your product is a highly efficient way to assess interest in it before shelling out dollars on production.

Projects, apps and causes are the primary focus of these platforms. There is a proliferation of sites that cater to specific niches, such as ventures in science or music. Click here for a road map from Inc. Magazine.

In a coup for women-owned businesses, plumALLEY has recently launched its own rewards-based crowdfunding platform. plumALLEY founder Deborah Jackson, a 21-year veteran of Wall Street, angel investor, and co-founder of WIM (Women Innovate Mobile) Accelerator, had been eyeing the crowdfunding space. I recently met with Deborah, who noted that KICKSTARTER has raised $757 million for projects since 2009; that's about the same amount the National Endowment for the Arts awarded over the same period.

With the data ever trending up, it's clear that reward-based platforms aren't a bubble, but the real deal.

Tip of the Iceberg

Currently, only about two percent of Americans are eligible to invest equity in private companies, which isn't much of a crowd. Expect huge growth in crowdfunding when the JOBS Act (an acronym for Jumpstart Our Business Start-ups) is fully implemented and allows for non-accredited investors to make equity investments. If you’re not comfortable with a lot of micro-investments from many investors, you will soon be able to leverage these platforms for friends and family contacts too. They all offer the promise of administrative ease, which becomes significant as the number of investors increases.

Founders should evaluate these crowdfunding opportunities just as they would other capital sources, not only by the type of investment, but also by their success records.

Stay tuned for the colossal race for investor membership that will shortly ensue, separating the effective services from the mediocre ones. Disruptive to be sure, many of the old guard, including venture capitalists, regard crowdfunding as an option only for businesses that do not have access to A+ capital. This ignores crowdfunding’s potential for the thousands of businesses that— although not surefire candidates for an IPO – may provide beloved products and services to their customers and communities and tidy returns to their investors.


Equity platforms








IPOVillage - giving retail investors the opportunity to get in on the ground floor of the IPOs



Reward-based platforms



moolaHoop - for women entrepreneurs




Picture courtesy of ddpavumba/Free Digital

Elizabeth Crowell is the co-owner of Sterling Place, a multichannel retail company that sells eclectic antiques, fine home décor and specialty gifts. Profitable from year two, Sterling Place has steadily grown, with three store locations in Brooklyn, as well as a website, and last year, the business posted its highest revenue and profit to date. Sterling Place has been profiled by the NY Times and Elizabeth has been a repeat guest on Martha Stewart Living Radio. In 2011, Elizabeth was selected as one of 10 in the inaugural class of Pipeline Fellows, a program designed to train women to angel invest in women-led triple bottom line ventures, ie. profitable, environmentally responsible and delivering social impact. She is currently in the process of building her own angel portfolio. For more information on Elizabeth, see her profile.

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