Gizis’ technology startup, Connectify Inc., raised capital in 2011 from a strategic investor to develop technology that improves wireless-Web connections. Gizis then needed to figure out whether anyone would buy a product that he had based on the breakthrough. That’s where crowdfunding came in.
“We said, ‘If we can get $50,000 based on videos and nobody even trying the software, we’ll know there is a market of untapped demand,’ ” Gizis said.
Kickstarter and peers such as Indiegogo are breaking new ground. For a half decade, these crowdfunding sites have helped aspiring filmmakers, comic-book creators and Web entrepreneurs in need of a few thousand bucks get an inaugural product rolling. Now, cash-rich, venture-backed startups are using the sites to find users and reviewers of their technology – instead of having to tap the networks of their friends, cousins and friends’ cousins.
It’s a twist on what has become an increasingly popular way to raise money for new ideas. Some 4.7 million people have pledged more than $760 million to 47,000 Kickstarter projects in the past four years, according to its website. The giving has gathered steam in the past year as crowdfunding becomes more mainstream and well-known.
Indiegogo, based in San Francisco, now distributes millions of dollars a week around the world. Through crowdfunding sites, users pledge small amounts to a project, and get an early version of the product – in contrast to venture capitalists, who typically dole out much larger sums to grab ownership stakes and often board seats.
The model benefits venture investors too, letting them deploy smaller amounts to fund company operations with the crowd paying for product development and initial manufacturing. That means less wasted money on failed iterations, said Scott Jacobson, a managing director at Madrona Venture Group.
“A lot of people confuse Kickstarter as a fundraising or financing platform,” Jacobson said. “That’s a bit of a misnomer. It’s for companies to identify early adopters.”
Madrona has backed two startups that plan to introduce campaigns within the next year to test their products: Play-i, which makes robots to help children learn computer programming, and Snupi Technologies, a developer of home sensors. Scanadu, whose devices help consumers monitor their health and wellness, wrapped up its Indiegogo campaign last month, reeling in almost $1.7 million on the site after raising several million dollars from private investors.
Kickstarter lets anyone raise a specified amount of money for a project that fits into one of 13 categories by posting a short video and description of the endeavor. Anybody can donate, and backers often receive promotions or the first release of a product.
Kickstarter is all or nothing, meaning that if a project doesn’t reach its target, the money is refunded. Many Kickstarter-funded projects don’t finish on time, leading to disillusionment among some donors. Even so, giving to Kickstarter has accelerated in the past year.
Indiegogo has a flexible option that lets those raising money keep the funds even if the goal isn’t met.
Connectify’s Kickstarter campaign was a success. In four weeks, the Philadelphia company raised $107,622, more than double its target amount, from 1,708 donors. The first 200 backers received a one-year license for the new software – Dispatch – and the company’s hotspot product for $40, less than half the retail price.
Dispatch lets users link to multiple Wi-Fi and high-speed wireless networks at the same time, improving download speeds. Consumers in countries ranging from Kenya to the Philippines tested the service and submitted feedback. Connectify is backed by funding from the investing arm of the Central Intelligence Agency.
Source: SF Gate – Callie Bost and Madeline McMahon – September 8, 2013