Game-Changers:
Crowdfunding tries to
grow up

game-changerWelcome to the new world of fundraising, in which so-called crowdfunding websites like Indiegogo and Kickstarter let just about anyone with an idea try his or her hand at bankrolling a dream. Proponents of crowdfunding believe it has the potential to upend traditional financing models, such as loans and venture capital, and unleash a tidal wave of capital for entrepreneurs, creative types, and, yes, cheesemongers. Reliable estimates of the industry’s size are hard to come by, but one research outlet, Massolution, predicts some $5 billion will be raised through crowdfunding this year, up from $2.7 billion in 2012.

This thoroughly modern, highly democratized approach to finance still has a Wild West feel to it, and many crowdfunding pioneers hope it stays that way. They want people to be able to use the web to fund virtually anything, from fertility treatments to puppetry-school tuition (for real). But as more for-profit enterprises seek to raise money, regulators are stepping in to make sure small investors are protected — and rewarded — for their risk taking, just as in traditional finance.
The two largest crowdfunding sites, Indiegogo and Kickstarter, offer very different glimpses at the future of the nascent industry. Indiegogo, founded in 2008 by a former securities analyst and others, supports a new law that would enable equity crowdfunding, or the ability of nonaccredited investors to actually own a piece of the fledgling companies found on this type of site. Until now, the only returns given to individual backers were perks like shoutouts and signed copies of products (or, in Dvorak’s case, gift cards and Mission Cheese T-shirts).
Equity crowdfunding “offers promise that future successes can get off the ground, when in the past they wouldn’t have had that opportunity or would have had to limp along as they bootstrap themselves,” says Harvard Business School professor and innovation guru Clayton Christensen. “For entrepreneurs in underserved niches, it will make a world of difference.”
MORE GAMECHANGERS: PatientsLikeMe
Indeed, when Danae Ringelmann started Indiegogo, she hoped to help founders whose products were too focused or obscure to attract venture capital or even angel money or bank loans. “In the past, it was dependent on who you knew — friends and country clubs and going to the Hamptons,” says Ringelmann, who spent six years as an entertainment industry analyst at J.P. Morgan and Cowen & Co. Originally focused on small film projects, Indiegogo has now helped fund more than 100,000 initiatives around the world, from sex-toy inventors to a London-based café that caters to human patrons and their feline friends. Last year the first “crowdfunded baby” was born, after a couple from Florida launched an Indiegogo campaign to raise money for fertility treatments.

Indiegogo gets a 9% fee on any money raised through its site, though it takes a smaller cut (4%) from campaigns that manage to reach their fundraising goal. True to its mission, it has become the Android of crowdfunding sites — an open platform that lets just about anyone try to fund anything. There’s no waiting time for applications to be approved, and the only banned projects are ones that are against the law. In the spirit of giving more open access to capital to all entrepreneurs, Indiegogo plans to let people exchange equity for funding when the practice becomes legal. Ringelmann is not quite sure how it will work because the exact rules have yet to be published by the Securities and Exchange Commission, which would help regulate and monitor equity crowdfunding. But she says opening the doors to small investors is a natural fit with Indiegogo’s democratic ethos. “Finance has a bias toward mainstream, in order to make the numbers work,” says Ringelmann. “But if there’s a niche audience that wants to fund something, then they should have every right to do so.”

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