Crowdsource funding; appeal to the masses and they shall reward in kind.

by alex.

Crowdsourced funding is one of the newest and most internet-centered means of obtaining seed funding for startups. Savvy founders have raised tens-of-thousands or in some cases hundreds-of-thousands of dollars of funds on crowdsourced funding sites, all while retaining control of both their company and their IP ownership. Last year in 2010, the founders of FaceBook alternative Diaspora pulled in $200,000 in funding with a successful Kickstarter campaign that had a posted goal of  $10,000.

What is crowdsourcing?

Crowdsourced funding websites like Kickstarter.com or Indie Go Go are online venues where individuals can place a project description in order to solicit pledges from the general public or a targeted online community. The collection and disbursement schemes for pledges vary between sites.

Kickstarter takes an all or nothing approach. At the start of a campaign the founder sets a deadline and a minimum dollar threshold of pledges. If the pledges do not meet that threshold in the allotted time, no money is collected from the donors. If the target level is met or exceeded, the site collects the funds and takes a 5% service fee. The remainder is then disbursed to the individual or group who posted the project, with neither the site nor the donors claiming any ownership over the project or the founders' IP.

Indie Go Go, meanwhile, collects and disburses funds for projects that fail to meet their founder-assigned minimum threshold, but charges a higher fee. 9% versus the normal 4% levied on projects that meet or exceed their minimum. Both Kickstarter’s all-or-nothing approach and Indie Go Go’s failure-boosted fees are designed to motivate project founders to work hard to make a good case for why potential donors should pledge money with no strings attached.

Wait, no strings attached money?

For most sites, yes.

Others, including social entrepreneurship investment site 33needs.com do give donors a limited claim on a percentage of the startup company’s profits for a set amount of time. That and in the case of 33needs, the site also takes a 5% service fee.

The degree of trust between donors and project founders requires a high level of transparency, and most crowdsourced funding sites are set up to facilitate this. Generally every step of funding campaigns can be tracked by anyone with an internet connection. This means that failures to generate donor interest or to meet funding goals are readily apparent to everyone. Also, once you post something on the Kickstarter or Indie Go Go page of your project, you cannot take it down or delete it.

There is also no moving the goalposts. After you’ve set a project timeline and minimum pledge threshold, you are stuck with them. If the project fails to hit its minimum on time you can post a new version of it with new parameters, but while it’s under way there the finishing line is fixed in place.

Standing out

The biggest difficulty associated with crowdsourced funding campaigns in one of differentiation. There are a lot of projects on these sites at any given time, and standing out requires a well-honed pitch as well the use of supporting social media to tell a story. Namely the story of your project and the good you intend to accomplish with it.

Multimedia presentations such as videos uploaded through YouTube are also common features of successful crowdsourced funding campaigns. Along with transparency, letting potential donors see and hear you make your pitch is an important part of winning their trust.

Something else to keep in mind is that the crowdsource donor community has a strong internet ethos. Technology projects with lofty or humble goals designed to produce social value generally have a leg up with potential donors. Several successful fundraisers have written blog posts and online articles about this and other aspects of running crowdsourced funding campaigns that are worth checking out.

Who uses crowdsourcing?

So far crowdsourced funding has been kind to artistic endeavors of all stripes, hardware technology projects, and apps developers, as well as social entrepreneurs engaged in enterprise ventures within all three of these fields.

Social entrepreneurship and the L3C

If you are a developer whose application is designed to address a specific social problem like an aspect of homelessness while bringing in profits, this is a excellent time to be you. Not only has crowdsourcing offered up a new avenues of funding uniquely suited to reaching donors who are looking for a cause to put their money behind, but several states have recently passed laws to support you by creating the first new major business form since the emergence of the LLC.

The low-profit, limited-liability company. Also known as the L3C. A form of business designed in part to help facilitate the investment of private funds in social project enterprises.

The L3Cs form offers the limited liability and flexible tax consequences of an LLC. It also allows an L3C with the proper organization to receive venture capital style investments from private, non-profit foundations. To do this, the company’s articles of organization must be set up to reflect the standards for program-related investments that govern investments made by foundations under the 1969 Tax Reform Act. An L3C must also have an explicit charitable mission that comes before profits, but unlike a non-profit charity an L3C can disburse profits to members and investors.

Whether you’re a mission-driven social entrepreneur or you’re out to write the next blockbuster app, crowdsourced funding is worth considering. Like other forms of funding it can play a useful role in filling in your seed round. Or if your application requires only modest funding to develop, crowdsourcing may be all that you need to get to product launch while keeping complete control of your company and your IP.

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