Thursday, November 1, 2012

Crowdfunding part 1: What is it?

Some of you may already be on a first name basis with this while others may wonder if it is referring to the exporting of jobs overseas.  For those of you aren't yet familiar with crowdfunding, it's the perfect time to learn!

Crowdfunding is a relatively new phenomenon in raising money and the best way to understand it is through an example.  Let's say an entrepreneur (Elly the entrepreneur) has just created a never before seen invention called the widget.  This widget answers your phone, does the dishes, brushes your teeth; really it's just amazing and the Elly thinks everyone is going to love it.  There's just one problem.  It's pretty darn expensive to make these widgets.  She needs to hire an engineer to finalize the design, contact a company to build it, and have  it shipped to her and delivered to her customers (and that is just the tip of the iceberg!)  That's a lot of dinero.

But so what?  There are people with money out there.  Why not ask you wealthy friend Igor (the investor) for a little money (say $10,000) and in return give him some of the profits you make from selling  widgets?  Well it's let's put yourself in Igor's position.

Igor has experience in investing. He knows that investing in an early company is a gamble, and $10,000 is a significant amount to gamble. Igor needs to be assured that his money will be returned with interest.

Elly needs to prove to Igor that her business idea is feasible, whether this is through a series of conversations, a unique presentation, or even current widget sales.

If the entrepreneur gets money, on fair terms, that's great; but what happens if Igor doesn't believe in the idea?  If he thinks that the widget would never sell?  Elly could always get a loan from the bank, but if the widget was unsuccessful, Elly could lose her house.

Never fear, the widget may still survive!  Thanks to a little thing called crowdfunding.  Instead of asking Igor for $10,000, Elly could ask a crowd of people for $10,000?  She could go to 100 people and ask for $100 from each of them.

$100 is a lot less to gamble, but just like Igor, these people need to trust Elly and believe in the widget.  That means the ideal group of people for Elly to ask are her friends and family.

Logistically speaking going to each of these people and organizing an investment would be a nightmare, but there are websites in place to make this process simple and painless.  Websites such as:

Rocket Hub
The Funder's Club

This is but a small taste of what crowdfunding has to offer, and I hope it satiates your appetite for the time being.

Until next time,
Steven Burgess


  1. Igor's name magically changes to Tom in the fourth paragraph. ;-)
    Great first post! I actually could follow your business brain. :-P

  2. Yup, that's because Igor was originally Tom, but I liked the alliteration of Igor's name.

  3. Great blog, Steven! There is new short book called "The Kickstarter Handbook," that has very interesting stats. Turns out you must bring your own crowd--Elly must have a solid network. Kickstarter stats show an 8 to 1 ratio of external pledges to those from the site. Best, @judyrobinett

  4. Thank you Judy! And thank you for the suggestion, I will have to look into that book. And yes the networking effect is very powerful! I go over it a bit more in my third post of the series The Process. Let me know if you see anything else I can improve!