Crowd funding fuels businesses, charities, creative ventures
— -- While studying abroad in Ghana in 2006, Meghan Sebold often roamed local textile markets and marveled at the surplus of colorfully patterned fabrics that were left unwanted.
After she returned home to San Francisco, her thoughts kept drifting back to the faint but enduring idea of producing a clothing line that used textiles and talent from the West African country. She had few concrete plans on how to start a business — and even less money.
Then, a chance encounter at a seminar in New York with the founders of start-up RocketHub, a crowd-funding website, stirred her hopes. At the urging and guidance of Brian Meece and Vladimir Vukicevic, Sebold wrote at length about the business idea on RocketHub.com, accompanied by a video, and asked for direct financial contributions from family, friends, and friends of friends.
Her modest goal of raising $4,000 was achieved in about two weeks. Her first set of dresses, funded by the donations and made in Ghana with local labor, sold out online and at local pop-up stores. "It gives you more credibility than saying 'Hey, Uncle, can you lend me $20?' "
Entrepreneurs and dreamers such as Sebold are flocking to crowd funding, an emerging field of finance that, by using the Internet as an efficient middleman, often manages to be both more intimate and more high-tech than traditional means of raising seed money. The idea has existed for years but is receiving renewed attention now that social media, online networks and payment technologies increasingly strip away legal, psychological and logistical barriers for money solicitations.
RocketHub, Kickstarter, PledgeMusic, Funding4Learning, ArtistShare, FundRazr and hundreds of other sites call on individuals to pool their money, by way of the Internet, and support others' artistic, educational and business efforts, as well as charities and disaster relief. Some sites, like Kiva, specialize in small loans.
"The gradual success of many projects has validated this as a real option, a real way to make things," says Yancey Strickler, co-founder of Kickstarter. "The Internet is incredible for harnessing organizational power."
While they get a sense of fulfillment at seeing the campaigns they support continue, donors typically receive neither a stake nor artistic/operational input. That could eventually change. President Obama recently signed a law, the Jumpstart Our Business Startups (JOBS) Act, that would allow individuals to buy equity stakes in companies via crowd-funding sites under certain rules, likely effective next year.
A few dollars here and a couple of hundred bucks there can add up quickly. About $1.5 billion was raised in 2011 by about 450 crowd-sourcing Internet sites worldwide, says a report by Crowdsourcing.org, a site tracking the industry. That's expected to double this year, the report forecasts.
"This expands on the angel investor model" in which a wealthy individual puts up money in return for equity, says David Rubenstein, partner at accounting firm WeiserMazars. "There is some good to this. This will ultimately result in growth of companies and additional jobs."
The business is also good for those who operate successful crowd-funding sites. They make money by taking a percentage of the money raised — typically about 3% to 5% — and a per-transaction fee.
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