The World of Crowd Funding

Ninety-two people donated $11,350 so that Chris Young could shoot a stereoscopic, live-action short film. In return, they got special mention in the credits.

Thirty-seven people contributed almost $2,700 to help Elaine Zelker produce "The Hands--Some Journey," a photography project for an Easton, Pa., gallery. Their perks ranged from a big thank-you to a coffee-table book of the collection.

And 32 people gave $1,559 to help Janet Geddis open Avid Bookshop, a coffeehouse and bookstore in Athens, Ga. She'll use the funds, along with her savings, as equity toward a bank loan. In return for their help, Geddis' supporters received locally roasted coffee beans, autographed books, pint glasses and handmade stationery.

Welcome to the world of crowd funding--where a batch of new websites lets entrepreneurs combine social networking with project fundraising. Unlike peer-to-peer microlending, which has been around for decades, financial assistance received through crowd funding isn't paid back. Nor does it require pledging collateral, offering personal guarantees or giving up equity. The funds are outright donations from friends and strangers who believe in the dream and want to help.

A website called IndieGoGo made Young, Zelker and Geddis' projects possible. Although a number of crowd sourcing websites exist, they tend to focus on creative endeavors (Kickstarter.com or SellaBand.com) or specific industries (Spot.us, for investigative journalists).

IndieGoGo and the more recently launched Invested.in--whose web banner reads "Because banking executives just don't get it"--are standouts in the entrepreneurial arena.

IndieGoGo is the brainchild of Danae Ringelmann, Slava Rubin and Eric Schell, who launched the site in 2008 to leverage social marketing in a way that would democratize lending. Project owners from 120 countries have participated in more than 5,000 projects on IndieGoGo.com.

Here's how it works: Once you've created an IndieGoGo account, the website walks you through setting up a project description, fundraising goals and perks. Perks entice people to contribute at various levels (Ringelmann says there are three sweet spots in contribution levels--$10 to $25, $50 to $100 and around $500). The average project goal posted on the site is about $7,500, but they range from $500 to $50,000.

IndieGoGo earns its perks in the more traditional manner--taking 9 percent of whatever you raise. If you meet your fundraising goal in the time you've set, you'll earn a 5 percent bonus from the site. If you don't meet your goal, you still keep the money you raised (less the 9 percent). Contributions can be paid directly to you via Amazon, PayPal, credit card or check.

Not all projects are funded, but Ringelmann points out that the process offers valuable lessons regardless. "Sooner or later, you're going have to engage customers and get them to pay money for what you do," she says. "Careful selection of your perks can help you gauge interest in your product or service. It's basically free test marketing."

Let's say you have an idea for an energy-saving device. Your perks might include discounts, exclusives or an honorary position on the board of directors. If no one bites after you've made an earnest effort to promote it on Facebook, through blogs and via other social networking strategies, maybe you need to rethink the product or the market.

Although crowd funding isn't going to solve everyone's startup finance needs, it's good to see that at least some clever entrepreneurs are taking the golden rule of finance--"He who has the gold, rules"--and making it more democratic. 

This article was originally published in the September 2010 print edition of Entrepreneur with the headline: From Friending to Funding.