Fund-Raising for the Facebook Generation 

Crowd-funding sites help entrepreneurs kick-start their businesses, but are these new platforms too good to be true?

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Lawton, to be fair, isn't an entirely disinterested observer — the self-described serial entrepreneur has ambitions to start a new online funding platform of his own. He's even spearheading a movement to petition for an SEC exemption that would allow for crowd-funding with securities. What Lawton fears is that the existing sites are flying under the radar simply because the trend is so new and that if one or more of them gets shut down by the SEC, as he predicts will happen in 2011, it'll muddy the waters for everyone.

The term "crowd-funding" was coined in 2006 by Michael Sullivan of the now-defunct, a site that tried to apply the model as a way to pay creators of online video content, and it's only during the past two years that the idea (and buzz word) has really taken off. But the truth of the matter is that crowd-funding, at its core, isn't a particularly new thing.

In a way, any kind of charity has always been a form of crowd-funding, Lawton says. He cites the fund-raising efforts, on both sides of the Atlantic, to pay for the Statue of Liberty as an early example: In France, there was a kind of charity auction that helped fund the building of the statue. And in the United States, Joseph Pulitzer used his newspaper as a pulpit to encourage readers to send in small amounts of money to pay for the pedestal and for the shipping.

"If you really translated that to using a web site, you would have crowd-funding. That's Kickstarter for the Statue of Liberty," Lawton said.

In that sense, the only real change is that what used to occur offline — people pledging money, sending in checks, and so forth — is now taking place on the Internet. Nevertheless, and in spite of his reservations about some of the current practices of the crowd-funding industry, Lawton believes the phenomenon marks "nothing short of a monumental shift, not just in our culture but in our economics."

Why the bold statement? The key lies in the power of social media technologies and the way these technologies have indelibly altered the way people interact with one another — and, now, with the way they do business, too. Kickstarter, IndieGoGo, and most of the other crowd-funding sites are all optimized to work with Facebook and Twitter so that if you decide to fund a certain project, then, with just one click of the mouse, all your Facebook friends and Twitter followers will see that you did so — and can jump onboard themselves, if they so choose. In that way, a fund-raising campaign can reach a far wider audience much more quickly than was ever possible before, spreading outward from the aspiring entrepreneur's circle of friends and acquaintances toward strangers who are two or three degrees removed but might still be inspired to give. All of the actual transactions are smoothly integrated into the sites, too, making the tried-and-true act of writing a check and putting it in the mail seem impossibly old-fashioned.

Danae Ringelmann, a Haas School of Business alum who co-founded IndieGoGo in 2008, explained, "Everybody wants to wake up in the morning and do good. The reason that people don't is because they're really busy, or they have kids, or they've got a nine-to-five job and they're running around." So if the process can be streamlined, so that giving money to support a worthy project — and getting the word out about it, too — is just a matter of a few clicks, then people are much more likely to act on their impulse to help.

To start an IndieGoGo campaign, all you need is a pitch, a specific funding goal, and an image (or, better yet, a video) that succinctly sells potential contributors on your idea. At that point, getting the project up on the site only takes a matter of minutes. According to Ringelmann, the company performs perfunctory background checks, but for the most, part anyone who wants to start a campaign, whatever its nature, can do so — the idea being that the market will dictate which ones are worthy of support. (Kickstarter has a more involved application process that seems geared toward weeding out projects that don't fit a certain mold.)

Most project owners also set specific perks that donors can earn for contributions at various levels — and those perks can be a hodgepodge of tangible merchandise (a T-shirt) and some conferrence of "VIP" status (the right to name a product, for example). The various crowd-funding sites differ slightly in their payment mechanisms (IndieGoGo allows for credit card, check, or PayPal transactions; Kickstarter uses Amazon Payments exclusively). But, generally speaking, the sites place no limits on the amount of money that can be raised — so it's fine if you ask for $10,000 and end up getting $100,000. And almost all of the sites use an "all-or-nothing" model under which no funds are authorized unless a project reaches its full fund-raising target. The site then takes a cut of the total sum at the very end. IndieGoGo does allow partially funded projects, but charges a higher fee in those cases (9 percent, versus 4 percent for projects that meet their goal).

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