Crowdfunding - Micro No More!

Jan 22nd 2012, 13:42 by G.F. | SEATTLE

THE idea of collecting cash online through a mix of patronage and prepayment sprouted informally a few years ago. Initially bands used it to raise money for studio rental and the production costs for releasing an album. But the idea took off and is now offered by a plethora of middlemen, and embraced by all manner of creative types. In 2011 Kickstarter, the most successful of the online enablers, received nearly $100m in pledges for over 27,000 projects launched at its site.

This newspaper has written about Kickstarter several times in the past two years, including an overview of how crowdfunding works after the firm had raised about $15m in its first year. At the time, it was unclear whether such crowdfunding (also called micropatronage) was a passing fad or a rising alternative to conventional starter financing for creative media.

Kickstarter's performance in 2011 bolsters the latter case. The $99.3m pledge figure represents all commitments, backed by valid credit cards, to over 27,000 projects launched last year. The two biggest categories were film (with $32.5m pledged) and music (with $19.8m). Only those projects which reach a pledge target they set themselves within either 30 or 60 days receive the cash, which is charged to donors' credit cards. (These are validated on making the pledge, so Kickstarter's collection rate in close to 100%.) Last year 46% of the projects managed the feat; those that fall short do not get the cash and their donors are not charged.

In 2011 nearly 12,000 projects were financed through contributions by 960,000 unique donors with a median pledge of $25. Kickstarter's Medici, with the handle "H.T.", supported 724 projects. Yancey Strickler, one of Kickstarter's founders, says that just over $83m was collected. Projects which do reach their goal typically surpass it, typically hitting 130% of the target amount, and raising on average $4,500. However, ambitious ideas routinely muster $100,000 or more, and record holders have come within a whisker of $1m. (The company features a page listing its biggest success stories.) Unsuccessful campaigns rarely pass 20% of the goal. 

The remaining $16m in pledges was spread thinly among 34% of projects that win some support, an average of $1,000 each, but fail to reach their targets. One-fifth of launched projects do not receive a single pledge, a fact that Mr Strickler ascribes to project organisers who do not understand, despite his firm's best efforts, that they must actively market their effort to friends, family, fans and strangers. 

Kickstarter sends out a regular newsletter with editors' picks for the most interesting ventures. The site is curated to allow visitors (30.6m in 2011) to discover items of interest. But Mr Strickler says that the firm strives to remain behind the scenes and stays out of the relationship between organisers and funders. That can lead to disappointments, as Kickstarter disburses money for successful projects with no obligation on the part of the recipient to follow up. Kickstarter makes each project's creator responsible for delivery, and currently does not hold responsibility for late delivery or recipients who abscond.

Matt Haughey, a founder of MetaFilter, posted an account of an iPhone-case project he backed in which the delivered product did not live up to expectations. The comments on Mr Haughey's post feature a few prominent funded but unfulfilled efforts (as well as a spirited response from the iPhone-case makers). Projects that seem implausible or overambitious tend not to secure enough pledges to go ahead. Occasionally, those that do meet the bar fall through. For example, the developers of a wireless power-outlet control cancelled a Kickstarter effort despite surpassing their funding goal, after comments on the project raised doubts about its technical feasibility.

But Kickstarter seems to have vanishingly few of these. And proposals keep flooding in at a rate of 2,500-3000 a week. Micropatronage is growing bigger by the day.

What You Need to Know About the New Crowd-Funding Bill

By Jeff Steele at TheWrap The U.S. House overwhelmingly passed its first significant crowd-funding legislation, in the form of H.R. 2930, the Entrepreneur Access to Capital Act.   The bill (now in the Senate) amends the Securities Act of 1933, by allowing entrepreneurs to crowd source (online) up to $2 million per year in investment capital directly from individuals without having to register the investors with the SEC. However, the commencement and completion of the raise do need to be filed with the SEC.   Entrepreneurs (the “issuers”) must provide potential investors with audited financial statements in order to qualify for the $2 million cap, otherwise you are capped at $1 million.   Individual investments from crowd-shareholders are capped at $10,000 (or 10 percent of their annual income), whichever is less. To be clear, this is not free money; these are bona fide investor-securities for which they will receive a return on their investment as well as ownership interest in your enterprise, be it film, music, games, art, books, inventions, startups, etc. Many filmmakers have raised funding for films on popular gifting sites like Kickstarter and IndyGoGo. These sites have found success raising free money for ultra low budget films and other projects through crowdfunding models where people can pledge as little as $1 and as much as they like to a variety of different projects. That is free gift-money that cannot be paid back, so project benefactors have no financial interest in your film, nor can they take a charitable deduction on their gift (though some sites have contrived charitable workarounds.) H.R. 2930 specifically amends the “Requirements with Respect to Certain Small Transactions” (Section 4A of the Securities Act), by providing for registration exemptions for certain crowdfunded securities -- the details of which are summarized at the end of this article. Some important points worth highlighting are: The $1m/$2m funding caps and the $10,000 investment cap are pegged to the Consumer Price Index for all Urban Consumers, so they can be adjusted over time (this prevents the caps from becoming outdated.) A requirement that the issuer or broker use a 3rd party for cash management (this keeps prying fingers out of the cookie jar.) A requirement that the issuer or broker raise at least 60% of the target offering to take possession of the funds (this is a good because it keeps the issuer from collecting money for a project they can’t afford to finish.) Raising crowdfunds does not preclude issuer from raising capital by other means (this allows crowdsourced equity to participate in traditional capital structures alongside (other equity investors, tax credits, collateralized and mezzanine loans, etc.) Background checks are required for issuers and brokers/intermediaries. Crowdfunded shares cannot be resold for 1 year, unless the shareholder is an accredited investor or the issuer. The act does not specify which enterprises can be crowdfunded and which enterprises will be banned, if any.  So that remains to be seen. The act does preempt state “blue-sky” laws, but still allows for state enforcement. Massachusetts has the most representatives that voted against it (5 out of 10). Curious. The initial funding cap was $5 million, but was quickly lowered to $2m/$1m. The Act spells crowdfunding as one word, which will hopefully alleviate the 1 word vs. 2 words vs. hyphenated discrepancies. The bill has met some backlash by politicians claiming that crowdfunding measures would lead to speculative, risky offerings that could translate into heavy losses for small investors.  This argument has merit and should be carefully considered by the Senate and SEC.  It’s ironic that given the potential fraud risk and rampant financial abuses of the past 10 years that the House Republicans voted (in a strict partly-line vote) to kill an amendment that would have required intermediaries to disclose to potential investors how they are compensated.  This issue has plagued charities that outsource fundraising to 3rd party companies that, in turn, take a hefty percentage of the donations they raise.  Perhaps the Senate will re-introduce it. During the Senate Banking Committee’s December 1st hearing on spurring job creation through access to capital, Senate Banking Committee Chairman Tim Johnson said in his opening statement that they will hear from witnesses who will “provide insight on proposals to expand the scope of Regulation A offerings, to permit general solicitation of investors in Regulation D offerings, and to allow individuals to solicit and sell small amounts of stock over the Internet through crowd-funding.” Johnson continued, “They will address the size of a private offering and the amount of money that a crowdfunder should be able to risk without full regulatory protection.  They will discuss the types of markets where these securities should trade. They will also describe the existing investors’ safeguards, such as disclosures about the business and financials, and how current proposals would affect those safeguards.” Summary of H.R. 2930 (PDF): The amendments to Section 4A are as follows: ‘‘(6) transactions involving the offer or sale of securities by an issuer, provided that— ‘‘(A) the aggregate amount sold within the previous 12-month period in reliance upon this exemption is— ‘‘(i) $1,000,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, or less; or ‘‘(ii) if the issuer provides potential investors with audited financial statements, $2,000,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics, or less; ‘‘(B) the aggregate amount sold to any investor in reliance on this exemption within the previous 12-month period does not exceed the lesser of ... ‘‘(i) $10,000, as such amount is adjusted by the Commission to reflect the annual change in the Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics; and ... ‘‘(ii) 10 percent of such investor’s annual income; ‘‘(C) in the case of a transaction involving an intermediary between the issuer and the investor, such intermediary complies with the requirements under section 4A(a); and ... ‘‘(D) in the case of a transaction not involving an intermediary between the issuer and the investor, the issuer complies with the requirements under section 4A(b).’’ H.R. 2930 goes on to describe the statutory Requirements to Qualify for Crowdfunding Exemption, for issuers and brokers, which includes cautionary language, background checks, website requirements, etc. http://mobile.reuters.com/article/idUS125555802420111212?irpc=932

99designs Raises $35 Million for Crowdsourced Graphic Design

Authored by Mark Hefflinger on April 29, 2011 - 6:27am.

San Francisco - 99designs, the developer of an online marketplace for crowdsourced graphic design, said on Thursday it has raised $35 million in its first round of funding, led by Accel Partners.

Angel investors Michael Dearing (eBay, Harrison Metal), Dave Goldberg (Survey Monkey), Stewart Butterfield (Flickr, Tiny Speck) and Anthony Casalena (Squarespace) also participated.

San Francisco-based 99designs was founded in Australia in 2008, when co-founders Mark Harbottle and Matt Mickiewicz -- the entrepreneurs behind sitepoint.com, Flippa.com and Learnable.com -- spun it out of the SitePointForums.

The company, which has 26 employees, said it will use the capital for international expansion, platform development, community initiatives like design scholarships and aggressive hiring in both San Francisco and Melbourne.

"Most importantly, this investment goes a long way towards guaranteeing that we will be around long term," wrote Harbottle in the company's blog.

99designs said it currently has over 100,000 designers in 192 countries, and has paid out over $19 million to designers to date.
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Small Business Financing Might Get Easier If SEC Eases Crowdfunding Regulations

Venture & Angel Capital April 27, 2011 By Rieva Lesonsky

Social media has made it cheaper and easier for small business owners to market their companies. Now, social media companies might be making it easier for small businesses to raise capital, too.

Back in January, I posted on Small Business Trends about the rise of crowdfunding as a possible solution for small business owners seeking financing. Closely related to peer-to-peer lending sites, such as Prosper.com, crowdfunding goes one step further. While peer-to-peer lending focuses on individual transactions, crowdfunding uses the Internet to encourage many individual investors to contribute small amounts, adding up to substantial capital.

Today, individual investors are clamoring for a piece of hot social media companies like Facebook and Twitter, but those companies don’t want to go through the complex legal disclosures current securities laws require. As a result of this demand, reports VentureBeat, the Securities and Exchange Commission (SEC) has decided to study the crowdfunding issue. “[The] staff is taking a fresh look at our rules to develop ideas for the Commission about ways to reduce the regulatory burdens on small business capital formation in a manner consistent with investor protection,” says SEC Chairman Mary Schapiro.

Easing restrictions on crowdfunding would let Facebook and Twitter raise money from thousands of investors –and could also benefit small business owners looking to bootstrap their businesses without having to give up control to venture capitalists. For example, if you wanted to raise $100,000, you could sell $100 shares to 1,000 individual investors via Facebook.

Of course, although these individual investors are investing only small amounts of money, there’s still a risk involved–and that’s what the SEC is concerned about. Back in 1992, the SEC allowed small companies to issue shares of up to $1 million to ordinary investors without any going through the usual regulatory hoops, such as full disclosure of the company’s financial information. In 1999, however, that regulation was changed because of concerns about fraud.

A petition that would allow crowdfunding of up to $100,000 has been backed by 150 organizations and individuals. What do you think about the SEC’s move?

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New site helps small businesses crowdsource capital from their communities

By Anneke Jong

Stanford Graduate School of Business classmates create Profounder, an online crowdsourcing tool that helps entrepreneurs raise money online from their friends and family.

(CBS News/ What's Trending) Part of the mission of What's Trending is to bring you to the source of what will be trending in the years to come.

"Summit at Sea" was an invitation-only conference held from April 8 -11, 2011 for entrepreneurs who wanted to share their new ideas with other likeminded individuals. These "Summit Series" meetings have introduced the world to some of most innovative thinkers of today. Founder of Philanthro Productions Anneke Jong was on the cruise with the "Summit at Sea" attendees and discussed their forward-thinking businesses that they hope will change the way we live.

After founding Kiva, an innovative microlending website that helped individuals to invest in entrepreneurs in developing countries, Jessica Jackley turned her sights to supporting innovators back home.

With her Stanford Graduate School of Business classmate Dana Mauriello, Jackley co-founded Profounder, an online crowdfunding platform that gives entrepreneurs the tools to raise investment capital from members of their communities. Instead of just raising capital the usual way, the two introduced Profounder at the DC10 Summit Series in 2010 at a live pitch event and won $50,000 for their idea. Now, they're spreading word about their business -- and helping others -- by sponsoring a live pitch event for up-and-coming businesses at Summit at Sea.

What's Trending: Can you tell me more about your experience with the live pitch event last year?

Mauriello: We had the opportunity to pitch the business idea for Profounder for five minutes to all the attendees (of the DC10 Summit Series), who then got to do some live trading of fantasy stocks for all the businesses being presented. Second Market created an app that enabled everyone in the audience to do live trading of fantasy stocks from their phones. At the end, the business with the highest value stock won $50,000 from the Summit Series team and Presumed Abundance.

Many of the people involved in that experience are now really integral parts of our business. Barry Silbert from Second Market is an investor. Kim [Scheinberg] and Rafe [Furst] from Presumed Abundance are also deeply involved in our business, and we're so thankful for that. It really all gelled around the same time.

Jackley: It was pretty wonderful. I wanted to add that of the $50,000 we got, $10,000 was used today to pay it forward with another pitch event which we hosted. Our goal would be that next year we continue to have a pool of money that is paid forward through the investments that Profounder has made as a company in Summit businesses.

WT: Can you guys talk about paying it forward and, what you did today with this live pitch event?

Mauriello: During this pitch event we wanted to make it more than about just money. We also made it about crowd-sourcing a number of resources from the audience so everyone could participate and get involved, and a variety of different businesses in different stages could also be involved.

Six entrepreneurs got to pitch their business for five minutes, and then we asked for three things: what someone could do to advocate for them, what someone could do to lend their skills and services and how people could actually invest. After all the pitches were done, we had boards up on the wall for each of the six businesses. We had color-coded post-it notes for each category of contribution, and we tallied who had the most support. The winner received $7,500, that was the innovative new URL shortener called bre.ad, and $2,500 went to the runner up, Sole Bicycles.

WT: How did you identify the entrepreneurs who pitched today?

Jackley: What's nice is that it [Summit Series] is a supportive community. There's not really competitiveness as much as there's a mutual desire to see each other succeed... Even more than volunteers, we had recommendations. People would suggest someone else and say, "You should really talk to so-and-so, they're awesome and their product is amazing."

Mauriello: Our whole motivation for doing the event wasn't just about the money. Last year, we saw that you just get so excited about each other's businesses, but it can be hard to find opportunities to get involved in a tangible way. You noticed last year there were auctions and other ways to get involved and raise money for the non-profits, but for the for-profit ideas, there wasn't really that tool for engagement. This is our first iteration of that, which we hope continues.

WT: Profounder is founded on the principle of crowd-sourcing support for new ventures. What do you guys see as the future of that space? How are you hoping to shape it and what's next for Profounder?

Jackley: The statistics are so ridiculous and extreme; I almost start laughing when I say them. 99.9% of all businesses in this country are technically categorized as small businesses. Who's thinking about them, who's serving them? This market is so underserved. Eighty-seven percent of funding to private companies in the U.S. comes from friends and family -- not VCs, not angels, not bank loans -- it's offline, it's scrappy, it's haphazard, it makes Thanksgiving awkward... There aren't good tools to make it any kind of a standardized process. Not only is it offline, but they don't know what to comply with and which papers to file.

So, we decided to put this online and start with the people closest to you in concentric circles to do community-based crowd-funding, different than a wide-open, come-one-come-all marketplace. There's is a huge opportunity to start small and slowly build out. We're trying to provide entrepreneurs with the rules, the laws, and the best technolog, so people can slowly figure out how to fundraise not just through the obvious social networks, but beyond.

WT: At today's live pitch event, you included opportunities for people to invest money, but also to offer their skills, their support and their advocacy. It sounds like you guys want to build that into the functionality of Profounder to not only fundraise, but also to provide connections and support.

Mauriello: We wanted to start with the deepest need where we felt like the least innovation was currently happening, and that was definitely friends and family fundraising. It hadn't been innovated at all since the church collection basket. We wanted to start there and then partner with others in the space who are doing amazing things to provide this whole basket.

But, more and more we see that it isn't just money that is going to make it or break it. Money helps, but they may also need great marketing advice or just having people shop at your place more often can been tremendously valuable. So that's a next step for us.

Former strategy consultant by day and social entrepreneur by night, Anneke Jong is a student at the Stanford Graduate School of Business and a founding partner of Philanthro Productions. She writes and speaks about technology, design, storytelling, and the future of philanthropy. Twitter: @annekejong , Blog: www.annekejong.com.

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Finding Vivian Maier a $100,000 by Kickstarter.com

Tomorrow a Kickstarter.com project entitled "Finding Vivian Maier" - a feature length documentary with a pre-production funding target of $20,000 will have overreached its target with a culm of $104,207 as of this posting. What makes "Finding Vivian Maier" - a feature length documentary film such a winner...Well the answer is in the authenticity of the project and most of all the person the film is ultimately about. Vivian Maier nanny and street photographer who caught history in time and asked for nothing in return will unfold in this feature length documentary and take her humble place in the pantheon of undiscovered talent while alive, only to become globally famous upon her death and with the discovery of her pictures a truly amazing story will finally be told thanks to John Maloof, Anthony Rydzon, and award-winning Danish documentary film maker, Lars Mortensen.



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vivianmaier.com

Crowdfunding Cuts Out (Most Of) The Middlemen Categories: That's What Fans Are For

by WHITNEY BLAIR WYCKOFF NPR

For musician Anthony Cekay, a venture into the world of crowdfunding started with a poem.

A friend challenged Cekay, who double-majored in English and music in college, to write a poem that humanized the devil. From Cekay's poem grew a series of poems; the poems evolved into a melody; and that melody developed into an eight-hour piece of music, "The Spectacular War Museum."

Cekay was invited to present the piece in vignettes at a New York venue, but he wanted to offer an experience that went beyond a traditional performance: He wanted to stream his shows and have a jazz blogger offer a running commentary throughout. The problem was that the venue, while supportive of the project, didn't have the capital he needed to back the whole thing.

So, Cekay turned to the crowdfunding site RocketHub and raised $2,500 to pay for equipment, 20 musicians and tech support.

"We brought in well over 600 people both live and watching the performances recorded," Cekay says. "And that just wouldn't have been possible to do online without the crowdfunding element."


RocketHub is one of several crowdfunding sites burgeoning on the Internet that allow musicians — and other creative-types like filmmakers, writers and painters — to enact a kind of grassroots campaign online to earn money to fund their ideas. It may help musicians to get a career boost or pursue a nontraditional project, but it also allows fans to interact with musicians in a unique way.

For one thing, fans who contribute get a tangible reward from the artists. Cekay says his "fuelers" had a level of involvement that went beyond seeing one of his shows. Depending on how much money someone contributed, that person would receive a highlights DVD, mp3s or a books of poetry that inspired the music.


Isaiah Singer
Anthony Cekay's cousin Christopher Allen, who fueled Cekay's project, with Anthony Cekay and Brain Meece. Allen won a t-shirt in a raffle Cekay held each week to fuel the project.
Yancey Strickler, a co-founder of a crowdfunding site called Kickstarter, says crowdfunding is a business model that lies somewhere between commerce and patronage. Musicians get funding, but fans get something too: They get access.

"People like knowing where something is coming from and what the process has been to get there, and it gives you [as a consumer] an opportunity to be involved in a way that you never would otherwise," Strickler says.

The idea of selling seats to the creative process is nothing new. In fact, Brian Meece, a co-creator of RocketHub, says crowdfunding is a throwback — a throw way back.

"We sometimes say Beethoven-plus-social-media equals crowdfunding," he says. "Because back in Beethoven's day, he had patrons basically give him financial contributions so he could continue his work. And that's how he got paid."

The difference is that instead a handful of patrons funding an artist, crowdfunding has allowed more people to play that role. But despite the success that some artists have seen using crowdfunding, music researchers say it's not a replacement for the traditional record companies.

"I think the crowdfunding aspect is interesting, but shouldn't be overestimated," says Mark Mulligan, vice president and research director of Forrester Research.

There are practical obstacles. Crowdfunding can't do the dirty work that many musicians either can't, or flat-out don't want to do — things that a label might take care of, like marketing, promotions and distribution. In other words, it can help you buy a van for a tour, but it can't book your shows for you.

As Kristin Thomson, a consultant for the Future of Music Coalition, says, marketing through crowdfunding takes a certain kind of creativity — and an already-existing rolodex or fan base. It's difficult trying to build a fan base while you're trying to get people to financially support you, she says.

"Ultimately, a band wants to be out — playing music, writing music, performing," Mulligan says. "They don't want to be marketing and promoting."

Mulligan says that crowdfunding may resonate with certain types of artists, but for the mainstream, it's a means to an end: a stepping stone to a record label — or a life after one.

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