Financing from Strangers
“When recent college graduate Bronson Chang wanted to renovate his uncle’s candy shop in Honolulu, he decided to tap his social network for the funds via a ‘crowdfunding’ website, instead of seeking a loan at a bank.
Crowdfunding sites—such as ProFounder.com, Peerbackers.com, Kickstarter.com and IndieGoGo.com—allow entrepreneurs to raise money collectively toward a monetary target. Entrepreneurs can create a profile on a crowdfunding site listing their monetary goals, an explanation of how the funds will be used, and an end-date for the campaign. Once the information goes live on the site, investors can pledge money toward the entrepreneur’s goal. These sites typically take a small percentage of the funds that an entrepreneur takes home.
In a difficult climate for raising money, more small-business owners are using crowdfunding networks to find cash for starting up or expanding. The amounts that entrepreneurs raise are usually less than $10,000, and investors often are promised only token compensation such as coupons or free samples. But that trend may be changing, as sites like ProFounder are facilitating much larger fund-raising campaigns.
‘We’re at the beginning of a huge crowdfunding movement that will disrupt the traditional channels for funding,’ says Bo Fishback, vice president of entrepreneurship at the Ewing Marion Kauffman Foundation, a research organization in Kansas City, Mo., dedicated to start-ups. He reasons that entrepreneurs prefer the idea of pooling small amounts from ordinary people, rather than ‘trying to say the right things to get a rich guy to cut a check.’ “
See article at: WSJ 09Dec10: “Tapping the Crowd for Funds”