CrowdFunding - Does It Work? (Part 1)

10/16/2012 3:19:05 PM

Is it really practical to fund a business from hundreds of small donations harvested over the internet? Simon Brew investigates

There’s a sporting chance that you’ve seen the work of Jane Espenson on your television over the past decade or so. She’s written scripts for shows such as Buffy the Vampire Slayer, Torchwood and Battlestar Galactica. Naturally, therefore, she’s worked with and befriended some people with very deep pockets.

Yet, when it came to raising funds for one of her most recent projects - a small web-based sitcom by the name of Husbands ( - she chose not to turn to her well-heeled contacts. For Espenson is one of a growing number of people who has turned to the idea of crowdfunding: seeking small donations from many supporters over the internet, instead of big contributions from venture capitalists, banks and such like.

Description: Jane Espenson's series Husbands has been largely funded by its audience

Jane Espenson's series Husbands has been largely funded by its audience

Consequently, the budget for Husbands' second season has come almost directly from its audience. In all, 956 people have donated a total of $60,000, with the smallest contribution being only $1. Impressively, it raised its budget in less than a month.

Crowdfunding is a fascinating idea, and one that’s beginning to find its feet, thanks to the rise of dedicated websites such as Kickstarter ( Could it really give the banks - with their continued reluctance to lend to small businesses - some serious competition?

Who needs crowdfunding?

Let’s be honest from the outset: for the majority of businesses, crowdfunding simply won’t work. Since it requires the interest of a comparatively large number of people to fund a venture, the project itself has to have relatively wide appeal. After all, there’s something idyllic and romantic about being able to fund a film, but an educational hobby robot? That had 31% of its target when we visited its appeal page, with only 18 days left to go. Setting up a crowdfunding appeal is clearly no guarantee of success.

Description: Who needs crowdfunding?

“You need to do your homework,” Jane Espenson told PC Pro. “Look at other projects, both successful and unsuccessful, and figure out what would make you back something. Work on the campaign video and the wording of your appeal. Find great incentives for donors and include incentives across the spectrum, from low to high amounts. And publicise the campaign.”

Espenson only turned to the crowdfunding model for the second season of Husbands, “so we had all of season one to use as a demonstration of what people were funding”. And if you don’t have a back catalogue of work at hand? “Find another way to demonstrate what makes your project special,” she advises.

Many have. In the past year, there’s been a substantial rise in the number of crowdfunded projects. These range from small video games costing a few hundred dollars, through to a documentary about US footballer Jay DeMerit, which has banked $223,422. Seemingly out of nowhere - although the roots of this variant of crowdfunding go back a decade in the music industry, at least - a viable, previously relatively untapped source of project funding has appeared.

However, Doug Andrews, the CFO of the Homeworking & Small Business Alliance (HSBA) wonders if the novelty factor is what’s attracting investors. “Crowdfunding sounds like something that could work brilliantly for early pioneers, but I suspect that once it becomes mainstream, it will be very difficult to get your idea found among all the other businesses vying for attention. A lot of the excitement and goodwill that’s associated with early trends will have been replaced with people asking ‘what am I going to get out of this?”’. Andrews admits that such questioning is “not necessarily a bad thing in itself”, but adds that “as a business owner, I wouldn’t want 2,000 investors dipping their oar in and trying to run my business”.

Investor influence

Do investors really get much say? The emerging crowdfunding model, through websites such as Kickstarter, Sponsume (, Indiegogo ( and their ilk, encourage project initiators to offer rewards for differing levels of donation, but they tend to be gift-based rather than offering input into the business or a guaranteed return. Some of the rewards are enticing - a part in a film, special versions of the product being funded, the chance to get involved - but they tend to be a substitute for a firm, legally binding share of the profits that a substantive investment would normally attract.


“It’s more like a charity investment,” says Toby Ricketts, CEO of Margetts Fund Management. “People are investing on trust, or in excitement, in the same way you and I would buy a lottery ticket. There’s pleasure at the point of investment”. There are, however, far more effective - and tax-efficient - ways to invest in a business, Ricketts argues, adding that he would “invest $30 in a project, but only if I got $30 of enjoyment out of it”.

While the burgeoning popularity of crowdfunding websites suggests that people like the idea of small, tangible sponsorship of a project, it’s an uphill battle to convince potential investors to part with their credit card details, especially in less glamourous industries. A scan of the most popular crowdfunding websites confirms a skew towards creative projects. At Kickstarter, 943 film and video projects were trying to attract funding when we visited, compared to 90 in technology. More tellingly, in May 2012, only 23 tech projects had hit their funding target. In the film and video category, it was 345.

That isn’t to say tech projects can’t attract funding. Tammy Erdel, for example, is using Kickstarter to finance AIRbudz in-ear earphones ( “I believe that Kickstarter is beginning to promote more products that don’t necessarily fall into the creative works arena,” she told PC Pro. That said, she adds that “it’s important that you have another means to promote your product and direct people to Kickstarter”.

Theresa Burton, CEO and co-founder of British crowdfunding service Buzzbnk, told us that 58% of projects listed on her site receive full backing, although she adds that “we work hard to set expectations about what does and doesn’t work in crowdfunding, and the amount of effort required to actively fundraise”. Buzzbnk also offers the option for investors to make a loan, possibly with an interest return.

It’s worth noting that if you have a less prominent project that fails to meet its target, you haven’t actually lost much. Bernie Thompson, of Plugable (, has successfully raised funding via Kickstarter in the past, and is currently seeking investment for a $50 thin client computer for schools. He isn’t sure he’ll get to his funding target this time - although “there’s often a big jump in backers at the end”.

But he argues: “We’ll have invested a bunch of time, but we won’t have risked a big investment in hardware inventory, because we do that purchase only if the Kickstarter succeeds. We’ll have learned something very valuable about the size or character of the market for the product, with less risk.” And if he doesn’t hit his target? He’ll scale down his project, and do it anyway.

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