Crowdfunding Jumpstarts New Ventures in Unlikely Places

Darren J. Gendron wanted to develop a pirate-themed board game, but estimated that printing 1,000 copies would cost $15,000 – money he didn’t have.

So the Columbia entrepreneur turned to crowdfunding – the fast-growing global trend of using the Internet to raise small amounts of money from lots of people – to raise startup funds. The CEO of Scallywags International raised nearly $70,000 on Kickstarter to create his board game Scurvy Dogs, his comic card game 3v3, and children’s book “The Monster Alphabet.”
 
Crowdfunding, which started as a way to fund artistic projects like a band’s next album, has grown into a tool for startups to raise money.  Restaurants, shops, inventors and even high-tech startup companies are now using it to bootstrap their next projects, using Kickstarter, IndieGoGo and Rockethub. These sites can also help would-be founders test new ideas, develop a fervent base of customers and gain priceless marketing exposure. 

Crowdfunding is already a big market, yet it’s likely to grow even bigger in the next few years as new crowdfunding sites launch and equity-based crowdfunding takes effect.

Nearly $1.5 billion was raised for over a million different campaigns last year by 452 sites, according to industry group Crowdsourcing.org. That number is expected to grow exponentially once U.S. regulators approve a recently-passed law allowing regular people to buy stock in a startup company using crowdfunding. This equity-based funding is currently restricted to accredited investors, such as venture capitalists. 
 
“In the past few years, bank loans to small businesses have become all but extinct,” says Candace Klein, founder of the Cincinnati-based crowdfunding website SoMoLend.  “Crowdfunding opens up a new channel for getting funds to small businesses.”

Testing New Ideas

But getting money online from strangers isn't as easy as it might sound, Gendron has learned.

“There’s this perception that Kickstarter is a money piñata and it just throws cash at you,” Gendron says. “There’s so much work that goes into putting together a good Kickstarter page.” 

Touting the ventures through press releases and word of mouth, providing precise estimates of the cost and creating a promotional video are just some of the things that went into Gendron’s crowdfunding campaign.

But the promotional efforts help startups test their ideas with consumers.

“If you get a loan from a bank, you get a check and that’s all you get – you get no help,” says Mike Kane of Pittsburgh's cellhelmet.com, which recently raised $19,080 to create an iPhone case with a one-year guarantee.

“With websites like Kickstarter, you not only get a check – you get customers, too.”

Kane crowdfunded his Cellhelmet case in part so that he could soft launch his bright idea. “We were three guys putting out a product and telling people if your iPhone breaks, we’ll repair it. We needed a way to validate what we were doing.”

He was thrilled when Cellhelmet’s Kickstarter campaign raised nearly twice its goal. The firm’s product – a protective iPhone case that doesn’t feel like a brick and fits easily in your pocket – resonated with backers. And so did the startup’s unique guarantee.

Since launching the product two months ago, Cellhelmet has placed its iPhone cases in 30 stores and sold 2,000-plus units. Kane, who is committed to manufacturing his products locally, attributes much of his company’s success to crowdfunding.

“We’ve built a community on top of our customers – they pushed us further,” he says.

Although Kane wishes he’d made a higher-quality Kickstarter video, he’s since more than made up for it. Cellhelmet’s hilarious new YouTube video mocks other accessory companies who “dare customers to put their product to the test.” The film shows engineers hitting cell phones with golf clubs and dropping them from buildings.

Reaching a bigger market

Crowdfunding is not only a great tool for startups to raise much-needed capital, but it can also help new companies to catapult their ideas into a much bigger marketplace. 

Josh Dryden, Sam Li and Pete Whitworth created nesl, a nine-fingered, flexible desk organizer, as undergraduate design students at the Cleveland Institute of Art. They learned about crowdfunding in one of their classes and were drawn to it as a way to help fund a real-world product which they could design, manufacture and market.

“We wanted something in our portfolios that was a real object, not just a rendering,” he says. “As students, Kickstarter just seemed the easiest and was very accessible to us.”

This spring, the three partners launched a Kickstarter campaign to fund their project. It attracted the notice of Brookstone, a national retailer that sells home office supplies. The group landed the top prize in the William McShane Fund Kickstarter competition, and is now working with Brookstone to ultimately sell nesl in the company’s shops.

Birdhouse Studios, the company that Dryden, Li and Whitworth started, bills nesl as “a creative solution to desk organization that fits any work space.” While most desk organizers are not particularly easy to move around, nesl’s colorful, playful design has a suction cup that allows users to easily relocate it to any spot within a work space.

Within 30 days of launching its successful Kickstarter campaign, Birdhouse Studios had surpassed its goal of $30,000 with the help of 843 backers from across the world – including those from the Middle East and Asia, much to Dryden’s surprise.

“Crowdfunding is definitely becoming a trend within the design field,” says Dryden. “The great thing for young people is that you don’t need a lot of knowledge and there’s not a lot of risk. It was reassuring to see that people we’d never met before liked our design.”

Boom market?

National experts say that crowdfunding could help to accelerate the growth of startups in parts of the country that are now underserved by traditional venture capital sources.   

“What you have in the New York City and Silicon Valley markets are entrepreneurs and seed capital markets that are already established,” says Freeman White, owner of the crowdfunding website Launcht.com. “What crowdfunding will do in places where the market is not quite as established is to make everyone into a venture capitalist.”

Crowdfunding is already bringing fresh sources of capital to more than a few surprising places – including a tiny, off-the-beaten-path town in the Upper Peninsula of Michigan.

“We’re young and have energy, so we just jumped in,” says Melissa Hronkin of Algomah Acres Honey Farm in Mass City, Michigan of her successful Kickstarter campaign to raise money for a startup mead-making operation. Her husband makes mead in an old church on the farm. “If we hadn’t gotten funding, I don’t think we could have done this.”
 
Lee Chilcote is managing editor of Cleveland's hiVelocity, published by Issue Media Group. His writing has appeared in Cleveland magazine, Home Energy and Agence France Presse.