06/26/2012 03:30 pm ET Updated Aug 26, 2012

Money for Nothing, Checks for Free

Hello, my name is Alex and I deserve to have your money.

That sentiment is at the core of crowdfunding, which is exactly what it sounds like: crowd-sourced funding. Thanks to the interwebs, today's entrepreneurs can easily create and promote Web campaigns to fund their ventures. Anyone can contribute money -- anywhere from one dollar to thousands -- should they feel a particular idea has merit. I happen to be working on a startup myself -- Spend Consciously -- and thus I am painfully aware of how arduous and time-consuming it can be to develop and nurture new potential sources of funding. Crowdfunding provides us access to millions of potential sources -- at essentially no cost.

Crowdfunding campaigns can last as long as 60 days, but if they do not reach their targeted funding goal by the deadline, they get none of the pledged money. If you ask for $100,000 and only manage to raise $99,990 in pledges, you're still out of luck. This is why campaigns offer rewards -- depending on the size of their donation, backers can receive anything from thank-you notes to free apps to the option of naming a character in a video game. Sites such as PeerBackers even allow you keep whatever you raise, provided you can fulfill your reward obligations to your backers. But first you need the backers. For this, crowdfunding relies heavily on promotion through social and professional networks, not to mention a hellish amount of emails, Facebook posts, tweets, blog entries, comments and the like. Might as well call it cloudfunding.

There are a growing number of crowdfunders out there, the most prominent being Kickstarter. Each has its own focus. Kickstarter is geared towards creative projects, emphasis on 'project' -- they fund targeted campaigns designed to achieve specific goals such as publishing a children's book, developing a video game, or producing a film. Other sites cater to business startups, app developers, philanthropic ventures and so on. My venture is a sort of consumer spending aid, an app designed to help people make sure their purchasing decisions are in line with their values. Unfortunately, Kickstarter is allergic to any projects related to e-commerce. They even acknowledge that a startup like Kickstarter wouldn't be eligible for Kickstarter. While we won't actually engage in commerce, we will facilitate it -- which is unacceptable. It just goes to show how targeted some of these sites can be.

So we redirected our efforts. Now we are working with two other crowdfunding sites: PeerBackers and Start Some Good. It's nightmarish to run two campaigns simultaneously - not to mention it burns out your network of contributors, so we're starting with PeerBackers. Our campaign page went live last Friday, and I have to say, it's been pretty damn exciting. Innovating against a deadline is invigorating in itself, and each time someone contributes, it's extremely rewarding, and not just financially. Each contribution is a demonstration of support for, and belief in, our company. At the same time... I'll be happier after we've hit our target.

In a rather simplistic nutshell, there is one of two impeti behind a crowdfunding venture:
  1. Empowering others towards social change.
  2. Making it easier for small businesses to grow.

Alex Budak, co-founder of Start Some Good, falls into the first category. At one point Budak lived in India for several months, volunteering for an enterprise that sought to empower Indian girls by teaching them Ultimate Frisbee. "There, for the first time I recognized that substantive social change won't come from one or two organizations," says Budak. "Rather, it comes from lots of people pursuing social good in their own individual way."

"I came back to the States ready to dedicate my life to improving the world through social entrepreneurship. I had an idea for a social venture I wanted to start, similarly leveraging sports for community engagement, but I realized that there was no good place to start raising the funds or growing the community that is so crucial to getting a social enterprise off the ground. The more I thought about it, the more I realized that there must be countless wonderful ideas out there for improving the world that never go from the idea stage to action. I called up my buddy Tom Dawkins, whom I had met while working at Ashoka, and through a lot of late night talks and too many coffees, StartSomeGood emerged."

Meanwhile, Sally Outlaw co-founded PeerBackers for different reasons - specifically, to empower entrepreneurs. "I hate when the lack of money stands in the way of a good idea," says Outlaw.

"I've launched several companies over the years, and getting the money to start was always a huge hurdle. I don't have an impressive rolodex full of angel investors but I do have a lot of people in my life who I knew would support me in whatever way they could. So when I saw a guy in England raising money to launch a soccer team via thousands of people, each giving $75, I thought 'Why can't this approach be applied to entrepreneurs?' I started shortly thereafter."

PeerBackers differs from Kickstarter in that it is all-encompassing. According to their literature, "Anyone with an idea, project, business or invention can apply to post on our site from anywhere in the world." Meanwhile Start Some Good prides themselves on exclusively supporting social impact projects. Our goal is to develop a smartphone app that will allow consumers to make informed spending decisions that are in line with their values and beliefs. As we have an idea, project, business or invention, we were accepted by Peerbackers. As our app will certainly have a social impact, we were accepted by Start Some Good.

The concept is the natural evolution of previous crowd-sourced microfunding sites like Kiva and microlending sites like Prosper. Kiva allows users to donate $25 to certain humanitarian or charitable ventures. The money is a loan to that endeavor. It's eventually paid back to the user, who can then pay it forward to another cause. It's still a donation, in that you can't withdraw from your account; but it's a donation that keeps on donating. So to speak.

Meanwhile, Prosper functions as a peer-to-peer lender. Basically, no matter what your credit rating, you can go to Prosper and solicit loans from other users by submitting a bid. Other users function as lenders, each funding a small portion of the bid in order to diffuse risk. The money isn't a donation, it's an investment.

The new generation of crowd-sourced funding is distinctly different in that contributors don't get their money back. It isn't a donation and it isn't an investment; it's simply a contribution.

There are other benefits as well. Our PeerBackers page gives us an additional platform from which we can showcase our concept. Also, because meeting your goals depends on extensive outreach and networking, we can't help but raise awareness of Spend Consciously.

Does it work?

Long answer: I'll tell you after we get funded. Short answer: a qualified yes. Although in general the majority of projects never get funded, the general rate of success runs anywhere from thirty to fifty percent, depending on which site you believe. Still, many entrepreneurs -- myself included -- like those odds.

In March of 2011, video artist and puppeteer Ian Samuels set up a campaign with Kickstarter to support his short film Caterwaul. Samuels says he looked to crowdfunding because "I hate asking people for money and crowd-funding is a non-invasive way of doing it. You don't have to corner anyone. Nobody is obligated."

Samuels raised over $6,100 for Caterwaul -- only a bit more than his target of $6,000, but enough to ensure he'd get the funds. Then he used his experience from the first campaign and flipped it to start another -- $8,000 to create a children's book, Gwendolyn and the Underworld (note: not an Underworld prequel). He must have learned something from Caterwaul, because when all was said and done the second time around, Samuels had raised $19,658 from 45 different backers.

And then you have projects like Clang. Neal Stephenson is working on designing the best and most realistic sword-fighting game of all time, or at least to date. His campaign has a lofty goal of $500,000. Though he's not there yet, he has over $315,000 in pledges - but more importantly, his campaign has generated an amazing amount of earned media (a.k.a. 'buzz') all over the web, from techie sites like geekwire to Forbes Magazine. Also, each one of his 5,294 backers represents a potential (read: likely) customer. Investors like a guaranteed customer base. Stephenson's major advantage is that he's creating a tangible product - not only that, but one that's likely to become a very popular video game. That's the perfect sort of project to appeal to an online audience.

"Crowdfunding for startups is a game-changer that will level the playing field for startups outside of Silicon Valley," says Vinnie Lauria, a venture capitalist whose firm, Golden Gate Ventures, seeks to facilitate collaboration between Singapore and Silicon Valley. "As project reputations build on the web through services like for coders, or for designers, entrepreneurial and industrious individuals will suddenly have tangible -- if potential -- access to all the cash they need in order to launch their startup."

In a recent and condescendingly-titled Economist article on crowdfunding ("The new thundering herd"), one subheading said it all -- "From fad to funding". Crowdfunding is moving into the mainstream as awareness grows and success proliferates. There are concerns that the SEC will use the Jumpstart Our Small Businesses (JOBS) act, to put the kaibosh on crowdfunding as we know it. But one thing's for sure -- if it's going away, it's not going anywhere fast. Not when 10% of films screened at this year's Sundance and Cannes film festivals were crowd-funded. And not when the sentiment on the other side of the sociological spectrum, as articulated by NYST Euronet boss Duncan Neiderauer, is that if the JOBS Act is properly implemented, crowdfunding "will become the future of how most small businesses are going to be financed."