Crowdfunding is an alternative to raise funds for a startup, a project or a creative idea.

The crowdfunding concept allows an entrepreneur to reach out to a ‘crowd’ of people for a financial pledge in return for a small stake or some incentive. This is unlike an Angel Investment concept where a single person may have a large stake in a startup. While some investors may be hesitant to invest in a new idea, crowdfunding provides an alternative way to source seed capital from a number of backers. The concept is popularised by Kickstarter.com in the United States. The majority of crowdfunding platforms don’t charge for publishing a pitch; however they typically take a commission of around 5% when the financial funding target is reached. If the financial target is not met, no money is exchanged.

To lure people to invest in a start-up, most startups offer rewards such as exclusive access to first product or a discount on services, depending on how much people invest.

The JOBS Act (Jumpstart Our Business Startups) in the US changed the game for crowdfunding. It now makes it legal for crowdfunding sites to give actual equity to investors.

Crowdfunding can act as a great marketing tool for a startup. It creates a strong network of support for the start-up as it is able to attract potential investors. With the equity model in place, investors are likely to become brand ambassadors of the startup, promoting it among their networks. Some investors may offer help in the field of their expertise, for example by helping you with financial or legal issues.

Reaching your target gives people a message that the startup has a strong product/service offering and has a support of several people. This builds a strong case for the startup to reach out to local press for coverage.

Crowdfunding is not suitable for every startup. It works best for start-ups that are able to narrate a story - a passionate vision, a social mission or a personal ambition.

You need to connect with the people who feel inspired to invest in your idea. Your idea should be so innovative that people are forced to punch in their card details online.

Once a startup reached its online target there will be a short ‘cooling-off’ period. Investors are asked to confirm their pledge and some may withdraw during this stage.

The crowdfunding platform then refers the case to their lawyers, who formalise the deal and the money will be transferred to the startup’s bank account.

Regional Crowdfunding
I recently came across a few initiatives of Crowdfunding in the Middle East region.
One of them is Mawwell.com. At present you need to sign up for an invite to join Mawwell.com

 The invite says:  “Project creators will keep 100% ownership of their work and will build a unique relationship with their contributors. Not all projects will be eligible to be part of Mawwell. Indeed, Mawwell will not be a place for soliciting donations to causes, charity projects, or business expenses.”

There is another site called Aflamnah.com, claiming to be the first crowd-funding initiative in the region. It is scheduled to launch on 01 July 2012. Aflamnah aims to help independent filmmakers, artists, students and innovators to raise funds for their projects by getting people excited enough to financially support their idea. If a project doesn’t meet its goal then no money is exchanged.

Both the websites seem to run like Kickstarter in the US where people can donate money to projects of interest.

Some successful projects that have been able to raise finds using crowdfunding are:-

The Pebble E-Paper Watch -This is an upcoming smart watch from Pebble Technology that can display messages from a smart-phone.  On May 18, 2012, The Pebble E-Paper Watch raised more than $10,000,000 to become the most funded project in Kickstarter’s history.

Emphas.is — Photojournalist João Pina turned to crowdfunding to document the aftermath of Operation Condor, which led to the death of more than 60,000 political opponents in Latin America.  To do so, he turned to Emphas.is, the crowdfunding platform designed specifically for photojournalists. He has managed to raise more than $20,000 in different phases to help him travel to countries to document his work.

Scifundchallenge  — Mary Rogalski, a doctoral candidate in chemistry and environmental studies at Yale gave crowsdfunding a shot to further research for her thesis on lake pollution. She approached http://scifundchallenge.org a crowdfunding website that focuses on raising funds for scientific projects. Rogalski has raised $2,026, just over her initial goal of $2,000.

A downside to crowdfunding is that an innovative idea can be copied and developed ahead of the startup by better-financed competitors. Some people might submit fake projects online to get funds and dupe investors. Tech-Sync Power System was a project submitted on Kickstarter that was cancelled by the website for failing to provide photos of the prototype and sudden departure of the project creator.

Crowdfunding is a trend that will surge in the near future. We need to watch how startups can leverage public funds to create innovative things or address social causes.