The Scoop on Crowdfunding

You’ve probably heard of Kickstarter. But what is it and how does it work? Tech Talker explains the benefits, the drawbacks, and everything else you always wanted to know about crowdfunding.

Eric Escobar,
November 6, 2014
Episode #147

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This week I’m going to talk about crowdfunding - what it is, how it works, what are the benefits and drawbacks, and how to start your own crowdfunding campaign..

What Is Crowdfunding?

Let’s start with the basics. Crowdfunding is a way for people to get their business or project off the ground by getting funding from a crowd of people. Crowdfunding is a way of getting start-up money without having to solicit venture capitalists or high profile investors.

Kickstarter is the most popular crowdfunding platform. Here’s an example of how Kickstarter works:

Say I have a band (which would never happen since I can’t sing or play an instrument to save my life, but bear with me). And say I want to record a really professional album at a recording studio that would cost $5,000. If I didn’t have the money, it would be pretty difficult to accomplish. If I decided to go out and solicit funding from potential investors, there's no guarantee that I would get anywhere (or even find any investors willing to talk to me).

How Does Kickstarter Work?

That’s where Kickstarter comes in. With Kickstarter you sign up for the site, explain what it is you want to do, and how much money it would take make it happen. From there, you can advertise your project on social media, through your friends and family, and any other avenues you choose. People who believe in your vision and want to help it come to life can contribute any amount they want towards your goal.

Often projects will offer an incentive to contributors, such as a free CD if you donate $20 or more. Incentives may also be tiered so that you get more as you contribute more. If the project reaches its goal, Kickstarter gets 5% of the funds as a fee. If the project doesn’t get enough funding to reach its goal, Kickstarter returns the money to the backers. This means it’s all or nothing and no one gets burned for a partially-funded project.

Kickstarter vets the projects that appear on its site and does its best to offer protection from anything that looks like a scam or doesn’t have a chance of delivering on its promises. There’s a time limit on how long projects can be up on Kickstarter - typically anywhere from 30 to 60 days.

Kickstarter also limits what can be crowdfunded. For example you can’t ask for funding for something personal such as a charity you're supporting or your college tuition. It’s more for projects or businesses that create something (like a film, a cupcake cafe, a new video game, etc.). Furthermore, although you may receive an incentive for contributing to a project, your contribution is viewed as a donation. This means that when you donate to a project, you are not buying shares or a part of the business in any way.


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