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Crowd-funding sites getting attention from investors

Fundraising websites that rely on social media focus on helping people raise money for such things as hospital bills and tuition. But recent six- and seven-figure campaigns show that they could be another way for start-ups to secure funding.

March 22, 2011|By Wailin Wong

At first blush, crowd-funding may sound like just another attempt to raise money online by getting as many visitors as possible to donate to a cause.

But a growing number of start-ups see the landscape differently. They see the potential that social networks have to raise money in ways that align with how younger generations practice philanthropy.

They saw the power of crowd-funding work for Barack Obama in his 2008 presidential campaign. On a smaller scale, they also saw it work for online microcredit lender Kiva, which channels money to entrepreneurs in developing countries. The San Francisco nonprofit, which was launched in 2005, has processed more than $200 million in loans and gotten accolades from Oprah Winfrey.

"There's no reason people shouldn't give small amounts of money throughout their life," said Desiree Vargas Wrigley, the co-founder and chief executive of GiveForward, a Chicago company that helps people raise money for out-of-pocket medical expenses. "There's very much a mentality of `everyone can chip in a little bit.'"

GiveForward is one of dozens of companies in the crowd-funding space, which is becoming segmented as new entrants look for fundraising niches. Kickstarter in New York is geared toward artists, for example, while Grow VC in Hong Kong connects entrepreneurs with early-stage investors.

"All of those [Web] tools, all that Internet diffusion, when you connect it with that natural human energy to make change or support something, it's altogether different," said Josh Tetrick, the founder of 33needs, which raises money for social ventures. "Crowd-funding takes advantage of the tools of the social Web and the natural human need to feel connected."

Meanwhile, crowd-funding success stories are drawing the attention of investors. GiveForward recently raised $500,000 in venture capital. EduLender, a Chicago comparison-shopping site for student loans that also allows users to raise money for tuition or debt repayment, has raised $1 million.

Schaumburg, Ill., resident Mandy Burgos, 28, set up a GiveForward page for her younger sister, Stacy Karlo, who is fighting Hodgkin's lymphoma and will undergo a stem-cell transplant in May. Burgos said she and her cousins decided to organize an online fundraiser because many friends and family members were asking if they could give money to help. Karlo, 27, will be out of work for three months after the surgery.

"I feel better knowing that people know her story," said Burgos, who updates the fundraising page with news of her sister's health. The family has raised more than $6,000 of its $10,000 goal. "She hates attention, so it's been tough for her. … This is our way that everyone's trying to help. So many people ask me how she's doing; you break down a lot and it's hard to talk about. This is a way that people can see."

One challenge for crowd-funding sites is that because they rely on social Web tools and personal connections to spread awareness, they have to compete with an overstuffed online diet, from mundane daily musings on Facebook to viral YouTube videos.

The young industry also risks exhausting the generosity of donors who are bombarded with constant fundraising pitches.

"I'm hoping [crowd-funding] won't be an option that we're returning to again and again with each production because I think you get a lot of donor fatigue that way," said 23-year-old Natalie Hurdle, co-founder of the Strange Bedfellows Theatre, a Chicago ensemble that is raising money on a San Francisco platform called IndieGoGo for its inaugural production. The group has collected about $1,280 of its $3,000 goal.

Crowd-funding sites also face skepticism over their revenue model, which is to take a percentage of money collected. Kickstarter puts an all-or-nothing twist on the concept, meaning groups that don't hit their goal by the deadline receive no funding and donors' credit cards don't get charged. IndieGoGo allows users to keep whatever they raise but charges a higher commission of 9% if the total falls short of the goal, while successful campaigns are charged 4%. GiveForward takes 7%, which covers processing fees.

EduLender does not charge members who use its fundraising feature, which founder and CEO Sue Khim said makes the site more of a tuition gift registry.

"For me, the college debt problem is very personal," Khim said. "I wanted to solve it in a way where people don't have to pay out of pocket.... I don't want to charge, and we won't ever take a percentage. That's the key reason we don't want someone to do [a crowd-funding site] for the college funding space."

The same principles of fundraising by tapping into networks of family and friends, however, hold true.

Erini Shields is hoping to pay part of her $15,200 tuition at the Chicago Portfolio School through EduLender. By sharing her fundraising page via e-mail, Facebook, Twitter and her blog, Shields has received about $1,300 of her goal to raise $3,800 by her 27th birthday in June.

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