George Yu knew he had a good idea, but he couldn’t get investors to see it that way.
He needed about $50,000 to produce the first run of Node, a sort of Swiss army knife of sensors able to detect heat, motion and a variety of other metrics.
Yu tried banks. He tried angel investors. He tried venture capitalists.
It wasn’t until he asked his potential customers for money that he got a hit. He created a campaign on “crowdfunding” website Kickstarter.com, pitched his idea in a video and allowed people to preorder the device or simply donate money to the idea.
About one month later, he had raised $76,341, more than $800 of which was simply donated to the product.
“We got a lot of reaction, with people just saying, ‘Wow, this is the most advanced technology that I’ve seen on Kickstarter,’” Yu said. “The product itself is really cool. I think that’s what people really care about.”
Yu’s project is just one of 36 Chattanooga campaigns that have raised a total of $229,010 on Kickstarter. The website allows artists, fledgling companies or anyone else who needs some seed money to post their ideas, a funding goal and a time frame. From there, anyone with Internet access can pledge money to the campaign, often for a small reward such as a thank you credit on a website or a larger reward such as a copy of the product they’re funding. If the campaign reaches its goal, the business gets the cash. If not, pledges are returned to the donor’s bank account.
Yu easily exceeded his goal with more than 250 preorders. Those orders allowed him to fund the first run of his product and, more importantly, helped draw the eye of his first traditional investor, the Chattanooga Renaissance Fund.
“It’s very difficult to get money without some sort of proven need or proven product,” he said. “This demonstrated there is a market for this product, people are willing to pay money for it, and it gives us an indication of what kind of demand we might expect.”
Rarely, campaigners can be victims of their own success. For example, Yu would have been in trouble producing Nodes if instead of 250 preorders he received 250,000.
More often, it is the donor who shoulders the risk.
“You really are pledging this money without any strings, except for the reward you’re supposed to get. It’s sort of a small-scale transaction, and those are most likely to go wrong,” said Don Steinberg, author of the recently released “Kickstarter Handbook: Real-Life Crowdfunding Success Stories.” “The advice, for now, is buyer beware.”
A few funders of local Kickstarter projects are learning that firsthand. Though Chattanooga bands and companies all seem to have the best intentions, unexpected problems can lead to delays in promised rewards.
For example, the Warehouse Venue raised $12,226 to reopen after the Christian music club and teen center was shut down in relation to a controversial shooting at Club Fathom last December.
The campaign promised its 11 biggest donors, who each gave more than $250, free admission to all its 2012 shows. But the venue’s manager, Tim Reid, has since decided not to open a new venue until next year.
Reid said investors will still get into the first year of shows for free, and he is holding onto all the Kickstarter-raised money to reopen the venue. The project will still happen, he said. He said he just needs to finish dealing with the fallout of the event that first caused them to close.
“Right now we’re sitting tight,” he said. “I know you’ll see something next year.”
Despite the risks, several local Kickstarter beneficiaries said the website’s rewards make campaigns invaluable.
Beyond getting his project funded, Yu was able to show investors his idea actually has a market.
Local band Telemonster raised $5,466 on Kickstarter in May to fund its first album. Not only were they successful, but they attracted fans from places like New Zealand and Germany.
There are even rewards in failure. Specialty guitar maker Bruce Bennett’s monthlong campaign to mass produce his instruments failed earlier this month. It drew more than $34,000 in pledges but fell short of its goal.
“We consider this a really good fact check about what our market is,” he said. “We have numbers that we never had before, and they tell us a lot of things about where our guitars are going to be accepted, approximately how many sales we can expect in a given time period, what they’re willing to pay and what they’re not willing to pay.”
Until the economy bounces back, Kickstarter may be the only funding option for some businesses.
Local baker Ann Dickerson spent the last year looking for funding for her cookie company. When she launched her new Tennessee Moonshine Cookies line, she decided to take her funding requests to Kickstarter to keep up with demand.
“As much as the news might say there’s money out there, there’s really not,” she said. “We’ve got the orders; we just need a way to fill them.”
Even if traditional sources of funding were to come back strong, Dickerson expects crowdfunding options such as Kickstarter to stay around for a long time. In the three years since the site started, it has launched nearly 30,000 projects and raised $289 million.
Bennett said despite the failure of his guitar company’s project, he would use the site again.
“Kickstarter makes sense,” he said. “It’s going to change the way people do business.”