Indiegogo or Kickstarter: Crowdfunding Part 2

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Indiegogo, Charity, Art, Revenge… “Artevengity?”

My first exposure to charitable crowdfunding was Matthew Inman’s (the Oatmeal)  campaign to finance his counter attack to a $ 20,000 lawsuit from FunnyJunk using the crowdfunding platform Indiegogo.    ”I’m hoping,” writes Inman in his description of his project “that philanthropy trumps douchebaggery and greed.”  It seems it did.  He raised $ 220,024.  11 times his $ 20,000 goal.  What was his project?  This is the odd part  and his success was entirely dependent on the Gen Y zeitgeist of Indiegogo.  Was it inspired by a genuine social need or was he just venting his righteous indignation via the Internet?  His words, your call:

“Instead of mailing the owner of FunnyJunk the money, I’m going to send the above drawing of his mother. I’m going to try and raise $ 20,000 and instead send it to the National Wildlife Federation and the American Cancer Society.”

And when he finally received all those bundles of money he assembled them into the big “FU” he wanted to send FunnyJunk all along.

Look, you gotta love this guy, and he did raise money for two great charities, but was it charity? Or art? Or just revenge masked as charity or maybe something entirely new, “artevengity?”  What in the world exactly is it that Indiegogo did?  The money eventually wended its way to two big charities, even if it did take a little artistic detour on the way:  FU in money bundles. So, it was sort of a charity, even if an angry charity, and that made it Indiegogo material, not Kickstarter material.  Kickstarter simply does not provide a platform to fund charitable causes or organizations like National Wildlife Federation and American Cancer Society or even FU FunnyJunk.

After his first success Inman is now on to a more typical arts and culture project with Indiegogo: raise $ 850,000 to create the Tesla Museum in Shoreham, New York. And he is well on his way with close to $ 500,000 already raised and more than a month left in the campaign. The Tesla museum is not a charity, as Kickstarter might have defined it, since it is clearly a cultural project with an end goal, but the Tesla museum is significantly different  than his first project.   It is not artevengity.

The bullied bus monitor campaign, created by Max Siddorov,  is again artevengity and that is why it was so successful on Indiegogo and might not have been on Kickstarter.  Though this project had a clearly defined end goal, which Kickstarter requires, it was still too narrowly a charity.  The “Lets Give Karen-The Bus Monitor-H Klein A Vacation” had a target of $ 5000, but unbelievably raised $ 703,833 on Indiegogo!  That’s a vacation chalet in the Rockies.  It appears artevengity is a money magnet on Indiegogo.

When Oatmeal Inman was asked why he didn’t use Kickstarter, Inman wrote it’s because Kickstarter doesn’t fund charities and Indiegogo does. And anyway, he’d already had great success with Indiegogo.

Also, Kickstarter is all or nothing.  Kickstarter only disperses the cash if your project meets its projected goal.  If not, it returns all the money back to the investors and you never see a dime. Indiegogo, however, disperses funds even if you don’t reach your goal. Indiegogo keeps a larger percentage of the money (9%) if you don’t reach your goal, but it still disperses the cash.  If you do reach your goal Indiegogo keeps only 4%.    On the other hand, even if you do meet your goal, Kickstarter is still more expensive than Indiegogo since it charges 5%  which is 1% higher than Indiegogo’s 4% for a successful campaign.

So why use Kickstarter at all?  Indiegogo seems to do it all better.  Well hold on there, cash-poor cowboy.

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Kickstarter vs Indiegogo

Copyright Madalyn Sklar

Kickstarter is Artworld 2.0.

As pointed out by Patrick Hussy at the Guardian this week, Kickstarter has projected it will raise $ 150 million for the arts in America in 2013. That’s more money than the National Endowment for the Arts disperses in a year. No way around it: that’s amazing.  When you look at what sorts of projects Kickstarter funds it is easy to see how they do it.  This is art and culture funding, not Indie charity.  Kickstarter is the Big Dog on the block, which becomes stunningly clear when you look at their continuously updated stats page. They are so successful doing what they have been doing they even resisted changing their business model despite the new JOBS act.  In other words, Kickstarter is not heading toward equity crowdfunding anytime soon.  Madalyn Sklar has also posted a helpful comparative piece on this.

Now for the best news:  Kickstarter is an easy platform to fund your project. You heard right: Kickstarter will help you fund your artistic project no matter how inexperienced you are at self-financing or how small your project is. That does not mean you will necessarily succeed in raising your funding but if you have that new artistic enterprise, that totally awesome video game idea or knitted-bag line you want to fund, Kickstarter is a good first stop.  In their own words:

“Kickstarter is focused on creative projects. We’re a great way for artists, filmmakers, musicians, designers, writers, illustrators, explorers, curators, performers, and others to bring their projects, events, and dreams to life.”

And they do not claim any percentage of your Intellectual Property Rights!  What you fund is yours.  “Project creators keep 100% ownership of their work.”

When philosopher Arthur Danto first coined the term the “artworld” he never anticipated this.  He meant ‘real’ art is only what the art critics and institutional curators decide is real art.  Art only exists in the world of aestheticians and art snobs at wine and cheese parties.  For Danto, only the art intelligentsia really defined art since, after all, only they approve what gets into the galleries to begin with. And the well-heeled only funded new art based on the criticism of those self-impressed mighty aesthetes. Well, sorry Artie, no more.  Kickstarter does all that now.  Kickstarter lets your artistic ability to make something people are willing to finance determine your success.  To ensure better success, try giving your benefactors a free t-shirt, a mention in the rolling credits of your latest Zombie flick or a free sample handbag.  Kickstarter has now, by far, become the most powerful platform for financing art for art’s sake.  That’s artwold 2.0.

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CrowdFunding Part 1: Due Diligence? Fugetaboutit!

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Crowdfunding is where most small businesses and small startups will likely go for funding by mid 2013, and odds are it will be the primary means of funding for small businesses for the next five years at least. It makes equity investment possible for the 99% of us, who up until now, were simply not allowed to make equity investments because we were not rich enough to be certified as accredited investors.” Equity crowdfunding also makes raising funds easier for the small businesses and entrepreneurs since now they have a much larger pool of investors available to them. There are two varieties of crowdfunding. Most, for example, have heard of Indiegogo and Kickstarter, but those are primarily artistic charitable crowdfunders, and I will discuss them in greater detail next week. Today’s blog, however, is about a powerful and potentially dangerous type of crowdfunding called equity crowdfunding.

Equity crowdfunding has been making inroads for the past few years, particularly with, but with the introduction of the JOBS act in March 2012, equity crowdfunding has achieved serious legitimacy. The only problem is the rules are not yet entirely in place and won’t be until early 2013. This means there is the potential for harm to both the gullible investor and the overly ambitious entrepreneur.  Right now equity crowdfunding is a bit Wild West meets Lucky Luciano. For entrepreneurs to stay out of the gunfire until all the new regulations stabilize, one simple bit of advice, as Scott Edward Walker put it last year:

“avoid selling stock or other securities via crowdfunding sites or social networking sites. Why? Because such sales [may be] in violation of applicable securities laws and thus could lead to severe consequences, including a right of rescission for the stockholders (i.e., the right to get their money back, plus interest), injunctive relief, fines and penalties and possible criminal prosecution.”

Nevertheless, equity Crowdfunding is a fantastic opportunity for small businesses and startups, and I urge you to consider it.  But equity crowdfunding requires caution by both the investors  and entrepreneurs.

So what is Equity Crowdfunding anyway? It allows small businesses (yes even micro web-based businesses) to work with a crowdfunder, like Kickstarter, Bolstr, CircleUp, AngelListIndiegogo and many others who are also referred to as funding portals or crowdfunding investment platforms.  These crowdfunders can bring together large numbers of investors, to raise “up to $ 1,000,000 for your business without registering with the SEC.” The new law also raises the number of stockholders –from 500 to 2,000– a company is allowed before it has to go public.

In a nutshell, crowdfunding lets a fledgling business raise a heck of a lot of money without going to a moribund bank for a small business loan or taking the arduous, often intrusive and glacial, Angel Investor route. As a consequence of equity crowdfunding, Mark Fidelman has predicted the “death” of the Angel investment community. Predictably, Angel Investor groups like Gust have given the most disparaging reviews of Crowdfunding.   Smart entrepreneurs and investors alike will check out both sides each has important points.

Now for the darker side:Crowdfunding Crook

Ever buy a used car? Ever sell a used car? What’s the biggest problem? Information. If you’re buying, you want to know what the seller isn’t telling you. If you’re selling you don’t want to tell the buyer about the unfortunate stain in the back seat or the bent spare-tire rim. This is “information asymmetry” the seller has the cards, and the buyer can only hope to see them through “due diligence” or bluffing. Due diligence requires time, funds and ability that few of us have. This is why until the JOBS act only accredited investors could buy equities in startups.  Accredited investors were presumed to have the capacity for doing due diligence before investing. And they could survive the inevitable hit or two.

Many years ago I lived in a storage closet (literally). I thought I was savvy and took every nickel I had saved and bought penny stocks. One day I sold all my soon to be Verizon to buy Bulb-Miser. That was a bad idea. I lost all my nickels and someone else made a lot of money. My broker was  possibly churning for commissions, and Bulb Miser was possibly “pumping and dumping,” talking up a stock in order to dump it profitably later. I have no idea. I was certainly not an accredited investor, and my loss kept me relegated to the closet for quite a while longer. Welcome to crowdfunding investing gone bad.

There are two potentially awful problems with crowdfunding:  Information asymmetry, described above, and the hoity-toity sounding but actually worse problem:  Moral hazard.  The reason I fell for the broker’s scam is I simply was not sophisticated enough, or wealthy enough, to do the work necessary to recognize Bulb Miser as a bad investment. Due diligence was beyond my ability; so I forgot about it and trusted my broker.  He faced the moral hazard, and it hurt me. Since the broker was gambling with my money–not his money–he was not nearly as careful with the money as he should have been. My loss was secondary. Not getting his commissions was primary, and that is the moral hazard. For him moral, for me a closet.

Business Attorney Antone Johnson makes these arguments splendidly in “The Great Crowdfunding Train Wreck of 2013.” Since the regulations will not be entirely in place at least until January 2013, equity crowdfunding is still more or less a lottery for most investors.  Exciting, but all reasonable people know the odds are clearly not in the gambler’s favor. Lightning is more accurate. The potential for fraud in equity crowdfunding is enormous, if for no other reason than that the cost of a lawsuit would be exorbitant, and the investment made by any individual would be too small to justify a lawsuit. Also, any equity invested remains entirely illiquid, unsellable, until the startup is sold or goes belly up which most will.  The biggest danger, though, is the likelihood that quite a few unscrupulous entrepreneurs may raise funds from gullible investors with the intent of going out of business. So for gullible investors equity crowdfunding is gambling plain and simple. And the information asymmetry favoring the entrepreneur could be downright racketeering.

Nevertheless even from the entirely honorable entrepreneur’s side, there is no assurance that the startup will ever raise the funds to begin with. Crowds are fickle to put it nicely. They invest in the weird and ignore the valuable. Here is where highly experienced Angel Investors could be a real help to a newby.  Perhaps the funniest example of a self-convinced, but not really expert, crowdfunder is Glenn Fleishman. His new book “Crowdfunding: a Guide to What Works and Why” never hit its target and it simply wasn’t funded at all. Welcome to New York…

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