From Crowdfunding to Jobs? IndieGoGo Seeks to Boost Startup America By Corraling Small Investments

4/26/11Follow @wroush

The Startup America Partnership wants to make sure the little guy doesn’t get forgotten. That’s why San Francisco-based IndieGoGo turned up on a new list of companies contributing to the high-profile national job creation initiative last week. One of the first “crowdfunding” platforms, IndieGoGo helps individuals and organizations raise non-equity funding for their projects online. The company said it would contribute to the cause by cutting its fees in half to help these fledgling businesses get off the ground.

It’s an interesting tactic, given that when companies raise money through crowdfunding, they don’t usually think first about hiring people. Most crowdfunded organizations rarely collect more than $30,000 through this method—which makes it hard to hire people for anything other than occasional part-time work. I was curious about the jobs connection—so I contacted IndieGoGo CEO Slava Rubin and Startup America Partnership CEO Scott Case last week to get their perspective on crowdfunding’s role in creating jobs.

Slava Rubin

“It’s just a matter of time” before the first Facebook-scale company emerges from a crowdfunding platform, Rubin argues. “Three years ago, people used to say ‘No one will ever fund a small, for-profit business this way.’ Now, not only are they raising funding but you’re seeing it across every part of America, in many different industries.”

Building on the buzz over President Obama’s town hall meeting last week at Facebook headquarters in Palo Alto, the Startup America Partnership held a livestreamed panel at Facebook to announce it has obtained commitments from U.S. companies to provide an additional $400 million in services to American entrepreneurs. That’s on top of the roughly $360 million in commitments announced when the White House, the Kauffman Foundation, and the Case Foundation first unveiled the partnership in late January.

Case says the point of assembling these resources—which range from training programs to venture investments—is to increase the number of entrepreneurs who are able to take their businesses from the idea stage to the startup stage to the exponential growth stage, with the ultimate goal of creating more jobs. But when you look at the list of services being offered, most are geared toward established companies. Intuit (NASDAQ: INTU), for example, said it would pitch in $37 million in discounts on its financial software, while Microsoft (NASDAQ: MSFT) offered free access to its cloud computing platform, and Silicon Valley Bank said it would hold an “exclusive event” designed to bring the “America’s most promising entrepreneurs” together with venture capitalists and business mentors.

That’s why IndieGoGo stood out on last week’s list. Anybody can join IndieGoGo to raise cash for an idea. It could be an attempt to commercialize an invention (like the AlphaSphere, a futuristic musical instrument with 48 tactile pads) or realize a dream (like a concert tour for the Bucky Walters String Band from rural Humbold County, CA) or sustain a small business (e.g., Atlantis Books, a bibliophile’s haven on the island of Santorini in economically distressed Greece).

Crowdfunding is a model that dozens of organizations, such as new New York-based Kickstarter, are now pursuing. But IndieGoGo, backed by New York-based Penny Black and a number of individual investors, says it is still the world’s largest open funding platform. And the startup says that for the next three years, it will lower the fees it collects on funds raised by qualifying Startup America Partnership members by 50 percent, up to a maximum of $30 million worth of contributed services.

It was important that the Startup America program include components aimed at the earliest of early-stage entrepreneurs, Rubin says. Most of the companies contributing to the partnership “have made massive commitments, whether it’s Microsoft offering BizSpark or Intel offering hundreds of millions in investment capital,” he says. “One of the things they didn’t have, as we were discussing it with them, was any funding platform for companies that aren’t already $10 million companies. Before you can actually grow to 50 employees and $10 million a year, you have to start out with two or three founders and an idea.”

It’s not clear yet how the program will work. Scott Case, who previously co-founded Priceline, says the organization is still putting together a procedure for vetting people who apply for the various services to make sure they’re legitimate entrepreneurs building real companies.

But Case (no relation to Startup America Partnership chairman Steve Case) says that he’s been interested in IndieGoGo’s crowdfunding model ever since meeting Rubin at the South by Southwest Interactive Festival in Austin, TX, in March. “We recognize that entrepreneurs are all at different stages, and what intrigued me about the crowdsourced funding model was that it really touched on the first two stages—you have an idea and you need to flesh it out, or you’ve started a company and you need to develop a product,” says Case. “What particularly intrigued me was the notion of being able to raise tens of thousands of dollars relatively quickly to get your project off the ground.”

But does online crowdfunding really help to create jobs? There hasn’t been much time for economists to study the question. But if you browse the fundraising campaigns listed on IndieGoGo, Kickstarter, and similar sites, you’ll see a lot of people trying to raise just a few thousand dollars to get a project off the ground, whether it’s vintage-inspired lingerie or a new shrimping device. Obviously, that’s not enough money to fund even one person’s annual salary, let alone a growing company.

At the same time, however IndieGoGo points to examples like Mission Cheese, a San Francisco cheese shop opened by entrepreneur Sarah Dvorak with $12,555 raised on the site; Emmy’s Organics, a vegan bakery in Ithaca, NY, that raised $15,326; and Walk In Love, which raised $30,795 to turn a T-shirt kiosk at a Lancaster, PA, mall into a store. “Projects like Walk In Love started out as one person and now they have several employees,” says Rubin. “Who’s to say they can’t be the next big fashion company? The whole idea is that you want to grow.”

Rubin points out that roughly 600,000 new businesses are started in the U.S. every year, with average of only $7,000 in seed financing. “Imagine if they all got funded on IndieGoGo and they all hired a few people,” Rubin says. “Obviously a high percentage will fail within one year, but a good number of them will become successes.”

Case makes a similar point. Of the 600,000 companies started every year, “The reality is that probably 80 percent of them will never have more than one employee—the founder,” Case says. “The challenge is that neither you nor I can possibly predict which 20 percent are actually going to make it. So we’re trying to make sure we provide resources like IndieGoGo’s at the base level of the primordial soup of the entrepreneurial ecosystem, if you will. How do we make sure there are lots of nutrients in there, to increase the chances that good companies will bubble out?”

There’s another reason crowdfunding platforms are good for jobs, Case says. It’s that companies that are founded with small amounts of capital—often, services companies or those in software or other corners of information technology—tend to have larger employee bases once they succeed. In capital-intensive industries like biotechnology or clean energy, companies tend to spend a lot of money on technology development and intellectual property, but not so much on human resources, he says. “The companies funded by IndieGoGo are likely to be ones where payroll is the heaviest,” says Case.

Finally, running a fundraising campaign on a crowdfunding platform like IndieGoGo can be good practice for entrepreneurs as they prepare for other business challenges, Case argues. “If you can convince people to fund you on IndieGoGo, that’s a good indication that you have something worth investing in.”

Rubin says he expects the Startup America Partnership to issue guidelines for eligibility for the IndieGoGo fundraising discounts and other programs within the next 30 to 60 days.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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