Funding movement targets small entrepreneurs

Crowdfunding benefits entrepreneurs, allows investments with average incomes

Published: Monday, June 11 2012 8:00 p.m. MDT

Brian Meece, one of the founders of RocketHub, speaks at the "CrowdFunding Made Simple" conference at the University of Utah Guest House and Conference Center on Friday, June 1, 2012.

Laura Seitz, Laura Seitz, Deseret News

SALT LAKE CITY — Utah entrepreneur Phillip Chipping made a name for himself as the founder of the company now known as ZAGG — best known for its line of protective coverings for consumer electronic products and hand-held devices under the brand name InvisibleShield.

The company's products are sold at retail locations nationwide, including a prime Main Street location at City Creek Center in downtown Salt Lake City.

Chipping sold his interest in the company and is working on a new endeavor aimed at improving children's literacy called Knowonder. The project needs $10,000 of initial capital, and Chipping is making a foray into a new funding area to get it started.

Welcome to the world of crowdfunding.

Crowdfunding — also known as crowd financing, equity crowdfunding or hyper funding — is an approach to raising capital for new projects and businesses by soliciting contributions from a large number of stakeholders. Financial contributions are typically made by online investors, sponsors or donors to fund for-profit or nonprofit initiatives or enterprises.

"The reason we think our business will work well in that model is two-fold," Chipping said. "It's a powerful social cause … things that really do well are (projects) that really pull people in emotionally."

He said when people feel "like they are part of something … with social good," they are more likely to want to donate and offer their support.

The key is to offer something in return, something different from the lure of a big payday.

Chipping said he would exchange some "perks" or rewards to donors like autographed copies of their books and literacy materials along with some of the original illustrations.

He said the money raised would help pay for the book's illustrator, the print run of the first edition and the creation of the interactive digital app for electronic devices.

If the effort is successful, he will be able to create a fully illustrated version of the book and develop the digital apps as well.

"We have limited capital, so anytime we can bring in extra capital to fund the actual project, the better," Chipping explained. "Basically, (this model) is allowing you to pre-sell your product. It allows you to gauge the success of your product."

There are four major types of crowdfunding platforms — equity-based, lending-based, reward-based and donation-based, according to crowdsourcing.org, an industry website. The classifications are based on the funders' primary motivation for engaging in crowdfunding.

An equity-based crowdfunding platform (CFP) is a model in which investors receive an interest in the venture they support. Another equity position could include revenue or profit-sharing arrangements.

A lending-based CFP occurs when investors receive fixed periodic income payments and expect repayment of the original principal investment — in stark contrast to equity-based and lending-based models, reward-based and donation-based models are characterized by non-financial motivations for engaging in crowdfunding.

Reward-based CFPs allow investors to gain a non-financial benefit in return for financial contributions. Non-monetary rewards often take the form of a token of appreciation or the prepurchasing of products or services.

Donation-based CFPs provide investors with a way to donate to causes that they want to support, with no expected compensation such as a philanthropic or sponsorship-based incentive.

It's been used to fund disaster relief, in support of artists by reaching out to their fans, for political campaigns, and for funding a startup company, movie or small business.

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