Aug. 28 (Bloomberg) -- Most entrepreneurs go to Kickstarter Inc. seeking money to turn an idea into a viable product. Already flush with cash, Alex Gizis looked to the crowdfunding site in search of enthusiastic testers.
Gizis’s technology startup, Connectify Inc., raised capital in 2011 from a strategic investor to develop technology that improves wireless-Web connections. Gizis then needed to figure out whether anyone would buy a product that he had based on the breakthrough. That’s where crowdfunding came in.
“We said, ‘If we can get $50,000 based on videos and nobody even trying the software, we’ll know there is a market of untapped demand,’” Gizis said.
Kickstarter and peers such as Indiegogo Inc. are breaking new ground. For a half decade, these crowdfunding sites have helped aspiring filmmakers, comic-book creators and Web entrepreneurs in need of a few thousand bucks get an inaugural product rolling. Now, cash-rich, venture-backed startups are using the sites to find users and reviewers of their technology -- instead of having to tap the networks of their friends, cousins and friends’ cousins.
It’s a twist on what has become an increasingly popular way to raise money for new ideas. Some 4.7 million people have pledged more than $760 million to 47,000 Kickstarter projects in the past four years, according to its website. The giving has gathered steam in the past year as crowdfunding becomes more mainstream and well-known.
Indiegogo, which was started in 2008 to fund independent films, now distributes millions of dollars a week around the world. Through crowdfunding sites, users pledge small amounts to a project, and get an early version of the product -- in contrast to venture capitalists, who typically dole out much larger sums to grab ownership stakes and often board seats.
The model benefits venture investors too, letting them deploy smaller amounts to fund company operations with the crowd paying for product development and initial manufacturing. That means less wasted money on failed iterations, said Scott Jacobson, a managing director at Seattle-based Madrona Venture Group.
“A lot of people confuse Kickstarter as a fundraising or financing platform,” Jacobson said. “That’s a bit of a misnomer. It’s for companies to identify early adopters.”
Madrona has backed two startups that plan to introduce campaigns within the next year to test their products: Play-i, which makes robots to help children learn computer programming, and SNUPI Technologies Inc., a developer of home sensors. Scanadu Inc., whose devices help consumers monitor their health and wellness, wrapped up its Indiegogo campaign last month, reeling in almost $1.7 million on the site after raising several million dollars from private investors.
Kickstarter, based in New York, lets anyone raise a specified amount of money for a project that fits into one of 13 categories by posting a short video and description of the endeavor. Anybody can donate, and backers often receive promotions or the first release of a product.
Kickstarter is all or nothing, meaning that if a project doesn’t reach its target, the money is refunded. Many Kickstarter-funded projects don’t finish on time, leading to disillusionment among some donors. Even so, giving to Kickstarter has accelerated in the past year.
San Francisco-based Indiegogo has a flexible option that lets those raising money keep the funds even if the goal isn’t met.
Connectify’s Kickstarter campaign was a success. In four weeks, the Philadelphia-based company raised $107,622, more than double its target amount, from 1,708 donors. The first 200 backers received a one-year license for the new software -- Dispatch -- and the company’s hotspot product for $40, less than half the retail price, according to a press release.
Dispatch lets users link to multiple Wi-Fi and high-speed wireless networks at the same time, improving download speeds. Consumers in countries ranging from Kenya to the Philippines tested the service and submitted feedback. Connectify is backed by funding from the investing arm of the U.S. Central Intelligence Agency.
“By the time we ended, we were able to say this software works everywhere in the world,” Gizis said. “The fact that we charged them money to be our testers made them value it and take it seriously.”
While the additional financing option is a boon for technology startups, it could be seen as an unfair advantage for those that have already raised outside funding, said Joe Heitzeberg, an entrepreneur-in-residence at Madrona.
Heitzeberg said he has seen 10 or 15 venture-backed companies turn to Kickstarter, and pointed out that an influx could potentially undermine the site’s intent.
“The heart of Kickstarter is that they want to support those who need the support, not MBAs who have raised millions of dollars,” Heitzeberg said.
Justin Kazmark, a spokesman for Kickstarter, declined to comment. Rose Levy, a spokeswoman for Indiegogo, said “market validation is one of the main benefits of crowdfunding.”
The fundraising method is particularly useful for companies developing hardware, video games and open-source software, said Chris Dixon, an early investor in Kickstarter. They attract the most passionate followers, he said.
“It’s the hobbyist community,” said Dixon, a partner at venture firm Andreessen Horowitz in Menlo Park, California. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.
Play-i, based in Sunnyvale, California, plans to initiate its Kickstarter campaign in the next few months and hasn’t yet decided how much it will try to raise, said founder and CEO Vikas Gupta. The company, which earlier this year raised about $1 million from investors including Madrona and Google Inc.’s venture arm, is developing robots to help kids learn to code.
Gupta, who sold his previous startup to Google, said he wants to find some users before going into mass production. “You have to get the early adopters on board,” he said.
Not all campaigns are successful, even for the well endowed. Lively Inc., a San Francisco-based sensor maker backed with $2.5 million from investors including Maveron LLC, tried to raise $100,000 on Kickstarter but attracted just $15,177 for its project by the campaign’s end on May 16.
Even though it had to forfeit its Kickstarter financing, the team gained insight into its potential market and who the likely buyers would be, said co-founder David Glickman. Lively’s devices track a person’s daily actions so they can be easily shared with family and friends.
“Kickstarter helped us understand the type of communication that we need for our audience,” Glickman said.
Connectify also had a more difficult experience its second time around. The company started a follow-up campaign in May with an enhanced cloud-based product called Switchboard. After the first week, feedback from its base indicated that the software needed modifications. The company shut down the campaign and kept testing the revised product with those who had donated.
“On some level this was a great success,” Gizis said. “Kickstarter stopped me from going too far with this thing that wasn’t quite what people wanted.”
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