Crowdfunding is the key

More technology entrepreneurs are seeking to raise capital on sites like Kickstarter.

In late March 2014, Facebook Inc. (Nasdaq: FB) made another big headline-making acquisition: it was not the $19 billion that it shelled out to acquire instant messaging app WhatsApp, but a less known company called Oculus VR, which has developed the Rift virtual reality headset, which allow wearers to play sports and feel as if they are on the field.

Facebook paid $2 billion for Oculus VR was not only a badge of honor for the state-of-the-art technology behind Rift, but also for Kickstarter and other crowdfunding sites, which enable entrepreneurs of every stripe to raise money from a wider audience to kick start their dreams of innovation.

The public learned about the Oculus Rift in August 2012, when the company launched its Kickstarter campaign, in which it raised $2.4 million. This was one of the most successful campaigns by the site. 9,522 people invested in the project, which raised 975% more than its initial target within 30 days.

Reliance on Kickstarter long ago became one of the preferred ways for new entrepreneurs to embark on their long march to success. It does not work for everyone, and not everyone succeeds in meeting the challenge and surviving even after a successful financing round, but Kickstarter alone, as the most popular crowdfunding site, has raised more than $1 billion from 5.7 million people worldwide in its five years in business.

Fundraising or advertising?

The big question is whether this is a fundraising platform that can replace the early financing rounds by start-ups and entrepreneurs from private investors and venture capital funds. The problem is in the objective: is the desire to raise money or to secure advertising and fame? The responses from several entrepreneurs, who ran campaigns on Kickstarter and its peers, to "Globes" are divided on this point.

"The money you raise from platforms like Kickstarter is not something that can keep sustain you for a long time and build a big company, says, Pitango Venture Capital managing general partner Aaron Mankovski, who invested in 3D printer developer formlabs Ltd. shortly after it closed the raising of $3 million in a successful Kickstarter campaign. He says that the platform mainly creates contact with the public, an understanding of the way the wind is blowing, and early feedback. "It's a huge advantage for both companies and investors who want to know if there are customers for the product outside," he says.

Kano Ltd. is a computer and code kit maker for all ages, which raised $1.5 million. Co-founder Yonatan Raz-Fridman says that this money is not enough for the company to survive, but is mainly to create a community, because most income finances initial production of the product. This is because in some Kickstarter campaigns, investors can receive the products involved. In this way, the bottom line is not necessarily profits. "Kickstarter is a wonderful place where people can fall in love with what you want to do," he explains. "Look at us. Five years ago, before we ran the campaign, only 200 people had heard about Kano. After the campaign, we had more than 13,000 people."

Crowdfunding projects are widely covered by the media, and new and fascinating projects garner newspaper headlines and bloggers' attention. Nonetheless, the entrepreneurs behind the projects do not really depend on traditional investors rushing in to become talent hunters. "I don’t believe that venture capital funds will be tracking the graph of the trendiest projects on Kickstarter," says Pressy Ltd. founder Nimrod Back. The developer of the "Almighty Android Button", which is plugged into a smartphone port to characterize and operation functions, raised $700,000 on Kickstarter. "The entire venture capital industry is very conservative, and they see this whole sector as a game or toy. They don’t yet treat it seriously."

Anyone who thinks that he can find angel investors or high-tech leaders at the top of a list of Kickstarter backers is in for a surprise. After five years of operations, its biggest investor is American-Jewish author Neil Gaiman, and the biggest backer is Mr. Kickstarter himself, Tieg Zaharia, who has invested in more than 1,000 projects.

Although no big investor tracks or believes in Kickstarter ventures as the next big thing, unless there is something exceptional, Israeli technology and gadget entrepreneurs continue to throng it. It is currently possible to find on Kickstarter ventures such as ConsumerPhysics' SCiO pocket molecular sensor, which can identify the components of an object in real time. The sensor can detect the percentage of fats or the number of calories in a schnitzel on the plate in front of us, or the chemical formula of a medication prescribed by a doctor. The project has raised more than $630,000 to date, and the campaign has more than a month to run.

Another interesting project is ZUta Labs's The Mini Mobile Robotic Printer, a pocket printer that can be taken anywhere. The 300-gram baseball-sized printer with a printhead, cogs, and Bluetooth processor that can print a page from a smartphone. Although the printer has had extensive media coverage worldwide, the campaign, which ends this week, raised just under $500,000, only a little more than its target.

Bottom line, can entrepreneurs turn to crowdfunding to promote their start-ups? The answer, as mentioned at the top of this article, is in dispute. A campaign on a site like Kickstarter is a huge public relations boost for any entrepreneur who wants and can promote himself or herself. Such a campaign will create awareness about the entrepreneur and the product, from which the point the path to meet the target and raise enough money to get the product rolling is short. However, in view of the product's production costs for its backers, it is not certain that the entrepreneurs will be left with enough money to grow and thrive. Nonetheless, the cases of formlabs and Oculus VR shows that a little bit of luck can definitely help, and the creation mass awareness can lead to the doors of traditional investors. From there, the road to securing big money is faster.

Who will win smartup2?

"Globes", in collaboration with Bank Hapoalim (TASE: POLI) is launching the second annual SmartUp competition for Israeli start-ups. As part of the project, "Globes" correspondents will track three start-ups, which receive assistance from incubator experts and Bank Hapoalim advisers, based on the understanding that many companies with good groundbreaking ideas get stuck at the start because of difficulties that prevent them from achieving their potential.

The project is designed for Israeli companies that have raised at least NIS 250,000 in seed funding. Each company selected for the program will receive over three months advice from the high tech and business world on a range of topics relevant for early-stage start-ups, such as marketing, financing, human resources, and heading overseas. All they have to do is to register at smartup2 page (in Hebrew), and tell us why your start-up should participate. Participating companies will receive a start-up package from Bank Hapoalim, including a high-tech account at preferred terms and a NIS 20,000 grant.

The three winners will receive assistance from leading Israeli incubators and accelerators Explore.Dream.Discover, 8200 EISP, and Nielsen Innovate.

Published by Globes [online], Israel business news - - on May 8, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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