Website lures startups seeking guinea pigs

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 crowd-funding site in search of enthusiastic testers.
Gizis’ 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 crowd funding 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 crowd-funding 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 crowd funding 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 crowd-funding 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 crowd funding.”
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, Calif. Bloomberg LP, the parent of Bloomberg News, is an investor in Andreessen Horowitz.  •

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