When Oakland startup MegaBots needed to increase the firepower of its 15-foot-tall combat robot, it put out a call online.
The founders set up a crowdfunding campaign on Kickstarter last summer, explaining their giant robot needed to prepare for a duel with a robot in Japan.
A month later, MegaBots had raised more than $550,000 from almost 8,000 supporters.
Crowdfunding is becoming popular for early-stage startups that need capital to get off the ground. It generates buzz and, for a few, can raise seven figures.
It may be an especially attractive option as venture capital becomes harder to secure.
Now, the crowdsourcing market may be taking off, thanks to federal regulations that expand “equity” crowdfunding.
Companies can raise up to $1 million a year from anyone — friends, family, neighbors, fans or strangers — and give those backers a share of the company in exchange for their investment.
Rob Solomon, CEO of charity crowdfunding platform GoFundMe, predicts equity crowdfunding is going to be “disastrous” for most inexperienced investors.
“Investing in startups and picking the right ones is really hard … even if that’s what you do for a living,” Solomon said.
In 2014 crowdfunding campaigns raised $9.46 billion in North America, and the industry had an annual growth rate of 145 percent, according to a study published last year by crowdsourcing research and advisory firm Massolution.
Crowdfunding isn’t going to replace traditional VC and angel funding anytime soon, says VLP Law Group partner David Goldenberg, who represents startups.
Venture capital firms pumped more than $27 billion into Silicon Valley last year, according to a report by the National Venture Capital Association.
“If you’re going for crowdfunding, most of the time it’s because you’ve struck out with those more traditional sources,” Goldenberg said.
Big bonus is ‘buzz’
It’s hard to raise a large chunk of cash on a crowdfunding platform — and most campaigns fail.
Only 36 percent of Kickstarter projects reach their funding goal, according to the company. When a Kickstarter campaign falls even $1 short, it gets nothing — contributors are never charged.
Experts say crowdfunding allows fans to support ideas they care about and feel like they’re connected to the company.
But those warm feelings can fade quickly if the startup takes their money and then cashes out — which happened with virtual reality company Oculus VR.
Oculus raised $2.4 million on Kickstarter in 2012 before being acquired by Facebook for $2 billion two years later. Some of the 9,500 Oculus backers complained about the deal — though they hadn’t been promised a payout or a stake in the company.
In January, Oculus pledged to ship free virtual reality headsets to its Kickstarter backers.
Founders of Flosstime say their Kickstarter campaign was about the experience as much as the money. They raised almost $53,500 from more than 1,000 backers in December for their “smart” dental floss dispenser.
The futuristic-looking machine sticks to a bathroom mirror and displays a blue “smile” when a user flosses regularly, and a red “frown” when he or she doesn’t.
The campaign gave Flosstime more publicity than a VC deal, and allowed it to connect with customers and get early feedback on the product, founder Michael Evans said.
Up in Oakland, MegaBots had a similar experience.
“The Kickstarter campaign really helped us generate awareness and connect with our most passionate fans,” co-founder Brinkley Warren said.
Last year’s campaign was MegaBots’ second try. It failed to reach a $1.8 million goal in 2014 — receiving pledges of just $65,319 — and netting nothing.
MegaBots succeeded the second time around, after reining in expectations. Since then MegaBots has raised more than $2 million in private investment, Warren said.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
