Starting your own online company with "crowdfunding."

[Alan Mendelson]

There is a new buzzword among Internet entrepreneurs -- crowdfunding. It's also written as "crowd funding" and it's the new way of expressing "I'm broke, I need help to start my online business and will you please send me $5 or $10 to help me out?"

Over the years I visited many websites that were started by entrepreneurs that had links for making small contributions, usually through PayPal or some other online service. There was no "in your face" plea for funding -- just a link on the site's home page or "about us" page saying that a contribution of a few dollars would be appreciated. Those kinds of requests for help never bothered me.

But I just got my first request for "crowd funding" and it bothered me.

First of all, the campaign was launched by someone with an established business who also happens to work for another established online business. A week ago, I received an email from this person (I won't mention any names here) that included a link to a video about what services this person can provide. The email asked for "support" but there was no mention of money. I read the email and the first thing I wondered was "why didn't he ask me to do the video? He knows I'm in the video production business."

Then today, I got another email that said "some of you asked me how to support my project and you can support me by making a contribution. I decided to use crowdfunding to start a new online business for my services."

That's how I discovered crowdfunding. I did an Internet search and found out that I am behind the times. Crowdfunding -- or making appeals through the Internet to people you know -- has been going on for a while.

Then I returned to the email from the entrepreneur who said that he needed $30,000 to create his online business. Really? Only thirty-thousand dollars? Why not ask for $70-thousand and buy yourself a new Mercedes so you can have magnetic signs on the car doors to advertise your new online business?

$30K is a lot of money to start an online business. I started my TV show with less than ten-thousand dollars -- and that included cameras and editing gear and my website www.alanbestbuys.com which frankly was done with a do-it-yourself program and actually costs me about $12 a month.

So a start-up request for $30,000 strikes me as a bit rich.

Now, just suppose I thought I liked this business model and was willing to contribute-- or invest. Where is the $30,000 going and how much of it is going to the business, and how much of it is going into the entrepreneur's pockets for living expenses? And what do the crowdfunders get in return? Is there stock? Part ownership? Dividends? Free merchandise or services?

Years ago when I was trying to sell a screenplay that I wrote I had the opportunity to rub elbows with some Hollywood movie producers and I got clued in to some of the funny business that goes on in Hollywood. For example -- the funny business of the use of "seed money" for "pre-production expenses."

Here is the joke about Hollywood pre-production money. There is a financial contributor calling the producer of the movie on the phone:

Financial contributor: "Hi John, how is the movie coming along?"
Producer: "Well things are tight, running into delays. We'll need another fifty thousand dollars soon."
Financial contributor: "Another fifty thou? What happened to the $100K you already got?"
Producer: "Pre-production expenses were high. My wife said we had to finish the kitchen, add on the bathroom, and finish the cabana by the swimming pool."

I even thought that crowdfunding was the equivalent of a panhandler on a street corner who, at the end of his day, walks around the corner and drives home in a Cadillac.

So, you have to wonder where that $30K is going to be spent on the new website business. And I have to wonder why my company wasn't hired to do the videos?

Crowd funding. I think it takes nerve and it hits a nerve. Is it Internet panhandling?

[Spock]

And I have to wonder why my company wasn't hired to do the videos?

Just a guess, but if they have no money then perhaps they couldn't afford you?

I think crowd funding is a viable alternative, but like anything else there are probably decent people asking for money and others that are likely to abuse it. Caveat emptor.

You didn't mention what business this person started but it may be that without reaching critical mass they don't have any hope of succeeding. Some businesses/people may be able to start slowly doing it part time and growing either through donations or modest profits, but others will need cash for equipment or advertising. Starting a business is hard, and the vast majority fail. Starting on a shoe string budget may work for some of them, but it probably would doom others to failure.

I find the whole crowd sourcing industry interesting, but it has limited use. If you have something truly unique and try to get people to invest it seems to me that someone with deeper pockets could just take the idea and run with it and leave you out in the cold.

[Alan Mendelson]

Just a guess, but if they have no money then perhaps they couldn't afford you?

I doubt that's the case. What made my business successful is that we charge less. Much less than our competitors. Let me give you an example (and I don't mind a little self-serving advertising here):

We charge $350 per minute for an ad that appears on our Sunday Best Buys Show on KCOP Channel 13. The price of $350 for one minute of TV airtime includes the cost of producing the one-minute advertising spot. We also put the video on YouTube and the advertiser can use the video on their own website or anywhere else on the Internet including Facebook, LinkedIn, Twitter, etc. for no additional charge. The "production" includes my narrating their ad, writing and direction and editing and of course the cameraman and post production. Compare that to the average cost of hiring a videographer in this Los Angeles market which ranges between $1,000 and $2,000 a day -- with editing, writing, directing costing "extra" and that doesn't include TV air time.

Now, I do have shows that have followed my lead -- and they charge per minute $850, $1,000 and $1,500 per minute and their "broadcast times" are less desirable than mine.

One problem I run into is that clients tell me they didn't believe me when I told them our prices. They said "it's too good to be true." It just happened this morning, but when I showed up with my cameraman the business owner said to me "I didn't believe it until you walked through the door. I thought it was a scam." And that has happened a lot.

There is no reason to rip people off. We keep our overhead low and with our prices we do quite well, thank you.

[Spock]

LOL! My initial reaction before I got to the end of your post was "that sounds too good to be true".

You're right, that is pretty affordable. But I was thinking more along the lines of the person decided to do it on their own with -0- costs.

[Alan Mendelson]

I was thinking more along the lines of the person decided to do it on their own with -0- costs.

No, their video was done by a professional crew with graphics and editing. I'm sure they paid several thousand dollars for a one minute "demo video." The same thing we would do for $350 and put it on TV.