When is using a fundraising site such as IndieGoGo or Kickstarter appropriate?

I have a potential software company that's generating an overflowing amount of notes and drawings on my desk and on my computer.

I'm looking for a small amount of seed money to hire a freelance programmer to develop a functional prototype, and from there I hope to generate buzz about the site and hopefully a second round of funding used to hire a full-time programmer or two.

I keep asking my friends and relatives, but they only suggest Kickstarter and IndieGogo, probably because it's popular and they've heard of them.

Are crowd-funding sites appropriate for a software company that still has to get off the ground?

What are my other options?

My advice is to not use those sites. The sites have rules for what projects can crowdfund with the aim of making sure they produce an actual product. From the kickstarter page:

Every project needs a plan for creating something and sharing it with the world. At some point, the creator should be able to say: “It’s finished. Here’s what we created. Enjoy!”

Building a prototype is kind if a grey area there. You've built something, but it's really not a finished product. Even if it gets through the rules and launches a campaign, do you really expect people to pay money to "generate buzz" so you can ask for more money? In their minds it would make more sense to invest in the second round, where there's less risk.

But let's assume that the campaign launches and it hits its goal. You get your money from Kickstarter! Now kickstarter takes its cut, then the government taxes you, if you're in another country, there may be some more fees there and then you have to keep some money saved for rewards to give to backers. How much do you have to pay your programmer at this point?

In my opinion, Kickstarter is best for projects that already have a clear idea and have built a prototype. They're 99% of the way there and just need a little push to get to market.

If you don't need to much money, friends and family are your best bet. If none of them are offering anything it could be for a may reasons such as:

  • They are having a tough time financially and can't afford anything extra
  • You aren't promoting your idea well enough
  • Your idea isn't any good. They don't see any potential in it.

The last one may be a tough pill to swallow. But also consider your own position. Do you really believe in this idea? Pay out of pocket! Keep 100% ownership of the project. Alternatively work on the product yourself. You can learn the basics of programming online. Your code doesn't have to be perfect, just a prototype to show people why your idea is great.

tl;dr Kickstarter etc is a bad idea. Why would people pay you to pay someone else to produce something vague? Ideas are worthless without execution. Take ownership of your idea and get something done.

I think sites like Kickstarter is best suited for "mostly completed" projects. I don't think it works as a seed funding for companies in general. You can make use of it by creating a campaign for a product that your company is creating though.

When your project is on the course of being published (almost finished) you can always promote your project with your backers - they are likely to tell their friends about it/share it in their social accounts. Best way to advertise is customer to potential customers IMO. Of course, promotion starts before creating your project, but extra promotion is always welcomed.

Also, it is a "kick-starting" funding for your project expenses. You can use the money for advertising your product, creating events for your fans etc.

Again, I don't think it is useful for a seed funding though.

You can always try. If people are willing to give you money it is appropriate. The worst case is you don't raise the money, in which case you can squash your dreams or ask your rich friend/uncle to back you :). Just make sure you don't break any Kickstarter/IndieGoGo rules and you should be fine.

You are more likely to raise money if you are a known brand, but a story of an aspiring entrepreneur trying to launch his first start up, with the right amount of pity inducing content should work.

I agree with Connor here. Kickstarter is probably not the best approach initially.

Kickstarter is mainly for a hardware product, that has a working prototype or production of an artistic creation (e.g. movie). People pay because they want to see it.

It is unlikely that your software product would generate enough buzz to get people to signup. Why should I donate to this software company, when there are others out there like it? I'm probably going to have to pay for it at a later date as well on a monthly subscription.

Software doesn't ever fair well on those sites. Investors or self funding are the best ways to go. Self funding can include doing contract work for your business while you work on a product. A good example is building a product, then charging for integration work into their existing systems if appropriate. That way you get cashflow to keep yourself afloat, while getting your product out there and building your product.

I think that using this sort of platform for software can be risky: crowdfunding sites are generally used for hardware products that people can have shipped to their door and that they can hold in their hands as a finished product.

Software is never a finished product, and crowdfunding generally does better when you're showing people something concrete that they can place a value on internally.

However, there is something interesting here: it doesn't hurt to try. If people are willing to give you money, then so be it. Fundraise however you need to, but crowdfunding is an unconventional way to get money for this type of project.

There are many crowdfunding sites out there, and they can be a great tool to help you fund an initial project. While there are runaway success stories, most people report that the site is a good way to reach out to your own extended network, rather than a way to access people eager to find and fund new business projects.

Most of the well-known sites have a gift model - people who contribute may be rewarded in some way, perhaps at different levels. Funders have the reassurance that their money will only go to you if you raise your target sum, so this is a pretty good way for friends and family to support your project in an uncomplicated way.

Apart from this sort of sites, you will find crowdsourcing sites for equity and business loans. Each of these is also finding a role in startups, so you need to get familiar with what's out there and which might be viable options for you to put alongside other avenues to seed finance.

I think that, although the crowdfunding route could be good for you, you're aiming at the wrong sites.

Indiegogo and kickstarter are good if you're going to build a product now. You can even see that money as presales money. You clearly are not an that phase now.

On the other hand, there are crowdfunding sites as FundedByMe that may be what you actually are looking for, places where people invest in startup projects and they receive equity, yearly interest or rewards in exchange.

My startup has deliberated over this as well, and we ultimately decided that it wouldn't be worth it. It could have negative impacts on how people perceive us, but also, if the kickstarter fails, it sends a really bad, provable message to potential VCs (yikes!)

We are toying with using Patreon.com though, since it's more of a pay-what-you-want subscription model.

For the record (2016)

I checked Kickstarter for software and it looks bad. Some (half baked) projects are asking not more than $5-$10k. Some projects are earning $30k. But even after that, developing is a hell of expensive. Just try to hire somebody ($3k - $8k per month) and most projects takes 3-6 or even a year and not for a small developer.