Renny Braga had almost everything he needed to start his food truck business: the equipment, a website and a truck. ¶ What he didn't have was $4,500 for last-minute mechanical work on the truck, which he plans to start operating Saturday. ¶ Braga decided to create a profile on Kickstarter, a recession-inspired website where people can make donations to different projects, businesses and causes. ¶ He filmed a short video explaining his business and why he needed the money, and posted his campaign to the site. Within 24 hours, friends, family and total strangers had donated enough money to meet his target $4,500. After 17 days, they had donated more than $10,000.
"Even people we didn't even know thought it was a worthwhile thing," Braga said.
Braga is one of an emerging crop of entrepreneurs turning to ''crowdfunding'' to help finance their startups. The term defines a method of raising money by collecting small amounts from many donors. In exchange, the businesses offer rewards in the form of free merchandise or services.
"Nobody wants to say that something good came out of an economic recession, but I would say this is something good that came out of it," said David Martlett, National Crowdfunding Association founder and executive director.
Bank loans for startups and home equity credits are hard to come by these days, Martlett said, so crowdfunding is an attractive option for new entrepreneurs. Crowdfunding sites like Kickstarter and Indiegogo have surged in popularity, addressing financing needs for everything from restaurants to album recordings to sex-change operations.
"It's exploding across the nation," Martlett said.
In 2011, crowdfunding sites reported about 1 million successful campaigns and raised more than $1.5 billion worldwide, according to crowdsourcing.org. Experts estimate crowdfunding platforms will raise $2.8 billion in 2012.
"If you meet your goal, it's well worth it," said Justin Beamon, who is asking for $30,000 on Kickstarter to help him start a mobile craft beer canning business in Tampa. "It really allows you to pursue your dream without having a second or third party maybe wanting to control something they know nothing about."
Starting in January, business owners will be able to offer shares in their companies in exchange for donations.
With the passing of the JOBS Act in April, the Obama administration legalized equity crowdfunding, in which the donors can receive securities in the business rather than a just a T-shirt or a coupon. The Securities and Exchange Commission is still working out the regulations for this new model of investing, but experts expect the response to be huge.
Maurice Lopes, one of the founders of Early Shares, a Miami-based equity crowdfunding site solely for small businesses, said about 500 businesses have applied to use the portal since the start of this year. The site won't officially launch until January.
Typically, the startups using the equity crowdfunding model will ask for fairly large amounts, between $100,000 and $500,000, Lopes said. The donation/reward model used by sites like Kickstarter will continue to be the most appropriate method for business owners like Braga and Beamon, who need less money.
The economic and political climate is just right to support this new practice of crowdfunding, Martlett said. Lopes called it "a cross between philanthropy and business" in a time where more businesses are getting creative with their financing.
"Everybody needs help," Lopes said. "Most successful businesses are not a one-man team. The reality is you divide the time, you divide the work."