Indiegogo co-founder: crowdfunding power

Earlier this year, just a few weeks from opening, Mission Cheese needed help furnishing one last section of its new shop.

Mission Bowling Club wanted to renovate the entrance of its bowling alley and dining hall with an outdoor patio, bike racks and a garden. Natural Resources asked its customers and supporters to help keep the doors of the popular pregnancy, childbirth and early parenthood center open.

For help, the three small San Francisco businesses turned to Indiegogo, a crowdfunding site, and began online campaigns seeking the funds they needed. All three were eventually able to finish their projects.

For nonprofits, musicians, artists and small businesses, crowdfunding is increasingly becoming a powerful way to raise money. Instead of seeking a bank loan or a corporate sponsor, they turn to their friends, family, neighbors and strangers to pitch in what they can, from $5 to $5,000.

In return, the contributors receive perks: For $50, for instance, funders received four drink tickets at Mission Bowling Club and an acknowledgement on its website. For $100, contributors received a $20 gift card, a T-shirt and their name on Mission Cheese's wall on opening day. Natural Resources rewarded two $150 donors with an acupuncture and massage session and a wellness psychotherapy session.

At any given time, Indiegogo - at www.indiegogo.com - has about 6,000 live campaigns. Danae Ringelmann, the site's co-founder, spoke recently about the rise of crowdfunding. This conversation has been edited for length and clarity.

Q: How did you come up with the idea for Indiegogo?

A: I was working as an analyst (in New York) and I got invited to an event, "Where Hollywood Meets Wall Street." It was not at all what I expected. Instead of celebrities, it was a sea of emerging artists, writers, filmmakers and theater producers who were all hoping to meet their next angel.

But it didn't hit me until two days later. I received this script and a note saying, "I look forward to you financing my next film." It was at that moment that my heart sank. I realized that I didn't have any money to finance him and the only reason he was asking was because I was his connection to money. I realized the system was broken.

We (Ringelmann and her co-founders, Eric Schell and Slava Rubin) were frustrated with the inequity with fundraising and finance. The reason people were successful was a little out of their control. It was about who they knew, if they had a rich uncle, a trust fund or a connection at a bank. It was not based on their work ethic, their brilliance or the responsiveness of the community.

Q: Kickstarter, another crowdfunding platform, has gotten a lot of attention lately. What's the key difference between Indiegogo and Kickstarter?

A: Since our launch in 2008, there are hundreds of competitors that have launched, and Kickstarter is one of them.

We're truly open, across all industries and all geographies. We don't decide if you have the right to raise money or not.

(One of our differences with Kickstarter) is our funding mechanics. We're very flexible. Our true mission is to democratize fundraising. With that, we've given people options for raising money. We have the fixed funding model and the flexible funding model. Under the fixed funding model, campaigns set a goal and target. If they don't reach their goal, they don't get any money. (This is Kickstarter's model.)

Under the flexible funding model, which is by far the more popular model, the campaigns set a goal and target, but they get their money whether or not they reach their goal. (Indiegogo takes a 9 percent cut of the funding if a campaign goal is not met and 4 percent if it is met.)

We want to be open and democratic and transparent. We shouldn't decide who should be successful or not. We're simply a platform where everyone has an equal chance of success.

Q: What do you tell people who are cautious about contributing? How do they know that their money is going to something worthy and not fraudulent?

A: What we encourage campaign owners to do is embrace the fact that crowdfunding is an inherently social experience. You should raise the first 20 to 30 percent from people who know you, can validate you and provide credibility.

On the flip side, we also encourage our funders to do exactly the same. If they know someone and can vouch for them, go ahead and fund them, but if they don't know someone quite as well, do a little more due diligence.

With that said, because we're an open platform, we know that, just like with the credit card industry or eBay, you're going to get people who want to take advantage of it. We've been doing this for five years and we have built an incredible fraud algorithm to catch anything that shouldn't be there.

Fundamentally, the strongest deterrent is the dynamics of crowdfunding itself. It is fundamentally a social experience. A lot of people think that someone will post an idea that's bogus and run off to Bermuda. (But) they would have to convince thousands of people that their idea is real. It's a lot easier to walk into a bank and defraud one bank lender than it is to defraud thousands of people.

Q: What happens if a project doesn't work out?

A: That's why we encourage the campaign owners to be transparent, because not everything happens as planned. We had a great example of a Burning Man campaign. They were trying to make a floating disco ball. They did a great job of engaging their community, raising the money and providing progress updates. But then at Burning Man, when it was time to fly the flying disco ball, the winds were such that it couldn't happen. But because of the communication from the campaign, no one was upset. We knew they had given it their best try.

Q: Do you worry that people will get tired of funding projects?

A: Do you ever think, I don't want to buy more music? Or, I don't want to buy any more coffee? Crowdfunding is allowing people to vote with their dollars and decide which ideas come to life and which don't. If you're sick and tired of the large coffee chain in your neighborhood, you can change that. You can fund a campaign to open a local coffee shop in your neighborhood. It's a very empowering experience.

Ellen Lee is a freelance writer. E-mail: business@sfchronicle.com