In business, it isn’t enough to have a good idea. Wannabe entrepreneurs have been admonished time and again, “Nobody cares about your idea.” It’s whether or not you can get capitalized, execute a well-thought-out business plan and turn a profit that matters to investors.

That’s usually the case. But crowd funding has withstood the notion that investors can’t be sold on an idea on its own. Crowd funding is all about selling the idea, the chewy center of a tough business financing model straight out of the school of hard knocks. Except that in some cases, crowd funding actually works. And, unlike peer-to-peer micro lending, it isn’t a loan, so it doesn’t have to be paid back.

There have been examples of groups of people supporting causes and art projects for decades, but crowd funding has only expanded into the small business financing realm is the last four to five years. Many of the crowd funding engines online are geared toward musicians, filmmakers and other creative interests such as the Kickstarter and Sellaband sites. Today, they have been joined by sites extending crowd funding opportunities to startups.

“The concept of using crowd funding to fund ideas and to fund companies is a bit newer than using crowd funding to fund projects,” said Ross Kimbarovsky. Kimbarovsky is co-founder of CrowdSPRING, a crowd sourcing business based in Chicago’s West Loop that provides a platform for small businesses to access logo, Web design and writing services. “If you think about some of the most successful crowd funding platforms, a lot of those started from the notion of creating social good, helping other people. Now people are thinking about a business space, funding startups. If you don’t have a lot of other options, can you use crowds?”

Options for funding startups have been limited by the financial crisis and disappearing lines of credit. For Suzi Thompson, a freelance makeup artist in Los Angeles, crowd funding came to her rescue.  

Thompson had been working three years to develop and finance a makeup line free of parabens, a potentially toxic, cancer-causing substance. She began working with two business partners and a lab in New York to formulate the brand over a year ago. The partnership fell apart when Thompson refused to compromise and add the parabens to save money.

“I ended up back at square one,” she said, adding that a filmmaker friend of hers told her about Indiegogo. She created a campaign, which included a profile and video showing her wearing the makeup, and posted it on the site last October around her 30^th birthday. She appealed to friends and family members to donate to Thompson Cosmetics in lieu of presents. She set a goal to raise $1000 but raised $1900 in 30 days. Indiegogo takes its fee (4 percent for every dollar raised) from the proceeds.

“I told friends and family the best thing you can do is help my dream come true. Any little bit helps,” Thompson said.  

In exchange for donations, Thompson offered perks such as naming a product after people who gave $100 or more. The campaign even drew donations from people she did not know, including in Canada and England.

“I did it through Facebook and Twitter and on my Web site MakeupbySuzi.com. I just constantly posted it, the perks and people’s names. I had friends post and repost it. It was 100 percent social media,” she said.

Using social media as a primary marketing tool is the one cool trait that crowd funding Web sites have in common.  Other than that, rules of engagement vary. Some limit the service to certain types of industries (www.spot.us for journalists, for instance) or projects. But anything goes at Indiegogo. One campaign sought donations to pay their pet’s veterinary bill.

“You can create a campaign to pay for absolutely anything. Root canals, new computers, in-vitro fertilization, creating new technologies, new fashion lines, new stores,” said Indiegogo co-founder Slava Rubin, adding the site targets small businesses, creative projects and causes. He also offers the ability for nonprofits to provide a tax deduction to donors, but he avoids conflicts with securities laws by prohibiting users from offering equity or any type of financial payout in return.

“They can give products or services or experiences. It’s not a financial instrument. It’s not a loan, equity, or stock,” Rubin said.

Since its founding in 2008, Indiegogo has posted some 18,000 campaigns that were all pushed out through social media tools such as Facebook and Twitter and the traditional media, Rubin said. “Social media just makes it faster and easier. But you can market it however you want.”

Another site, Profounder, works differently. It permits revenue sharing and is marketed exclusively to small business owners looking for investors.

“It’s not donations, it’s not lending; it’s investments. People are literally investing in the business so they can share in the upside if the business is successful,” said Jessica Jackley, who co-founded Profounder with Dana Mauriello and launched last December.

Profounder provides tools for business owners to send out emails and answer questions, and an investor management set of tools to invite people in and track who has seen the opportunity, Jackley said. Once a business owner specifies the return, Profounder makes sure they make good on their promises to investors, she said.

“We facilitate payoff and we provide the platform where entrepreneurs can reveal as much or as little as they like. Over time, investors may demand more. For now, it’s based on the trust and the existing relationship,” Jackley said.

Profounder’s first customer was the owner of a candy store in Hawaii who raised $54,000 from 19 investors.

“Part of the problem is trying to get people to know about you,” Kimbarovsky said. “It’s the same problem companies have in marketing. This is why some of these platforms are so instrumental in the space of helping people.”

Siiri Morley and Ted Barber turned to Profounder after they had exhausted funding for Prosperity Candle, a social enterprise that works with NGOs to economically empower Iraqi women and refugees. Prosperity Candle designs the candles, trains the women how to make them, and pays them a premium for the finished product. Morley said the company is beginning to work with agencies in Haiti and Afghanistan, as well. 

Creating a campaign on Profounder helped them to leverage interest in the social aspects of their business from people in their community. “A lot of people wanted to contribute and were confused about how to contribute. We’re not a non-profit, so we couldn’t offer them a tax deduction. So there was not as much appeal to donate.”

Prosperity Candle launched a 30-day campaign in mid-October and reached its fundraising goal of $10,000 from 32 investors who will share a percentage of the profits. They used the money to help pay the costs of production, marketing and overhead.

“All the outreach was great in the end, because now we have 32 brand ambassadors that are invested in sharing the info and talking us up,” Morley said.

 Crowd funding pros and cons

For obvious reasons, crowd funding should not be counted on to seed a business. In many ways, it is a crap shoot.

Another drawback: Some sites stipulate you only collect the money if you make your goal, otherwise you don’t get any of the money pledged. It’s literally all or nothing. Profounder and Kickstarter, for instance, follow this model. Indiegogo does not. However, Indiegogo charges 9 percent for every dollar raised when the goal is not met, as opposed to 4 percent if it is.

To increase her odds of success, Morley ran campaigns on Indiegogo and Profounder around the same time. Campaigns typically go on for 30 days.

“That put the pressure on to continue the outreach,” Morley said. “When you don’t have a deadline and no immediate call to action, things can go on for a really long time,” she said.

In hindsight, Morley said it was time-consuming and stressful knowing they would get nothing if they missed the goal. They hit their goal of $10,000 on Profounder but came up short on Indiegogo, yet still collected some money minus the fee.

On the pro side, crowd funding sites are a great way for entrepreneurs, musicians, filmmakers, artists and inventors to show and prove themselves. Companies like, Satarii Star, a tech firm that is seeking funding on Indiegogo for a mobile camera application that follows your every move. 

“They asked 43 (venture capitalists) for money and all of them told them it was a brilliant idea but bring it to me and prove it works. So they brought it to Indiegogo,” Rubin said. “The video is amazing.”

With 64 hours left to go in their campaign, Satarii Star had raised $24,472, nearly $5000 above its goal. Satarii Star, however, is unable to offer equity or a share of the profits on Indiegogo. So, instead, they offered other incentives including being listed as a supporter, T-shirts, or the device itself depending on amount of the donation.

Certain industries may be subject to SEC regulations and required to register under securities laws if a financial stake is given.  Kimbarovsky notes that there is less crowd funding activity in industries that are regulated. “The music industry isn’t regulated so there are more opportunities to do those types of programs.”

Profounder has built legal compliance into its service offerings so customers do not have to worry about running afoul of the law. “We have a fully automated compliance engine for national [federal laws] and laws in the 50 states, documentation for government and state, and filing fees,” Mauriello said.

Crowd funding may not be for everybody. But for business owners like Thompson, it can help them get the seed money they need to get closer to their dream.

“I’m definitely planning to do my second phase of funding through crowd funding again,” Thompson said.

Be on the lookout for Aunt Becky’s butter cookie matte facial powder in a store near you.

 Stay tuned next week for more on crowd funding: The Elements of a Successful Campaign.