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Local ideas get jump-started on Kickstarter

For the past 13 years, Jessica Lerner has slowly gained a local name for herself by singing and strumming her heart out in San Diego malls.

Over the course of just two weeks in October, however, she catapulted her career to the next level by posting a plea for money on Kickstarter.

"If we don't meet the goal of $1,000, the whole project is void," she wrote on the fundraising site, referencing a project to record and release her original holiday track on iTunes.

In October, 46 donors bit and gave $1,305 in increments as little as $3.

Penniless artists and entrepreneurs like Lerner have been using Kickstarter as a tool to gain dollars, as well as marketing and national exposure from an otherwise oblivious audience.

Since Kickstarter's launch in April 2009, more than $350 million has been pledged by more than 2.5 million people, funding more than 30,000 creative projects.

There are currently 77 projects listed for San Diego that are active or already funded. Others, like a detective Web series that would have been filmed in San Diego, were unsuccessful in raising the money. A local brewery making European ales is looking for $30,000 by Nov. 14.

"Kickstarter is one of those things like Wikipedia, where five years ago someone described it and people said that's a novel idea but no one's going to really do it," said Steven Johnson, author of "Future Perfect: The Case for Progress in a Networked Age."

Now, just three and a half years after Kickstarter got going, it's on track to give away more money to creative people this year than the National Endowment for the Arts.

"The question is not whether the peer network approach to arts funding will be as big as the NEA. The question is will it be 10 times bigger," Johnson said.

Duane Roth, CEO and board member of Connect, calls Kickstarter a philanthropic platform that supports good ideas – but stops there.

"Generally, it's not something I'd consider to be an investment. It's donations," said Roth, whose regional technology and life sciences program has helped form more than 3,000 companies that have secured over $10 billion in funding.

Roth pledged $100 to get the San Diego Public Market in Barrio Logan off the ground, making him one of 1,379 donors who gave a whopping $146,121 to transform more than two acres of funky warehouses near Petco Park into a fresh food haven, in the fashion of Seattle's Pike Place Market or San Francisco's Ferry Building.

The market only asked for $92,244, but that extra injection of money has let them go a little further and enter into the design phase for the commercial kitchen portion.

"Kickstarter is not designed to open a business, per se, but it's designed to do a specific project within a larger project," said Catt White, co-founder of the market.

Kickstarter is just a piece of the overall fundraising process, she said.

Potential donors are inundated with daily distractions, so to keep one project on top of their minds, the Kickstarter posting needs to be updated on a regular basis and blasted out to large networks like Facebook.

"I've seen terrific ideas on Kickstarter that didn't get funded," White said. "Generally, it's people who post an idea then just sit there and wait for it to roll in. That's not how it works."

San Diego's Praline Patisserie, for example, needed money to move its caramel sauces from a farmers market booth into a dessert and confection shop. It failed to raise the $22,000 it asked for by Oct. 31.

"It's an amazing product and there's no reason the thing shouldn't have funded," White said. "They had no time to devote to it."

Most projects on Kickstarter essentially involve pre-paying for the delivery of an item, explained David Titus, president of San Diego Venture Group.

"This would make the money received revenue to the business and the ultimate profits and losses would determine taxes. It is not a purchase of equity in the business," Titus said.

Crowdsourcing and crowdfunding, however, is a serious investment platform that links up small businesses with large-scale capital. The government has been crafting rules to regulate the concept under the Jobs Act, and the Securities and Exchange Commission has not yet made an approval.

"There is some concern about the timing and how it will work," Roth said. "I think that is why the rule-making is more complicated."

When there are thousands of small stakeholders in one company, problems can arise.

"Regulation has to be looked at, particularly if you are using this for a stepping stone to larger financing," Roth said. "You've crafted a huge group of shareholders and you need to deal with venture capitalists or corporations. How do you get the vote to do something?"

The government plans to reduce limitations on general solicitations, but it also plans to plunk down another set of regulations that will make it difficult to take money, explained Martin Waters, a corporate and securities partner at Wilson Sonsini Goodrich & Rosati in San Diego.

"It will be able to reach a lot of people but there will be a number of regulations you have to comply with before you can get that money," said Waters, who spoke at a panel about new models for early stage financing at the WBT Innovation Marketplace conference in San Diego on Oct. 25.

To grapple with those new regulations, he said, one solution is to develop a pre-qualified list of investors that has the pockets to invest in startups raising under $5 million.

Kickstarter has its own set of regulations, but critics say they aren't stringent and clear enough. The site quickly reviews projects before they launch to make sure they meet their project guidelines.

"Kickstarter does not investigate a creator's ability to complete their project," according to a Kickstarter blog post about accountability. "Backers ultimately decide the validity and worthiness of a project by whether they decide to fund it."

While it has its skeptics, Kickstarter remains a sound way to score small, angel-like investments.

"Instead of going into big government institutions, like the NEA or big wealthy philanthropic organizations endowed by some billionaire, you create this network of small donors or funders, with each contributing $10 or $50," Johnson said.

That diversified donor pool dictates what creative work should be supported, he explained.

"It's a bold new world, how the Internet is being used for different things," Roth said.

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