#DigitalSkeptic: Crowdfunding Doesn't Work Like You Think, and Not Much Is New

NEW YORK ( TheStreet) -- Griffin Reinhard recognizes that if investors rely on the crowd when it comes to crowdfunding, they're probably going to wind up all by their lonesome.

"It's not like people with money get up and go to Kickstarter or Indiegogo at 8 o'clock in the morning and decide, 'Oh, I'm going to give money to this idea,'" Reinhard said to me on the phone. The man is as close to a crowdfunding pro as I could dig up: He's director of digital media at The Crowdfund Mafia, a thriving San Diego-based crowdfunding marketing company.

"What really happens is backers hear about a campaign through their network," he said. "So you have to be out there promoting your service, or even the best idea has little chance."

Just guess what turns out to be The Crowdfund's Mafia's secret high-tech weapon when it comes to getting the next, hip socially funded product "made"?

You got it: old-school dialing and smiling.

"We started in the business of helping new products with their videos, copy and project pitches for their campaigns," he said. But that turned out, he said, to not be the biggest bang for the buck. Instead, getting the message out to potential backers was the real challenge.

"So now we offer direct, human outreach to journalists, bloggers and other influencers," he said.

Reinhard's firm, which has doubled in size in the past year to a staff of six, charges $2,500 for three weeks of press support before a product launch. And so far, so good. They've helped drive the buzz to such slick offerings as the TILT Stealth MacBook cooling pad, ChargerGenie charging tote bag and the iDoorCam Wi-Fi connected doorbell.

"We do offer deals where we turn over the press releases and contacts lists to startups for about half that cost, so they can use their own manpower," he said. "But if you have like three Twitter followers and you wait until your campaign begins to get the word out, it's too late."

New age fundraising grows up
What's fascinating about digging into the crowded realities of modern crowdfunding with Reinhard is how quickly raising money in this new age is becoming like raising money in the old age.

"There are four basic components now to a well-managed crowdfunding campaign," Reinhard explained.

First, a product must be well-developed, with a defined benefit and a clear brand. Long gone are the days where Kickstarter is a cuddly place to work out an idea. Next, a product has to serve a large affinity group with a powerful social footprint. Then companies are ready for a well-structured pitch, including a top-flight video and a strong public relations push. And finally, a product has to have the organizational muscle to execute on the promise of its campaign.

If you're not ready to do what you say you are going to do at the moment you'll say you'll do it, it can get rough, he explained. "The crowd is not afraid to go negative."

When I asked the obvious question -- Doesn't all this sophistication raise the cost, and barrier to entry, to social fundraising? -- Reinhard was thoughtful.

"Does it mean that somebody with a $2,000 project will struggle to manage all these pieces?" he asked. "I suppose it probably does."

Reinhard estimates that $10,000 is the rough dollar amount needed to comfortably cover the cost of video promotion, PR and other support tools for a reasonable social fundraising marketing effort. And it is not hard to see the edge bigger socially funded projects now seek to exploit. In August, open source mobile software provider Ubuntu pushed the outer limits of crowd capital formation when it attempted to raise a cool $32 million (that's no typo, Thirty Two MILLION) on an Indiegogo campaign for its Edge smartphone.

Though the Edge missed it fundraising goal, it did raise north $12 million in pledges. And its marketing campaign, which included positive buzz from first-tier media outlets including Fast Company, Engadget, Forbes and most everybody else, was as sophisticated as any I've seen.

Crowdfunding gets tricky

The changing crowdfunding reality would be just another Digital Age silliness, save for one fact. Regulators will soon dump such crowd-financed intricacies into an private investor's laps. Baked into the new JOBS Act is clear provisions that allow for direct equity investment in private companies, many of which raise money on social funding platforms.

"We are all waiting for the JOBS act to get passed," Reinhard said. "That is why we got into this business. When that comes, it is going to change everything."

Unless investors are careful about pulling the social fundraising stars out from the crowdfunding rabble, that change may not be for the better.
This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.