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Crowdfunding gets reality check

– When Oliver Housknecht gave $25 to virtual reality headset maker Oculus VR through crowdfunding website Kickstarter two years ago, he wanted to help a startup grow into a larger, independent company. Instead, Oculus became part of one.

Housknecht was shocked about two weeks ago when Oculus announced it was selling itself to social media company Facebook for $2 billion. He was one of many backers who helped it raise more than $2.4 million through Kickstarter in 2012.

He wants his money back.

“Why do they need my $25 now?” says Housknecht, who does technology work at a hospital in Kansas City, Kan.

Crowdfunding websites such as Kickstarter, Indiegogo and Peerbackers provide a way for people to donate to a variety of things including community projects, vacations, independent films and even small companies. On Kickstarter alone, users have pledged more than $1 billion since it launched in 2009.

The backlash over the Oculus deal puts a spotlight on the people who donate with no expectation of a financial return to businesses as varied as bakeries and smartphone app makers that aim to turn a profit someday. It also highlights the tension that could arise when those funders disagree with a company’s decisions.

The Oculus Kickstarter page was ablaze in late March with outrage about Oculus selling to Facebook. Some donors – including people who gave $300 or more – argue that Facebook will ruin Oculus. Others say Facebook, with a market value of about $159 billion, doesn’t need their hard-earned cash.

So why then do people donate to a company that has the potential to strike it rich and to give little, or nothing, in return?

Many want to feel like they are part of creating something new and exciting, says Paul Levinson, a professor of communications and media studies at Fordham University in New York.

But most of that is imagined. Funders have little say over how a company is run. That harsh reality can create a feeling of betrayal.

“They’re psychologically robbed of the illusion of being part of a company,” says Levinson.

Representatives from Facebook and Kickstarter declined to comment for this story.

Crowdfunding websites make it clear that backers have no control over what comes of the project they fund. Some projects offer T-shirts or an early prototype of a gadget or other items, depending on how much is donated.

Meaghan Fitzgerald, the head of marketing at social network 23snaps in London, says giving $75 to fund the “Veronica Mars” movie made her feel like a part of creating the film. The creator of “Veronica Mars” raised $5.7 million through Kickstarter last year to turn the former TV series into a movie.

Producers sent backers frequent updates on how filming was going. She’s also gotten a copy of the movie, a poster, a T-shirt and a copy of the script. She says she’s happy with what she got, even if the movie earns millions.

“It’s very clear what your reward is,” she says. “There’s no miscommunication.”

Entrepreneurs turn to crowdfunding sites because bank loans are hard to get, says Melinda Emerson, the founder of Philadelphia-based Quintessence Group, which helps businesses with their social media strategy. Many small-business owners get wrapped up in crowdfunding success stories, but the sites don’t always manifest a pot of gold.

“What happened to Oculus is rare and really hard to do,” she said.

Little Boo Boo Bakery, which sells marshmallows in flavors like chai, vanilla bean and lemon lavender, fell short of its goal of raising $5,000 on Indiegogo. Co-owners Hannah Scarritt-Selman and Kieran Delaney got $2,106, mostly from friends and family. But it was still enough to pay for startup costs.

“We were a little disappointed, but we were really happy to have any money,” Scarritt-Selman said.

Tracy McMillan had better luck. She turned to Indiegogo to help raise money to finish a smartphone app she was launching called Localeikki that helps active people find nearby places where they can run, bike or walk. McMillan, who lives in Flagstaff, Ariz., beat her $10,000 goal by $143.

About 70 percent of what she raised came from people she knew. But her app also appealed to strangers like Amy Halseth, a runner who donated $100 after she came across the campaign through a Facebook post. She had never met the app developer.

“I know it sounds selfish,” says Halseth, a clinical trial researcher for a pharmaceutical company in Minneapolis. “But I really just wanted the thing to be built so I could use it.”

And Oculus donor Housknecht? He says he’ll continue to fund projects on Kickstarter, but he won’t donate quite as easily. He says he’ll first ask businesses whether they have plans to sell their companies to larger ones.

“I’m going to be a little more leery,” he said.

People who want more from their funding dollars may have an option soon. The Securities and Exchange Commission is working on rules to let startups sell stock to small investors through the Internet for the first time. That would give small-time investors real ownership in businesses they fund.

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