Crowd funding fueling creative projects in China

Selling your dreams to people who have don't even know you? That's exactly what's happening in the Internet age.

When Jia Yuhao, the owner of a hostel, thought about furnishing his hostel last year, he posted a fund-raising advertisement on demohour.com.

Two months later, he received 146,000 yuan (23,725 U.S. dollars) from 3,000 people who he's never met. In return, they all received membership cards for Jia's hostel in Lhasa, capital of Tibet Autonomous Region in southwest China.

Jia is one of many Chinese entrepreneurs who are benefiting from crowd funding, an innovative way of raising money for their businesses.

Crowd funding projects are usually displayed on websites designated for the purpose, with a fundraising goal and deadline. People who like the project can pay to support it.

Project initiators must reach their funding goals to receive the money. Supporters are rewarded with service or products. The websites charge fees of up to 10 percent of the funds raised.

First introduced in the United States, crowd funding websites have become increasingly popular among business people in China.

"Crowd funding has made it easier for ordinary people without much money to start their own companies," said Zhang You, co-founder of Demohour.

Launched in July 2011, Demohour is China's first crowd funding website.

"I was inspired by the huge success of Kickstarter.com, the most influential crowd funding platform in the U.S. I think Chinese people also need such an opportunity to realize their dreams," said Zhang.

For project initiators, crowd funding websites not only provide an alternative to gather money, but also allow business people to promote their products and gauge market interest.

"Supporters gave us so many wonderful suggestions. One of the ideas we adopted was selling lampshades with bulbs included," said Jiang Zhaoning, a developer of intelligent light bulbs who received crowd funding to the tune of 40,000 yuan.

To Jiang's surprise, several venture capital groups contacted him after Demohour displayed his project.

"Crowd funding websites are effective in promoting products. And they're really cheap!" said Jiang.

Zha Li, founding partner of venture capital (VC) funds "Istartvc" and "Dragonvest Partners" in Shanghai, regards crowd funding as a necessary alternative to existing forms of investing, such as private capital (PE) and VC.

"PE and VC will only go to projects with significant returns. But many creative projects are not supposed to develop into big businesses, and that's where crowd funding fits in," said Zha.

But there are worries about the potential risks that crowd funding faces. Some are concerned that a swindler could use the platforms to raise money for fabricated projects.

"Our team members review the projects very carefully before putting them online. Only about 10 percent of the projects we receive can be displayed on our website," said Zhang.

To avoid legal risks, Demohour prohibits project initiators from rewarding supporters in the form of cash or equity. It doesn't accept projects involving drugs, alcohol, cosmetics or real estate.

Demohour has received more than 6,200 creative projects since its establishment. About 700 projects have been listed online and 50 percent of them have successfully collected funding.

However, compared to their foreign counterparts, Chinese crowd funding websites are far from influential.

"A single project on Kickstarter can raise millions of U.S. dollars. But in China, raising over 500,000 yuan for a project can be very difficult," said Zhang.

But he said he is confident in the future of Chinese crowd funding platforms.

"Every time we contact project initiators, we see huge market demand for such websites. I think all we need to do is keep on working and accumulate recourse and experience," said Zhang.

Liu Weibing, a professor of political science at the China Youth College, reminded passionate business people of the challenges ahead.

"Getting funded is just the first step. You have to provide good services and products to your project supporters. There are many unknown challenges to face after celebrating successful online fund raising campaigns," said Liu.