Etsy launches crowdfunding pilot program

The marketplace is expanding into financing, product development

An employee walks past a quilt displaying Etsy signage at the company's headquarters in Brooklyn, New York.
Victor J. Blue | Bloomberg | Getty Images
An employee walks past a quilt displaying Etsy signage at the company's headquarters in Brooklyn, New York.

Online marketplace Etsy is dipping into crowdfunding.

The successful e-commerce platform that features independent makers went public in April, and is now expanding its reach to include financing tools. A pilot program called "Fund on Etsy" allows sellers to raise money on Etsy's website to bootstrap the manufacture of new products.

Etsy calls the project "crowdfunding for production."

"Fund on Etsy fits in seamlessly with sellers' business lifecycles, from ideation to product creation to financing to retail and even to wholesale," said a spokeswoman for Etsy. "Fund on Etsy gets at another need—financing and product development," she said in an email to CNBC.com.

The Brooklyn-based company, which features some 20 million buyers on its site, will pocket its standard fee of 3.5 percent of each transaction plus a 20-cent posting fee.

Crowdfunding is a broad financing trend that allows individuals and ventures to raise many small amounts of money from a large number of individuals to reach a financial goal.

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The finance model has gained popularity as the demand for creative handmade products has grown. Shoppers are seeking the story behind the goods they buy because the knowledge of the product's evolution and makers feels cool and "insidery." It makes consumers feel special. (Of course you wanted a handcrafted, wooden cheese board in the shape of your home state.)

In many ways, Etsy's nudge into crowdfunding allows small-scale manufacturers to essentially create and drive their entire supply chain—from sourcing raw materials and financing, to production and sales of the final products.

"We believe that crowdfunding on Etsy is a natural way for sellers to forge even more resonant connections with their existing communities and customer bases and to grow in ways that may not have been possible before," Etsy said in a company blog post.

Crowdfunding bubble?

Looking ahead, more online sales platforms are expected to emerge and raise even more money.

Crowdfunding initially connected small makers to the masses. Platforms have since grown and join bigger scale entrepreneurs and businesses with larger sums of capital. Larger platforms include Kickstarter and Indiegogo, peer-to-peer lending site Prosper, and OnDeck, which connects entrepreneurs with business loans.

More than 1,250 online platforms globally raised $16.2 billion combined in 2014, up 167 percent from 2013, according to a report by research firm Massolution. Many of the platforms are small-scale, with less than 50 of the larger communities comprising some 90 percent of the global market.

But in time, the financing bounty will end, if history if any indication.

As crowdfunding matures, remaining financing platforms will have precise logistics and clear business models in place, said Steven Cinelli, a senior fellow at Massolution.

Cinelli is a crowdfunding proponent and while the platforms offer benefits, execution by the players of course will matter. "My view is the crowdfunding [platform] as being defined with all the hype, is very similar to the dotcom boom, and dotcom bomb days in the early 2000s," said Cinelli, also founder of PRIMARQ, a housing finance platform.

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