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Crowdfunding: The new business incubator?

Many Kickstarter projects reach or exceed their funding goal, ship their product and build the business from there. But for some, the end of that campaign is just the beginning of the true funding process.

As more and more crowdfunding projects go viral, they're capturing the attention of the venture capital community, along with other equity investors.

Of course, there's no Kickstarter success story that rivals that of Oculus, which was acquired by Facebook for $2 billion in March. It was a Cinderella story that's unlikely to be matched anytime soon. The now 2-year old venture was able to raise $4.2 million on Kickstarter in 2012 to fund the Rift, an advanced virtual reality headset. That helped it gain the attention of Mark Zuckerberg.

In June, Oculus showcased its VR Rift Development Kit 2 headset at the E3 Electronic Entertainment Expo in Los Angeles.
Patrick T. Fallon | Bloomberg | Getty Images
In June, Oculus showcased its VR Rift Development Kit 2 headset at the E3 Electronic Entertainment Expo in Los Angeles.

Oculus and others are proof that even after the crowdfunding process ends, money continues to change hands.

Last month, for example, LIFX, whose Wi-Fi enabled multicolor LED lightbulbs raised $1.3 million from backers in November 2012, secured a $12 million Series A funding round led by Sequoia Capital (bringing the company's total equity funding to $16.6 million).

Formlabs, whose 3-D printer reached its goal in three hours in 2012, ultimately raising nearly $3 million via crowdfunding, received $19 million in Series A funding in the fall of 2013. That same year, the OUYA game console secured $15 million from Mayfield Fund, Kleiner Perkins Caufield & Byers and others. And Pebble, a smartwatch developed by Pebble Technology that was rejected by numerous venture capitalists, later picked up $15 million from Charles River Ventures after its enormously successful Kickstarter campaign.

Read MorePotato salad crowdfunder's plan for leftover cash?

One of the advantages of a successful Kickstarter is it gives companies a chance to clearly demonstrate the demand for their product. The consumer investment they attract to help refine and move their product closer toward a finished state means angel investors and venture capitalists don't have to risk as much capital.

"Proof of demand is nice, but the funding to support the early product development is even nicer," said Brad Feld, an early-stage investor and managing director of Foundry Group. "It means that start-up can get a hardware product further down the road—more of an MVP equivalent in software—before going out to raise money."

A virtual testing ground

Crowdfunding in and of itself, though, isn't yet a preferred screening tool for many venture capitalists, although they do acknowledge it has its advantages.

"There are a variety of factors that go into an investment (team, market, product, etc. ...) and I would say that crowdfunding campaigns provide an additional factor, but they do not really outweigh the others," said Omar Hamoui, a partner at Sequoia Capital. "Showing proof of demand is the key advantage. Even with this, though, we frequently think about whether crowdfunding results are proof of deep and enduring demand or whether it is a shallow pool of early adopters."

Read MoreFunded! The top Kickstarter campaigns

For some crowdfunded properties, the process is less about attracting equity investors and more about finding a distribution partner. For example, video game developer Pwnee Studios successfully funded Cloudberry Kingdom in 2012, raising $23,582 for the platform title. That was enough to not only fund a PC prototype of the game but to put them on the radar of Ubisoft.

The French game-publishing giant struck a deal with Pwnee and released a console version of the game last year.

Inherent risks for entrepreneurs

"Kickstarter gives an alternate source of funding to develop and prototype a full game and then bring it to publishers," said Chris Early, vice president of digital publishing at Ubisoft. "It's beyond proof of concept at that point. ... That reduces our risk considerably. And what that means for the developer is they get a better deal. Instead of us making a speculative upfront investment, we've got a lot more visibility."

Read MoreYou hear lots about crowdfunding, but what is it?

However, there are risks that come with big investments in, or buyouts of, crowdfunded projects. While users of Kickstarter or Indiegogo are told up front they have no equity stake in the products they contribute to, many still feel a sense of ownership. And when the company is bought out, that can trigger an angry knee-jerk reaction.

Oculus discovered this firsthand, in a scary way, after the Facebook purchase. Some overly emotional backers made physical threats to the company's employees and their families after the transaction was announced.

"We expected a negative reaction from people in the short term; we did not expect to be getting so many death threats and harassing phone calls that extended to our families," said Oculus founder Palmer Luckey in a Reddit posting months after the deal. "We know we will prove ourselves with actions and not words, but that kind of [expletive] is unwarranted, especially since it is impacting people who have nothing to do with Oculus."

There's also the pressure inherited from the successful crowdfunding round itself. That established base of customers expects the product as soon as possible, so any production delay could cause problems. That's why it's important that crowdfunders make sure the product is on track before investing—or be ready to handle the fallout.

Read MoreCrowdfunding of start-ups will be huge: Indiegogo CEO

"I think the more successful a project is, especially when it is a prelaunch physical product, it creates a 'debt' that the founders need to deliver on," said Hamoui. "As this can sometimes take years to do, it is a significant overhead on the progress of the company. What if the market changes and the promised product is no longer the best strategic choice for the company? It doesn't matter; they still have to deliver on what they promised."

The bottom line is that founders need to deliver on their promises, explained Hamoui. The advance financial support of consumers isn't a free pass. While users might put up with slight delays on a new product or service, their window of patience is limited. And testing that patience can affect a company's valuation when they're a crowdfunding superstar.

—By Chris Morris, special to CNBC.com

Technology

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