How effective are crowdsourcing sites like Techmoola.com and Kickstarter.com to raise seed money for tech companies?

I recently started a medical tech company in Chicago and want to know what would be some common dos and don’ts when approaching crowdsourcing and group funding? Although I read more and more in the news about such sites and success stories using crowdsourcing, I don’t know what’s involved and what to expect for a small business looking for seed money. Please help us young entrepreneurs with some good advice and guidance!

If by raising seed money you mean selling an investment in your company-- the answer is no. If by raising seed money you mean having the cash you need to launch from supporters with no promise, expectation or opportunity for a "return" then you can.

Equity-- Why you can't If by "seed capital" you mean bring in early investors who have an opportunity of equity in your company-- then you are selling a security. Under current regulations this must be done to qualified investors. You can do this through a private placement to qualified accredited investors, or you can do this through a public offering onto an approved market. There are blue sky laws that allow a certain number of "friends/family" and close "known investors" to particpate without either a private or public offering.

The SEC currently considers posting an offer to invest (seed money) in your company on a website to be a "public" offering. You need to have an approve public offering -- and even then, you wont be using Kickstarter.com

Until SEC regulations change it is not legal to raise seed capital in the traditional sense through crowdsourcing sites like Techmoola.com and Kickstart.com.

So, how do you use crowd sourcing? What techmoola.com and Kickstart.com do provide is an opportiunnity to secure "launch" money for your company be allowing customers or supporters to give you money to say "yeah you" because they believe in you. They can get product or services (like a new cd). they can get premium product or services (like an autographed copy of the cd). But they can not get a return (a portion of the proceeds from the sale of the record)

A pre-sale of your product can be a fantastic way to prove concept to equity investors. It can also allow you the resources to do a small run. Usually these work better for consumer products. I think that it iwll be challenging to pre-sell a medical technology product.

Will this ever change? The crystal ball says yes. There has been bi-partisan clammering to open up the investment markets and allow non-accredited investors to particpate more broadly in the launch of great businesses in the United States.

There is a bill in front of congress right now. It is called "The Entrepreneur Access to Capital Act" and has passed the House of representatives with a stunning 407-18. There are some great qualities to the proposed bill. It currently allows business owners to raise up to $2 million from an unlimited number of individuals who can invest as much as $10,000 each. This will allow you to purchase a share of a new start-up on Kickstarter. It will allow niche market business that can't deliver the returns that Angel investors want another opportunity. It will provide the type of entrepreneurs that banks don't tend to support a crack at the bat. There remains significant concerns about fraud, lack of regulation, and unintended consequences.

Of course, as political hacks will tell you, even bi-partisan support for an idea does not gaurantee passage in the face of strong special interest opposition or election year games of conern about who gets credit for what.

Here are some articles to learn more: From NPR and from The Economist.

Great answer Joseph
One more thing start-up should be aware of: if your company is consider bringing VCs in the long run, too many angels will be a trouble and may be a cause to keep them away from investing your company.