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Money raised to support the Pebble watch on has set a record on the crowdfunding site that's designed to back startups.

Eric Migicovsky failed to attract interest in his invention from potential investors, but he certainly captured the imagination of the public.

The $3.7-million – as of press time, and counting – that backers have pledged for his Pebble watch on in the six days since it was listed has set a record for the crowdfunding site designed to back startups.

"It's beyond our wildest expectations to get the number of pledges we have. The number is going up every time we refresh the page," said Mr. Migicovsky, who graduated from the University of Waterloo in 2009, and set up Pebble Technology last year in Palo Alto, Calif., to market a watch with customizable e-ink displays that link to smart phones.

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He shopped the invention around to venture capitalists before deciding to try his luck with pre-orders and soliciting funds from the general public in the relatively new world of crowd financing. Listed on Kickstarter as a project in need of investment, he initially sought to raise $100,000 to launch production through pledges in amounts from $99 to $10,000, which he hoped to achieve over a five-week period.

"I thought it was pretty optimistic to expect to raise that much, but the response sailed past that in the first day," Mr. Migicovsky said. "We've had over 25,000 pledges."

Before turning to Kickstarter, he had tried more traditional financing routes by seeking venture capital or an angel investor. "I found it very difficult. Generally VC companies don't have much interest in investing in hardware."

It was a missed opportunity, admitted Chris Arsenault, managing partner of Montreal-based early stage venture funder iNovia Capital Inc., which was one of the companies Mr. Migicovsky had approached.

It's difficult to get venture capital to back an untested product in a mature market. "So in a sense, crowd financing serves a previously unfulfilled need," Mr. Arsenault explained.

Crowdfunding could be seen as competition for angel or seed investors. "But I think it's a great development," Mr. Arsenault said. "What venture capital always wants is to get validation, and with Kickstarter, he could prove there was a market."

Venture capitalists, he added, will still benefit in the long run because companies that succeed with crowd financing will still need more funding to grow.

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Kickstarter is proving to be different from the way it was initially conceived. When it was launched in 2008, it was designed to help people doing creative projects such as books or independent movies to find donations. "What happened over the past year is that it has expanded from 'please help me with my cause' to being a place where startups can test the market for their product," Mr. Arsenault said.

If the trend continues, it opens up a regular new source of financing, particularly for startups, said Mark MacLeod, a partner in Real Ventures, a $50-million venture capital fund in Montreal. "The truth is VC is not right for most startup businesses."

VC firms have very particular requirements because they're looking for outsized returns. A wrist watch is not something his company would have touched, Mr. MacLeod said. "We'd be very unlikely to back a consumer product in an established market that has a lot of competition. We're looking to invest ahead of markets.

"We're trying for the home run; something that is going to take off rather than going for a safe and steady return. VC lends itself well to new industries like information technology, life sciences, biotech and clean tech, and advanced materials, Mr. MacLeod explained.

But experts still advise caution about the crowdfunding phenomenon. "One large issue is that an inexperienced entrepreneur may not know how to effectively use a sudden infusion of millions into the company," Mr. MacLeod pointed out.

The money is coming from people who have no commitment to the success of the business. "For better or worse, when you raise money from venture capitalists they are very actively involved. At the very least they have a seat on the board of directors and beyond that they have a big impact on product development and marketing formation of a management team and strategic choices."

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There are also unanswered legal issues around crowdfunding, said David Thring, a partner at McMillan LLP in Toronto. It's not legal to offer shares in a company in Canada by way of crowdfunding, he added. "The Pebble is taking advantage of consumer enthusiasm, (because) it is legal to take orders for a product in exchange for money paid in advance."

What's restricted is selling shares of a business over the Internet. However, the United States has just opened the door for that to happen with recent legislation nicknamed the Jobs Act, which allows startup companies that haven't issued shares to raise up to $1-million in capital online.

"This is an idea we should be studying now in Canada, because if it takes off in the U.S., we should have the ability to allow it here too," Mr. Thring said. "This could be the start of something that, when we look back on it, could be as game changing as something like eBay was in retailing."

Another limitation with crowdfunding is that not all products get a successful response. While five companies have so far raised $1-million (U.S.) or more in pledges, most attempts tend to deliver responses in the tens of thousands. Some don't reach their initial target by their set deadline and have to cancel the pledges that are made through the Amazon Payments system. Kickstarter takes a 5-per-cent fee from the funds raised, while Amazon charges an additional 3 per cent to 5 per cent.

One of the things that made Pebble such a hit is that those who pledge will get products worth almost as much as they're putting up in return. The first 200 who pledged $99 will get a black version of the watch that is set to have a $150 list price when it ships in September. Canadians who pledge will have to pay an additional $10 for shipping.

A pledge of $125 includes the option to choose from colours other than black. And for those who want to be distributors, a $1,000 pledge brings a package of 10. The Pebble is customizable, with displays that can be changed by downloading applications. It links to an iPhone or Android smart phone via Bluetooth and it can alert wearers to calls and social-media messages with a silent vibration.

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Arranging the Kickstarter pitch was remarkably simple, compared with the process of raising venture capital, Mr. Migicovsky explained. "Previously the method of bringing a hardware product to market was to create a demo, show it off to a board. If they said 'yes,' you worked for another two years to make the product and then spent a lot of money on marketing and worried about having a distribution channel in place.

Then you finally get to market and hope there are buyers out there.

"Whereas we just skipped all of that and went directly to the consumer. It's a straight-forward process: you put a video together and figure out what rewards to give to attract backers. You submit it, you post it and the next thing you know people are pledging money. They're voting with their wallets that this is what they want to see."

The big response means Mr. Migicovsky is expanding his horizons. "We were hoping to make some profit from what we had originally estimated, but now, with a lot more money, we can build and market a lot more."

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