Crowdfunding refers to raising funds in an online forum, typically through the support of a large number of people. The arts have particularly benefited from creative financial backing in recent years; albums have been produced, tours have been paid for, and movies have been made based on crowdfunded support.
Most crowdfunding operations follow one of four models:
- Open online donation requests where donors may or may not be given a thank you note or trinket, but the expectation is that donations are gratis.
- Reward-based crowdfunding inventicizes donors with the promise of a reward in exchange for their donation. In many cases, donors are given the product or service they helped fund.
- Crowdlending or peer to peer lending works as a bundle of loans between lenders and the project creator. All loans must be paid back within a pre-ordained time frame with an agreed upon interest rate. In the event that a project fails to become profitable, some crowdlending contracts allow for outstanding loans to be partially or fully forgiven.
- Equity-based crowdfunding incentivizes funding by offering early entrance into the new venture’s equity shares. If the venture succeeds or ends up turning any kind of a regular profit, the creators are contractually obligated to disperse the agreed upon shares to its funding partners.
A successful pitch, regardless of how its done, can fund virtually any venture, be it a charitable cause, a research project or the development of a product. As you might guess, entrepreneurs have seen the most crowdfunding success, using the model to raise capital for any number of profitable ventures. Read on for more information on how to finance your business idea with crowdsourced funds.
Before You Get Started
As with any new business idea, thorough planning can make the difference between success and failure, regardless of how much money is available. It only takes a few minutes to set up a crowdfunding page, so it may be tempting to make this your first step.
Don’t jump the gun. If you want investors to take your project seriously, it is crucial to lay out your preliminary business development strategies before you start soliciting funds.
1. Conduct a Business Viability Review
Any serious campaign will have a strong sense of the business or product’s viability in the marketplace. If you are organizing a crowdfunding initiative, investors will expect you to grasp concepts like competitive analysis, market projections and your production or ramp up costs. Winning over investors takes a thoughtful, assured presentation; something that shows them you really believe what you are pitching is possible.
2. Understand Your Product
Before production, before marketing, before sales strategy, the product itself must be thoroughly vetted. Even the slickest marketing campaigns are limited by the product they promote, and entrepreneurs who succeed understand this. Questions to ask yourself as you investigate the possibility of selling your product or service might include:
- What unique need does my product meet?
- Identify and assess the niche market your product will appeal to
- Outline the new ways in which your product will solve a problem for your customers. How will you provide something of higher value than your competitors?
- Who is my competition?
- Competitive analysis is essential at this step, because understanding the way a similar product meets a market need can tell you about the viability of your idea.
- How do similar products meet demonstrated need?
- How are these products or services produced and marketed?
- What obstacles do your competitors face in bringing this product to market?
- Who is my target customer?
- Narrowing down your customer profile can help you maximize your marketing efforts and reduce costs. Additionally, a clear understanding of what makes your customer unique can inform the way you develop and sell a product later.
- Useful demographic data like this can be found by slicing and dicing data provided by the U.S. Census Bureau, or working with any of the multitude of firms that specialize in demographics.
- What are production costs?
- Sometimes investors want to see the product before they commit to large donations, so investing in the development of an impressive prototype can pay off in the long term.
- If your business idea produces a tangible product, consider the cost of design, materials and labor required to create it.
- Also note that prototype development costs are not the same as mass production costs. Raw materials in quantity, a larger production staff, packaging costs and shipping methods are all variables that need to be factored into long-term cost.
- What have I missed?
- A common practice among successful entrepreneurs is to have other professionals and friends review their business development strategy.
- When you’ve put in countless hours toward developing a plan that will attract investors, you may become too close to the project to view it effectively. Ask colleagues, family and friends for objective feedback before you solicit funds.
3. Assemble Your Team
Indiegogo, a popular crowdfunding resource, reports significantly better campaign results when entrepreneurs approach fundraising as a team. Working with people who are equally inspired by your idea may bring contributors with diverse backgrounds to the table. Along the same lines, each team member carries their own network of contacts. The more people you involve, the more outreach you can do when fundraising.
Be sure to mine your online professional networks. In addition to suggesting professionals within your extended industry network, LinkedIn offers special interest groups. Subscribe to these to keep up on discussions and events related to your industry. Likewise, niche categories on Twitter, Pinterest or Facebook and in the blogosphere can help connect you with potential contacts, team members and board members. Who is doing the talking in your space? Locating and building relationships with reputable industry bloggers and reporters will help you build the kind of brand, and ultimately, the kind of team you want.
When you are evaluating potential team members, think about each person’s background in relation to your business needs. All businesses need a finance or operations person, for example, but not all require a high-level IT specialist. Tailor your team to your product, and choose individuals who are as enthusiastic about your idea as you are. Finally, acknowledge that you’ll likely spend an enormous amount of time with these people. Can you work with every team member under pressure? Will the individuals you bring on mesh well?
4. Develop a Product Delivery Plan
Once your research and personnel efforts are complete, you will need to dig into the details of production, including marketing a finished product or service and delivering it to your customers.
Product Development: By the time you’ve built a prototype to present to potential investors, you should have a clear idea of the necessary materials, tools and processes required to deliver the product to customers. Begin researching materials acquisition and pricing, and don’t forget to research alternative supply solutions in the event you need backup during production.
Is it cost-effective to outsource design or labor? Would you prefer to oversee all of production? At this stage, you should identify potential outsourcing vendors and pricing, or acquaint yourself with the details around property and equipment acquisition. Build a timeline that is as close to accurate as possible. While it is unlikely you will be able to pick an exact date for mass distribution, you should have a clear time frame to share with investors.
Lastly, entrepreneurs need to be aware of the documentation required to own and operate a business and to produce, price and distribute a product. This sort of documentation can involve permits, blueprints, drawings, business plans and site photos.
5. Choose a Crowdfunding Platform
Digital crowdfunding began with well-publicized sites like Kickstarter and Indiegogo. Kickstarter, in particular, enjoyed quick and early success early on, raising over $27 million in funds for over 3,000 projects in its first year. Kickstarter’s popularity spurred dozens of other crowdfunding platforms into existence.
While crowdfunding platforms bewilder many business owners, many are more geared toward launching businesses in a particular industry. For instance, Mashable identifies six specialized crowdfunding platforms, each with their own distinct draw, demonstrating the possibilities of a campaign targeted at a specific community.
Many of these sites either have an all-or-nothing donation strategy, wherein entrepreneurs establish a fixed total and due date for all fundraising. If the whole amount isn’t reached by the due date, all funds are returned to investors. Other sites employ a more straightforward donation strategy, accepting all donations for eventual use.
Kickstarter is very much the big kahuna of crowdfunding platforms. Since its inception in 2009, over a billion dollars have been raised for six million entrepreneurs. At any given moment there are thousands of active fundraising projects on Kickstarter.
Kickstarter uses the all-or-nothing fundraising model; to date, 44% of project owners have been able to meet their deadlines with the requisite funding. A customizable reward system can be used to motivate or thank donors. With the exception of technology, this platform is primarily used to back projects in the arts, such as design, theater, publishing, music, dance and photography.
Indiegogo is second only to Kickstarter, in terms of crowdfunding popularity. This popular platform has funded dreams since 2008, and includes projects across the arts and business sectors. Campaigns are as small or as large as project owners choose, and funds may be donated under two deadline models.
The all-or-nothing method returns inadequate funds to donors, while a straight donation method allows project owners to keep all funds. It should be noted that Indiegogo charges slightly higher fees for straight donation charges, as well as for conveniences like PayPal and credit card processing.
The extra fees bring a significant amount of professional coaching to aspiring entrepreneurs. Indiegogo’s Playbook offers data-driven advice on every step of campaign planning and launch, and even strategies for analyzing post-campaign metrics. In addition, the site features articles that cover many crowdfunding topics, such as pitch marketing or reward systems.
RocketHub offers creative entrepreneurs a unique opportunity in its partnership with the Ovation Creative Studio. All new projects in business, the arts, science, technology and social welfare are able to be funded by Ovation, and the network has allocated significant funding to the RocketHub project. Some very successful projects may even be publicized on A&E.
RocketHub’s methodology is similar to Indiegogo’s: all-or-nothing campaigns are at no cost if unsuccessful, but pay a small percentage to RocketHub if funds are raised on time. Straight donation models are also processed for a slightly higher third-party fee. Equity and revenue sharing rewards are not available on RocketHub.
Peerbackers could be a good crowdfunding solution for entrepreneurs who’d rather hold the fundraising reins more tightly. Peerbackers offers project creators a platform and considerable reading material on how best to promote a campaign. You, however, are expected to generate buzz around your idea via social media, eye-catching videos, e-blasts or other marketing efforts. Peerbackers charges a flat 5% processing fee, and an additional 2.9% for PayPal processing. PayPal is the only method of payment accepted on the platform.
Crowdfunder is another highly successful platform that links entrepreneurs and investors. Operating in the U.S., Mexico and Latin America, crowdfunder does accept some entertainment projects but mostly serves to finance business, technology and social enterprises. This organization is also closely affiliated with the Securities Exchange Commission (SEC), so you can be assured your proposed business launch meets legislative guidelines.
Crowdfunder works by attracting a group of venture capitalists who seek to promote the development of new businesses. Once affiliated with crowdfunder, these wealthy individuals and organizations view your proposal and may ultimately invest in it. These investors are rewarded with equity shares in your company, a return of their capital plus earned interest, or a convertible cash note.
Of course, there are dozens of other crowfunding platforms to consider. But how do you track them down? In 2012, Alex Fieldman launched CrowdsUnite. This company acts as a third party source of user reviews for crowdfunding sites – the Yelp of crowdfunding, if you will. Like other platforms, CrowdsUnite will cost you a small percentage of funds raised, but many business owners are uncomfortable navigating this process and are willing to pay for CrowdsUnite to pair them with the right platform.
How to Launch a Successful Crowdfunding Campaign
By now, you should have a business plan that contains detailed timelines and financial requirements. You also have thoroughly researched available crowdfunding platforms and have selected one that most meets your needs. Your final step is to develop your fundraising campaign, tailoring it to attract the right investors. Here are some pointers to keep in mind with regards to the look and feel of your campaign:
1. Tell your story in a concise, unique way to grab the attention of a potential investor.
Many successful campaigners use high-quality video to introduce themselves and their ideas. Experts recommend one of four distinct storylines to sell an idea.
- Overcoming adversity: This story appeals to the human desire to right social wrongs, and can be quite effective at drawing funds for social betterment.
- Rags to riches: If your project is about drastically improving someone’s life, demonstrate this on video. Toot your own horn a little – let potential investors know you mean business.
- Quest: This strategy is effective in peer-to-peer fundraising. For example, you may be attempting to raise enough funding to open a coffee shop; as part of your business preparation, perhaps you traveled to interesting or exotic locations. A blog that entertains readers and updates them on your progress can keep venture capitalists interested.
- Emergency relief: In times of crisis, people want a direct way to reach out and help those in need. Develop relationships with regional or international aid organizations and find out how you and your client base can help. Anything you can do to demonstrate your organization’s values is good for your image and great for the people you end up helping along the way.
2. Analyze your metrics.
Some business owners do this at various points during the campaign, and some wait until the end. Whenever you choose, you can glean valuable information about the donors you attract and their financial motivations.
You’ll also have a better chance at success if you take into account the user data supplied by the crowdfunding site itself. Consider the reward systems, financial goals, and campaign duration of the site’s most successful projects. Will you be able to connect to more donors by offering multiple giving tiers?
3. Establish financial benchmarks.
Your business plan will supply the numbers you need. Before you ask for money, it’s good to know exactly how much you want, the timeframe during which you’ll need it, and the total cost to produce and sell your idea. Savvy investors aren’t likely to donate to campaigns headed up by someone unable to answer such questions.
In some cases, a two-tiered approach is useful, allowing entrepreneurs to first finance the prototype and then help fund larger-scale manufacture later on. Regardless of the structure you choose, it’s important to be realistic about all costs and your company’s approach to meeting them.
4. Drive traffic.
This can often be accomplished via tools provided by the crowdfunding platform, but you can augment these efforts with your personal social media accounts and by soliciting your own network of family and friends. Write a press release and pitch it to appropriate publications.
5. Communicate with your donors.
Blog posts or email blasts can announce milestones you reach as you fundraise, alert donors to upcoming press activity, announce changes to the project, and provide updates on production.
Back in 2011, the New York Times hailed Kickstarter as the people’s NEA, a platform where real users could come and contribute directly to the creative ideas they liked. Of course, the projects that reach their funding goals on these sites aren’t usually as serious as those that receive National Endowment of the Arts grants, but this is a good thing to keep in mind. Crowdfunding isn’t about easy, no-strings-attached money. If you want to earn a user’s attention and respect, don’t underestimate or rush them. Convince them that they want to see this project realized as much as you do and don’t launch your project until it’s actually worthy of investor consideration.
- Crowdsourcing: This resource is a neutral space that offers unbiased information on crowdsourcing and crowdfunding include news, industry events, articles and media presentations about crowdfunding.
- Ian Mackenzie’s How to Crowdfund: This resource is chock full of how tos relevant to prospective crowdfunders. Blogs from industry professionals, book recommendations, links to TED Talks, and a newsletter are available.
- Harness the Crowd: This e-book had its beginnings in a site dedicated to helping business owners successfully crowdfund. Full of articles and information on web design, manufacturing, platform comparisons and campaign management tips, this resource is invaluable.
- Indiegogo Field Guide: Filled with actionable tips that can be immediately implemented on Indiegogo, this book gathers industry experts’ thoughts on crowdfunding. Tips and tricks equally benefit newbies and pros.
- Vimeo Video School: Learn from the best on how to make eye-catching, meaningful videos to add to your pitches. The Video 101 course covers the basics of shooting and editing.
- The Crowdfunding Bible: This site details every process in obtaining crowdfunding, from early planning stages to metrics analysis. A discussion of the products and industries best suited to crowdfunding may be of particular interest.