7 Things I Didn't Know About Crowdfunding Before Today
Crowdfunding is a hot topic in the entrepreneurship space these days. Many startups are asking about it, and are trying to decide if seeking funding from the crowd is right for their company.
Recently, we hosted an event in which four Kansas City-based entrepreneurs talking about their experiences with crowdfunding, with an eye toward sharing their wisdom with a group of fellow entrepreneurs. First, Jase Wilson, local entrepreneur and expert on the subject, kicked off the discussion by giving us the basics on crowdfunding. Jase has been on the front lines of the battles surrounding this new way of raising capital thought his own startup, Neighbor.ly, a crowdfunding platform for civic projects. Then, Trellie co-founders Claude Aldridge and Jason Reid talked about their experience funding their prototypes and first round of manufacturing for their product through a Kickstarter campaign. Finally, entrepreneur Nate Allen shared with us a data project he’s been doing to scrape data from the Kickstarter’s website.
The best part of the event was hearing from Slava Rubin, CEO of Indiegogo, who told the crowd that “this was the decade of funding” and that in just a few years raising money from the crowd would be as commonplace as using social media.
After spending a morning with these experts on the subject, here are a few things I learned about crowdfunding:
1) It takes down the gatekeepers. Startups have to get through many gatekeepers today to successfully raise capital. Banks, venture capitalists and angel investors can all be hard to connect with and sometimes hard to find. Entrepreneurs are always asking me if I can introduce them to investors. Crowdfunding flips this paradigm and allows the startups to pitch their idea to potential investors no matter who and where they are. This new platform represents a rewiring of the business model for startups and could have a huge impact in the near future.
2) The differences between perks-based vs. debt- vs. equity/ownership-based.
There are really three types of crowdfunding. Perks-based is what most Indiegogo and Kickstarter campaigns currently offer. This is where something is promised (typically a product, copy or service) in exchange for the crowd’s money. Debt, which is the least-known form of crowdfunding, works more like a traditional loan from a bank, sourced through the crowd. What is about to change the entire game is equity crowdfunding -- taking investment in exchange for a percentage of ownership of the company. Another way to think of it is that perks are a donation, and debt/equity is an investment. For more on this topic, see other blog posts I’ve written "Five Things the General Public Should Know About Crowdfunding" and “Six Things Your Startup Should Know About Crowdfunding”.
3) Be prepared. “If you don’t know who is funding you on day one, don’t launch,” was how our keynote speaker, Slava Rubin, put it. His point was that you must know exactly who your likely investors are before you actually launch your campaign. In the same way you should validate your business idea with potential customers, you should validate your crowdfunding campaign with potential investors before you launch. Think about that crazy uncle of yours who has money and would love the product you are trying to bring to market. Also, be prepared to follow up with each of these investors once the campaign launches. You’ve got to make sure that those who commit to funding you in the early days of the campaign actually follow through.
4) Crowdfunding is like a layer cake. Most people think that crowdfunding is all about raising money, but all of our panelists said that money was really the least important part of the whole exercise. Crowdfunding enables startups to validate their idea with potential customers, raise awareness, test their marketing strategy and find early adopters and is more important for the future success of their companies than just the cash. The money is just the icing on the cake.
5) Picking the right platform can make all the difference. There are a plethora of crowdfunding platforms out there today. Don’t just go with the most popular one or the one you’ve heard of because you think it will have the most success. Use the platform that fits your startup best, whether it is an industry-specific or general platform, and can help you most effectively reach the slice of investing population you are targeting.
6) Listen to advice. Before you launch a campaign, be sure to find someone in your community who has done one before and ask for advice. Which platform did startup use and why? What did the founder learn as he/she prepared, launched and executed the campaign? What would the founder have done differently? Would the founder do it again? Be sure to seek out advice and heed it so you can save time and money on your capital campaign.
7) It’s not a magic bullet. Just because you can raise a large amount of money from the crowd does not mean that you have a successful startup on your hands. The rules for building a business still apply. You still have to build and develop a product or service, execute everyday and make sure that the team around you is functioning at a high level. You still have to make sure you do the traditional “blocking and tackling” to achieve success.
The future of crowdfunding will largely be determined by how effectively startups can use it to move their companies forward. This “new” method of raising money is certainly not for everyone, but for those who choose to employ this strategy, it holds tremendous potential.
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