Need to start or grow your business? Crowdfunding is an attractive alternative to traditional funding. Take it from music legend Neil Young who blew away his crowdfunding goal of $2.4 million in just one day! Sure, star power was likely what kicked this Kickstarter up a notch so quickly, but crowdfunding is hot – and continues to make positive impacts to the entrepreneurial ecosystem.
Crowdfunding has, in a very short time, revolutionized the way startups fund projects, but it’s not a magic bullet. The key to success, no matter where you seek funding, is directly linked to the amount of work you put into your idea – and that happens long before you launch your campaign. Ask all the right questions when you’re working on your plan. What problem does my product or service solve? Who will care about it? How much money do I need today to fund my project?
As with traditional fundraising models, there will be challenges, but if you do your homework – plan the work and work the plan – the positives will far outweigh any roadblocks you encounter.
The State of Crowdfunding
Did you know the crowdfunding economy has more than tripled in the last three years? Entrepreneurs just like you are using crowdfunding for proof of concept, early idea validation and even customer pre-orders.
To illustrate the magnitude of crowdfunding – and its impact on the global economy over time – here’s something to think about:1
- If just 2% of the $30 trillion in the U.S. long-term investment capital were placed into startups, it would be 10 times greater than the amount angels and VCs invest annually.
- That same 2% would equal 100% of small business bank loans outstanding today in the U.S.
- 80% of pentamillionaires in the U.S. are entrepreneurs who sold their business.
That is powerful! Crowdfunding is not only putting the power of fundraising into the hands of the people, but it’s permanently changing the financial ecosystem.
Where reaching out to a bank for financing used to be status quo, many small businesses believe that banks aren’t doing enough to help and I agree 100%. According to the Sage Small Business Index, 67% of small businesses are looking at alternative sources of funding. While some look to friends and family for investment, platforms like KickStarter, IndieGoGo, Kiva, Peerbackers, and Fundable are making it possible for SMBs to leverage the power of the crowd in their growth.
The SEC is in the process of approving the last part of the 2011 JOBS Act, which would allow smaller investors to purchase shares of a company instead of just receiving gifts for their investment. Although this portion of the law, called Title III, is still being finalized, the crowdfunding revolution is here to stay.
What’s really interesting is that some states have enacted their own legislation, allowing an exemption for “intrastate” crowdfunding and several states (including Georgia, Michigan and Washington) are taking action to actively shape the industry to suit today’s needs.
Three Must Haves in Your Crowdfunding Strategy
If you have a great idea, or think you do, crowdfunding may be the way to go – but you have to get buy-in from your audience. (And this is true, no matter what kind of fundraising model you use!)
Even if a person’s investment is small, you need to take steps to ensure you have all the important elements in place before approaching investors – or launching a campaign.
Here’s how to get started:
1. Perfect your message.
“The most important aspect of explaining your product isn’t around the benefits, it’s around the problem it solves,” says Wil Schroter of Fundable. Schroter advises to start with the problem, explain your solution and then verify the market size in your pitch to frame the situation for investors.
For example, Jessica Mathews was born in Nigeria, an area like much of Africa that is still without reliable power.In her pitch on Fundable, which is an amazing example of how to crowdfund, she explained that over 1.4 billion people are without access to power – and so she created the Soccket, a soccer ball that stores kinetic energy when you kick it that can be used as a clean source of energy for small appliances. With soccer being such a popular sport around the world, the idea of having three hours of a power for just 30 minutes of play is appealing.
“When Jessica explains that 1.4 billion people are without access to power, her solution sounds very powerful. The size and severity of the problem drives the value of her solution, not just the product itself,” says Schroter.
Give people something to believe in, and they’ll be more likely to invest.
2. Get clear on how much you need.
More money is always better, right? Not when it comes to crowdfunding. Asking for too much can leave you disappointed, and limit your future funding options.
Don’t ask for everything at once. Focus your crowdfunding requests on specific parts of your business or certain phases of development.
“The number one challenge businesses face when funding a company isn’t raising all the money they need in a single fundraise – it’s raising any at all,” says Schroter, “Like Kickstarter, Fundable requires businesses to meet or exceed their funding goal in order to successfully complete their fundraise.”
Instead of shooting too high, break down your funding into phases and establish a goal that makes sense within each phase. Forming estimates that are born from good ole due diligence will never steer you wrong. It sends the right signal to the crowd reviewing your offering and signals to them that you didn’t just “pull a number out of the sky.” Once you receive funding, do what you promise and use that success to prove your value to potential investors as you reach out for a second round. If the response is less than stellar, you could at least reach your minimum goal and be prepared for the next round. If it goes well, you can raise your goal amount, and use your initial success to prove to investors that a second round is worth their funds.
3.Skip the cold start.
Nobody wants to be the first to jump in the water. As with traditional funding, the psychology of things is a factor in producing the desired outcome – getting funded. Increase your chances on crowdfunding by starting out with some initial investment. Assemble a starter crowd to draw attention to your pitch and make investors more interested. Gary Humble of Grapevine Craft Brewery gathered together his local community for his efforts on Fundable.
“Instead of waiting until the day of his launch to announce his fundraise, Gary started building a list of potential supporters prior to his launch,” shared Schroter. “The moment he launched, he knew he had a good percentage of his funding already accounted for. This led him to rally over 200 backers to get even more than he needed to launch.”
Prime the pump and get interested parties on board before the launch. Create the atmosphere of success and other investors will flock to it. When you have interested people investing from the start, your product or service is perceived as more valuable. There’s a lower perceived risk, which can translate to more funding for you.
Keep in mind that once the crowdfunding round is over – it’s really just the beginning. If things didn’t go as planned then find out why. Analyze the feedback and then adjust your goals if need be. For example, you might find that your message wasn’t getting across clearly enough and investors weren’t sure what value your product served in the marketplace. Alternatively, you could have a great product that meets a specific need, but you haven’t explained how the money will help you take it to market. Listen to what people have to say about your company and offerings, and consider your fundraising as an initial pilot to whether you’re on track or not.
If you had a successful round of funding, maintain a relationship with your investors and show your gratitude. Regardless of how much a person has invested, they may be willing to donate more during your second round. You don’t know what they are prepared to do if you’re successful and fulfill your promises. Show your gratitude for the faith they’ve shown in you so far, and sow the seeds for future investment.
Finally, give back to others who are crowdfunding, too. Look for opportunities to connect with other companies that are starting up or on the grow. As you support fellow entrepreneurs, you’ll see support coming back your way when you launch round two or three.
With a crowdfunding strategy that has a clear message, a reasonable goal and some initial backers, you could be the next crowdfunding success story.
Reference:
1Unreasonable.is. Why Crowdfunding Changes Everything Part 1. http://unreasonable.is/opinion/why-crowdfunding-changes-everything-part-1/
