Things You Need To Know Before Crowdfunding Your Startup

26/10/2014
Crowdfunding_LeadInvestor

More and more startups and entrepreneurs are turning to crowdfunding these days and not just equity crowdfunding but rather, perk crowdfunding .

Crowdfunding can be a great tool for startups and provides much more than just funds (e.g. market validation, a loyal customer base, early adopter market, etc.), especially for younger, unproven (Millennial/Gen-Y) entrepreneurs.

Crowdfunding: What it is

Crowd funding is about persuading individuals to each give you a small donation – $1,000, $5,000, maybe more. Once you get thousands of donors, you have some serious cash on hand.

This is the social media version of fundraising. There are more than 600 crowdfunding platforms around the world, with fundraising reaching billions of dollars annually.

Crowdfunding: How it works

The most common type of crowdfunding fundraising is using websites where donations are sought in return for special rewards. That could mean free product or even a chance to be involved in designing the product or service.

It is also possible to use crowdfunding to assemble loans and royalty financing. The site LendingClub, for example, allows members to directly invest in and borrow from each other, with the claim that eliminating the banking middleman means “both sides can win” in the transactions. The idea is to link business owners with investors who lend money for a guaranteed percentage of revenues for whatever the business is selling.

The aim is to sell company shares or ownership stakes in the company on crowdfunding websites, because it could be like a mini-IPO without the traditional hurdles (in the past, this has only been legal with accredited investors, people who each have more than $10 million in net worth or more than $500,000 in annual income).

Crowdfunding: The Upside

Crowdfunding provides another strategy for startups or early stage business ready to take it to the next level – such as rolling out a product or service. Before, a business owner was subject to the caprices of individual angel investors or bank loan officers. Now it is possible to pitch a business plan to the masses.

A successful crowdfunding round not only provides your business with needed cash, but creates a base of customers who feel as though they have a stake in the business’ success.

Crowdfunding: The Downside

If you don’t have an engaging story to tell, then your crowdfunding bid could be a flop. Most sites don’t collect money until a fundraising goal is reached, so that’s still a lot of wasted time that could have been spent doing other things to grow the business.

It could be even worse if you meet your goal but then realize you underestimated how much money you needed. A business risks getting sued if it promises customers products or perks in return for donations, and then fails to deliver.

There is also an argument to be made that angel investors and even bank provide more than just money. They provide entrepreneurs with needed advice. Business owners miss out on such mentorship when they ignore traditional investors and turn to the crowd.

Key takeaways that entrepreneurs, or anyone else, considering crowdfunding need to know.

1) Personalisation = Obligation

The less personal your communication is, the less others will feel they need to give or support you. “Obligation” may sound like a dirty word in this sense, but if we’re being honest, that’s the feeling you need to convey if you want people to give. Additionally, it often takes more than one interaction to create that “obligation” (there is an old marketing adage that suggests it takes being exposed three times to something before it sets in).

When communicating through any medium, remember that one of the reasons people contribute to crowdfunding campaigns is to feel they are a part of something larger than they are. Give them insider info, such as showing them a video of where you make your product.

2) Don’t Underestimate the Time Commitment

Unless you’re the one in a million exception that goes viral without you doing anything, you’re underestimating how much time your endeavour will take up. When your crowdfunding campaign is live, it will completely consume your life (if you want to succeed and reach your goal), so don’t plan on being productive in any other realm.

3) Impressions Have Little, If Any, Value

This one I’ve learned the hard way. Whilst getting impressions and views on a campaign, will drive engagement and go viral, it does not guarantee conversions.

Sure, your SEO strategy may be successful and your campaign may get over a million hits, but just getting eyeballs, or impressions, has little to no value if they aren’t your target market and have no need for your product and no obligation to support you (once again, increasing the importance of personalized communication).

Don’t waste your time, energy or resources focusing on gaining mass impressions.

4) Plan Precisely and Exhaustively

Plan out ahead of time exactly where your funds will be coming from, and how much you expect from each avenue

Present a serious business plan and an explanation of why the money will take your business to the next level and demonstrate that you have your own skin in the game.

Although it’s nice to hope for anonymous givers and bumps from going viral, you can’t count on these things. So, it’s important to set a goal according to what you believe you can raise, and know exactly where you expect that money to come from and how much you expect to come in.

This also makes tracking your progress much easier and allows you to see where you’re on track, and where you may be falling behind.

If you are coming up short from any avenue, make sure you have a plan B, C and D in place because once the campaign starts, it doesn’t slow down and will be over before you know it.

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