A crowdfunding for startups campaign tries to convince a large number of people to make small contributions to a new business, typically via the internet. We live in a different era, where the internet and social media play crucial roles in building a startup. A couple of decades ago, who would have thought of creating a website and raising funds using social media and email? Today, the first step is to crowdfund your idea. It’s an alternative to the traditional way of raising funds through investment bankers, angel investors and venture capitalists.
Of late, a large number of entrepreneurs and small businesses have benefited from crowdfunding. According to the 2015 Crowdfunding Industry Report released by research firm Massolution, crowdfunding platforms raised $16.2 billion in 2014, a 167% increase over the $6.1 billion raised in 2013. Of this, Business and Entrepreneurship accounted for over 40% of worldwide funding. According to the research firm, the overall figure is expected to more than double to $34.4 billion in 2015.
To cite a few examples of successful crowdfunding: Pebble Time, a California-based smartwatch maker, raised $1 million in less than an hour and more than $20 million overall. Ryan Grepper’s Coolest Cooler struck gold with $13 million and 62,642 backers.
The latest thing in the U.S. scene is equity models. More than three years after the JOBS (Jumpstart Our Business Startups) Act was approved, Title III of JOBS Act (i.e., equity crowdfunding) was passed. Equity crowdfunding allows startups to solicit investments from accredited investors. The legislation was further strengthened by Regulation A+, which allows startups to raise funds from accredited and non-accredited investors in exchange for equity. These SEC decisions have opened up a whole new aspect of equity crowdfunding in startups.
Why should you try crowdfunding for startups?
Crowdfunding is a blockbuster funding route for startups. It is now mainstream and opens the gateway to a world of opportunities. There are at least six reasons why startups should look at crowdfunding options. Here are a few:
- Cost Effective – Crowdfunding campaigns can reduce costs to a great extent, especially for cash-strapped startups. All you may have to do is prove to the world that your idea is worth funding. You could prove your point by building a prototype or through a video presentation. You don’t need to build a business from scratch or use your life savings to set up a business. If your startup doesn’t have enough capital at its disposal, you may be forced to sacrifice equity for want of funds. Crowdfunding enables you to raise capital in exchange for simple rewards or recognition, without having to give up a large chunk of equity.
- Saves Time – Approaching a venture capitalist or applying for a loan can be time-consuming and painful. In a crowdfunding campaign, you just need to identify the right platform that suits your need. This relatively simple process involves the entrepreneur, a crowdfunding platform and a group of early adopters who are willing to contribute small amounts.
- Reduces Financial Risk – A crowdfunding campaign also reduces financial risk considerably. In the traditional method of investing, even if one investor decides to backtrack, it exposes the entrepreneur to huge risk. In crowdfunding, there may be a large of investors willing to back you. Also, the investment of a typical individual tends to be much lower than a traditional investor such as an angel or venture capitalist.
- Validates Product or Market – Crowdfunding enables startups to gauge their product and gain market validation. The internet increases the visibility of your product/concept/idea, and social media makes it a lot easier to know whether people like your idea. Crowdfunding platforms deploy many tools to get referral traffic to your web page and campaign. The feedback from these unique users and potential funders help you look at the “never before looked at” aspects of your business.
- Identifies Potential Customers – Crowdfunding is also a way to build a strong customer base. Every donation presents you with a potential customer. These people fund your campaign because they believe in the success of your business in the long run. Targeting these early adopters can help you save a lot on marketing costs in the future.
- Win-Win – Crowdfunding platforms do not penalize you for not reaching your target. Potential investment avenues (traditional investors, VC, angels) and media open up automatically once you achieve this target. If your fundraising campaign is a success, you can take all the money. You need to pay a pre-agreed commission to the platform. If not, you can choose to return the entire amount to the contributors. Your personal savings and bank account stay safe!! It’s a win-win situation all around.
How to launch quick
It would be a big mistake to think that crowdfunding your startup is easy or guaranteed. Raising capital for startups has never been easy, and never will be. But it’s not impossible. Equipped with the right know-how, people have realized dreams far beyond just raising capital.
- Validation & Innovation – The crowd can be used to validate an idea and innovate a product. Entrepreneurs can engage the crowd to brainstorm an idea and receive valuable feedback. A successful campaign depends on innovativeness of the product, market demand for the product, etc. Early involvement of the crowd makes them attached to the product. It encourages them to see you through the entire product development process.
- Marketing & Launch – Startups can use the crowd to market and launch products on time. They can outsource sub-tasks to crowdsourcing platforms in return for a small fee. Deploying a large workforce can be a huge financial burden for early-stage start-ups. So this route is more useful.
When many smaller tasks must be completed in a large project, the crowd can simultaneously complete different tasks in record time. It is also important to get feedback from the crowd before entering the market. Software products, in particular, must follow this rule.
So try your best to launch a high-quality product, and to provide enough information about the product. Increase the visibility of the product on the web by assigning appropriate keywords to your content. Awareness of the product and good feedback/image on your startup will exert a positive influence on buying decisions.
Realizing this, crowdfunding platforms are on the rise every day. There are more than 1,000 such platforms today. Despite this, the major ones, which have been around for a while are Kickstarter and Indiegogo. They dominate the landscape. Platforms catering to niche markets include AppStori for app development, Barnraiser for food and agriculture and MedStartr for healthcare. But the top crowdfunding platforms for startups are below:
Startups are now hiring experts to run their crowdfunding campaigns. These experts claim to have all the processes in place to deliver a successful campaign. The managers help you write the campaign pitches, help shoot videos and attract traffic to your site. The agencies charge setup fees, in addition to taking a percentage of the campaign funds. This could be anywhere from 3% to 20%.
With a successful crowdfunding campaign, it’s much easier to convince a venture capitalist to invest in your company. That’s why more and more startups are using crowdfunding to show traction before seeking VC funding. A study conducted by CB Insights in 2014 found that approximately 440 hardware startups have raised more than $1 million on Kickstarter or Indiegogo within since 2009. These same hardware startups later secured a total of $312 million in VC.
Little drops of water and grains of sand make the mighty ocean and the beauteous land…
would be the perfect way to describe crowdfunding. So, if you’re a startup owner who is worried about the funding part, don’t. There are many people around the globe who are ready to share your dream and are set to partner with you. So share your dream – and get funded!!