It Takes a Village: Crowdfunding Your Startup
Crowdfunding sites are the latest trend in startup funding, but how can entrepreneurs get the most funding and exposure from the experience?
Rayna Verbeck | 5/15/2014, 6 a.m.
What is Crowdfunding?
The concept of crowdfunding has been around for centuries, but it was not widely used until the advent of the Internet. It is a source of financing that allows individuals the opportunity to pitch an idea to the public and to ask a wide variety of people, from friends and family to strangers in another country, to donate small sums for their venture. Sites like Kickstarter and Indiegogo, among others, have developed platforms to open up access to capital for everyone. For entrepreneurs, crowdfunding can offer an accessible alternative to some of the more traditional forms of financing, like bank loans or venture capital. An entrepreneur can connect with the “crowd” and their own network to raise funds. Unlike traditional forms of investment, the entrepreneur generally does not have to pay back any funds raised, provide equity interests to donors or leverage assets.
Crowdfunding has become a powerful force in investing. According to Forbes, annual revenue for global crowdfunding reached $6 billion in 2013 across more than 1,500 platforms.
Eugene Hui, co-founder of the platform Rallyoop, promotes crowdfunding as an “accessible way to raise seed funding for a new business, while at the same time reaching out directly to the people who would benefit from the new business or product.”
Crowdfunding can have many potential benefits for an entrepreneur, particularly at the early stages of a business, but is not as simple as putting up a pitch and cashing a check. Entrepreneurs should be aware or benefits and drawbacks before launching a crowdfunding campaign.
What are the benefits of crowdfunding?
• The funds raised are usually in the form of a grant with a small fee to the platform, usually between 4 percent and 9 percent of the amount raised.
- Most crowdfunding platforms do not charge to list projects or penalize unsuccessful attempts.
- Many platforms allow you to raise more than the amount you requested.
• Campaigns can be used to validate an idea and identify potential customers.
• Platforms can serve as an e-commerce tool to pre-sell products.
• Campaigns can serve as marketing to inform potential customers and increase brand awareness.
• Entrepreneurs can gain free market research and feedback from potential customers early in the development process
• Some platforms are open to campaigns for causes or nonprofits
What are the potential drawbacks to crowdfunding?
• Not all proposals are accepted. Platforms have guidelines in place for the types of businesses and projects that are acceptable and encouraged for their model.
• Campaigns are not for the faint of heart. To reap the most benefit in terms of financial reward and marketing exposure, a campaign can feel like an additional full time job on top of running a business.
• Not all campaigns raise money. Some platforms have an “all or nothing” model in which a campaign must reach its goal amount for any money to be dispersed. Others charge high-er fees for goals that are not met.
After mixed experiences with a crowdfunding platform, chef Wheeler del Torro encourages other entrepreneurs to be specific about the goals they hope to meet through their campaign — both for funding and brand exposure — to ensure their company or product still benefits if their campaign is unsuccessful. To get the most out of their campaigns “entrepreneurs should plan the potential customers they want to target and how to build and maintain those relationships after the end of the campaign,” he said.