Crowdfunding for Entrepreneurs

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Thursday, May 1, 2014

There’s good news for entrepreneurs: it’s easier than ever to get your idea in front of a mass audience to get funding for your business. According to “The Crowdfunding Industry Report” by Massolution, crowdfunding platforms raised more than $2.7 billion and funded more than a million ideas in 2012.

That investment number could increase to as much as $90 billion by 2025. The crowdfunding market is growing. So, what exactly is crowdfunding, and how can you use crowdfunding to get the capital you need for your business?

Crowdfunding 

In general, crowdfunding refers to the process of getting investment capital via online platforms that expose business ideas to, potentially, hundreds of thousands of investors or customers. Some examples of crowdfunding sites are:

  • Kickstarter: The most popular crowdfunding site right now, Kickstarter lets entrepreneurs pitch their ideas directly to consumers and to take pre-orders before production has begun.
  • Crowdfunder: Offers a blend of opportunities to pitch ideas directly to buyers, as well as to find investors for business opportunities.
  • RocketHub: Similar to Kickstarter, RocketHub connects entrepreneurs with buyers.
  • Indiegogo: Indiegogo specializes in more niche projects, especially in services like art, film, education, applications, and other media. However, technology startups have also had success via Indiegogo. 
  • FundersClub: FundersClub allows accredited investors to become equity holders in FundersClub-managed venture funds–which then fund pre-screened, private companies. The vetting process is more rigorous than many other crowdfunding sites, but if you can get through it, you'll have access to a first-rate group of investors.

These sites let entrepreneurs solicit ideas directly to the people who will buy the product or service. 

For a recent example of a successful Kickstarter, you can look at Pebble.

The developers initially asked for a $100,000 investment to develop an iOS and Android version of their already existing smartwatch. The demand for the product was so great that 69,000 people “invested” in the product, and they raised over $10 million. And, the Pebble Smartwatch wound up a finalist for the T3 Gadget of the Year award. 

While that's an extreme example, it demonstrates that a great idea can get funding in the open market via a crowdfunding platform.

Risks and Rewards of Crowdfunding

Before jumping in, it's important to examine whether crowdfunding is the right way to secure funds for your idea. 

Risks:

Capital Constraints: While it is true that Pebble was able to raise over $10 million for their Smartwatch, that's not normal for crowdfunding sites. Doing the math, if $2.7 billion was raised to fund over a million ideas, the average funds raised were around $2,500 per project. So far, big projects are the outliers.

Your Intellectual Property Is “At Risk”: Let's say you've got a great idea. You put it out there for funding, but you don't raise enough capital for launch. That means any potential competitors have seen your idea and can run with it. You're trading publicity and access to more investors for confidentiality.  

Short Turnarounds: Most investors on crowdfunding sites are also customers. If they give you funding, they expect delivery of their product or service in a relatively short time. 

Rewards: 

Builds Your Customer Base: As mentioned above, most of the time, the people investing in the product or service are also your customers. Their “investment” is typically a pre-order with a payment in expectation of delivery. 

Access to Funding/Maintenance of Equity: Crowdfunding solves the problem of how to get the capital needed to produce a product at a reasonable cost before you have revenue. Crowdfunding locks in a revenue stream and gives you the capital needed to start production. What’s more, unlike VC funding, there’s no need to give up equity in exchange for the capital you get through crowdfunding.

Validates Your Idea: Crowdfunding is a great checkpoint. Before you spend any more time or money on your business idea, you can quickly gauge market interest in the product or service.

For entrepreneurs with mature ideas in the direct-to-consumer market, crowdfunding presents a unique opportunity to guarantee revenue before investing money in production. While it may not work for all ideas, crowdfunding presents a great way to take advantage of today’s technology in creating your very own startup.

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photo credit: Tracy O via photopin cc

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