Social media. We are all connected, whether it’s a Facebook or Twitter account, checking in on what our friends are posting, and/or following those celebrities or companies that entertain, inspire, or educate us.
But a comparatively new phenomenon is the use of social media-type platforms to raise funds – for artists, musicians, non-profits, and now businesses and even personal causes.
In fact, today, there are more than 600 platforms throughout the world that are known as “crowdfunding” sites, and fundraising on these sites has reached into the billions of dollars each year.
Just What is Crowdfunding?
The name says it all. Rather than look to family, friends, venture capitalists, or traditional banks for funding a startup or a business that wants to scale (grow), crowdfunding is all about convincing large numbers of small investors to make donations, often quite small, until you have thousands of investors and the amount of money that you need.
How it Works
The typical crowdfunding occurs through websites, like Kickstarter or Indiegogo for example, where you setup your account and profile, and begin your request for donations. In return, you provide certain rewards for those who donate – maybe a free product or even a share of stock in the company, based upon amount given, something that is now allowed in the U.S. by the Jumpstart Business Startups Act of 2012.
Is it Successful?
Just looking at statistics from Kickstarter, well over $3 billion has been pledged to date, and over 133 thousand projects have been successfully funded. The Kickstarter site is an “all-or-nothing” model. When a project in one of its 15 categories is listed, there is a funding goal. If a project meets its funding goal, then the pledges are all released and the funding goes through. Projects that do not meet their funding goals are not funded, and pledge money is returned to the donators.
All-or-Nothing Vs. Flexible Funding
There are other crowdfunding sites that do not use the “all-or-nothing” model. Whatever is donated is funded, and everyone hopes for the best. Sites like Indiegogo offer what is called “flexible funding.” If projects do not meet their end goal, they still receive the funding that has been pledged.
Whether to go for a platform like Kickstarter or the flexible funding offered is a personal choice, of course, and it may come down to the startup owner’s penchant for risk. After all, if total funding goals are not met, how will the company take the money that has been donated and make a “go” of it?
The other consideration are the fees involved. Fees are much lower when funding goals are met (around 4%) but can be much higher if only partial funding is met (up to 9%).
Pros and Cons
So, in thinking about a crowdfunding campaign, there are certainly some considerations.
1. Getting funded will help validate your push for funding in the future. If you have had a successful crowdfunding campaign and have launched your startup, future investors will trust that their investments are sound.
2. You do not have to pay the money back. This is the biggest benefit, of course, although you have certainly provided incentives to donors. In traditional funding, through loans, you will need to pay that money back. Or, if you have given an equity position to donors, they will be sharing in your profits.
3. You’ll get honest feedback and comments from donors and sometimes from those who choose not to donate. This is valuable stuff as you move forward, because this feedback may cause you to modify, expand, or move your business in a different direction.
4. You get a “base” of ambassadors. People who donate to your campaign feel “invested” in your success. They will become customers and their friends may too. The sharing buttons that accompany each project will also provide an easy method by which your donors can share your brand.
5. Except for a small fee, your investment is your time and effort. Mind you, this can be significant, but there is no additional financial investment on your part.
At first glance, it appears that there are no cons to initiating and maintaining a crowdfunding campaign. There are a few, however.
1. A crowdfunding campaign is a lot of work. It is not just about setting up a project and posting it. The campaigns have become very sophisticated marketing efforts, and will require a great deal of research and work to find the right crowdfunding formula for your niche and to engage and attract donors.
2. The competition is tough. You have to do something stunning to stand out, and that can be a tricky deal. And you certainly have to convince would-be donors that you are a great prospect.
3. If you do not reach your funding goal, you will get nothing at all on some platforms. While you may get your funding from flexible funding platforms, if it is not enough, you will have to figure out where you will go for the remainder that you need.
Examples of Successful Crowdfunding Campaigns
There are some exceptionally successful campaigns, and these should provide motivation for others to pursue crowdfunding. They come from all categories of businesses and research, a few of which are as follows:
This startup received $273,114 in funding for build a floating swimming pool in the middle of a dirty New York river. Basically, this is a floating swimming pool, water coming in being filtered. The founders are now looking at an expansion for full water cleansing, but, right now, people are swimming in this new floating pool.
This is a product that will allow anyone to have a small garden anywhere. It is a roll-out garden mat with pre-cut holes for planting the 19 plant varieties that come with the kit. Built in irrigation is also a feature. This startup raised over $107,000 and production is now in process.
Fueled by a desire to increase the interest of girls in STEM learning, found Debbie Sterling has developed a construction toy and book series. Sterling raised over $285,000 to produce these products which are now sold at Toys R Us and on Amazon.
A simple patch will keep mosquitoes away for up to 48 hours. This startup was launched by a team at University of California. While initial funding from the Gates Foundation and National Institute of Health was great, the project sought additional funding on Indiegogo and received what it needed to distribute this magic patch to Uganda, a country in which mosquitoes are responsible for many diseases.
Getting it Right
There are certainly some things you can do to give your crowdfunding campaign a better chance for success. Here are some tips to guide what you do and how you do it.
1. Research the options you have for platforms and choose one that is going to best fit your niche. Kickstarter, for example, has 15 project categories – make sure you will fit well into one of them. Do you want all-or-nothing or flexible funding? Read through the guidelines of each platform before you choose one.
2. Look at the “competition” in your niche. What projects are getting a good response and a growing number of donors? What are they doing that you can copy?
3. Your pitch must be amazing. It must include visuals and at least a short video featuring you and your passion for your business. If you don’t engage immediately, you will have a tough road ahead. It may be worth it to contract with marketing creatives who have a record of success with such campaigns.
4. Use family and friends as initial supporters. When they come through with small donations, these add to your numbers that you can publicize. Plus, they can share your campaign all over social media within their communities and ask those communities to share as well.
5. Updates are critical. You will need to plan on being online and on social media throughout the entire campaign. You must provide updates, because as donor numbers increase, they can be a bit contagious. People who see other donating will be more motivated to do so as well.
6. Look at the perks you are giving in exchange for donations. During its funding campaigns, PBS offers different levels of perks based upon amounts that are donated. You should do the same. And make your perks as cool as possible – they do help.
7. Make sure that you contact your donors personally to provide your appreciation, along with the perk you provide. And feel free to ask them to refer your campaign to others.
8. Be sure that your campaign includes enough facts about your business plan to show donors that you do have a plan and a path for launch. Your passion is important and will engage. Your ability to prove that you have thought this through is also important.
Crowdfunding is a solid and often successful method of obtaining the funding that a startup or a business that is ready to grow needs. Success of such a project, however, depends on how it is presented and the amount of effort a business owner is willing to put in to make it a “go.” It’s nice to have funding that does not have to be re-paid. But there is a cost – blood, sweat and tears that a campaigner must be willing to pay.