Do you think you’re the next Kanye West, expecting to raise $53 million in a single tweet?
If you read my blog post Crowdfunding: Failure to Plan = Plan to Fail, you likely know that crowdfunding is a lot of hard work. Just like the old saying goes, Rome wasn’t built in a day! But when done right, with a product, service or cause that appeals to your tribe, you can realize your dreams.
As an entrepreneur with a start-up and looking for some money to help your small business prosper and grow, crowdfunding may be a viable option to raise the capital you need. But first you need to know some of the basics.
It’s surprising how many people think crowdfunding is just about making money. It’s so much more than that. Here are three key reasons:
- Funding for startups (or fundraising for not-for-profits)
This is probably the best-known of the top three reasons to use crowdfunding.
- Creating awareness
In addition to raising funds, creating awareness is another reason start-ups turn to crowdfunding. In some cases, it’s an added benefit. In others, it’s the reason some founders opt for crowdfunding.
- Idea validation
If you’re not sure your idea is going to sell as is or you need some wisdom from the crowds to help shape it before it gets to market, crowdfunding is an effective way to let prospective customers shape your company’s offering.
Rewards vs. Equity Crowdfunding: Which is Best for You?
If those reasons are right up your alley, take the next step to figure out which crowdfunding platform is right for you. They aren’t all created equal, and each have their pros and cons.
The Crowdfunding Centre identifies two primary types of crowdfunding:
1. Rewards Crowdfunding: entrepreneurs pre-sell a product or service to launch a business concept without incurring debt or sacrificing equity/shares. This is probably the type of crowdfunding most familiar to you. According to a joint study between York University, Toronto, Canada and Université Lille Nord de France, Lille, France, in 2014, there are two types of rewards-based crowdfunding:
- “Keep-it-all” (KIA) – where the entrepreneurial firm sets a fundraising goal and keeps the entire amount raised regardless of whether or not they meet their goal. The most familiar example of a KIA platform is probably Indiegogo.
- “All-or-Nothing” (AON) – where the entrepreneurial firm sets a fundraising goal and keeps nothing unless the goal is achieved. Kickstarter is the best known example of an AON platform.
According to their study of 22,875 crowdfunding campaigns with targets between U.S.$5,000-US$200,000, they concluded AON campaigns were more successful because potential investors were more likely to support them. The study also noted that founders who use crowdfunding campaigns tend to release more details about their products and were less likely to release products that were substandard.
2. Equity Crowdfunding: the backer receives shares of a company, usually in its early stages, in exchange for the money pledged. Until this spring, equity crowdfunding was only an option for accredited investors or investors with proof of their wealth (financial ability to invest). This year equity crowdfunding has garnered much attention because as of May 16, 2016 in the United States, anyone who is interested may invest as long as they have the money to cover their investment. You can review new SEC criteria for more details. OurCrowd and NextGen Crowdfunding are two examples equity crowdfunding platforms.
Whether you decide on Kickstarter, Indiegogo, GoFundMe or another platform, there are pros and cons to each and to KIA and AON models. It’s also important to note that each crowdsourcing platform has a different funding model and typically charges a percentage of the reward revenue. So remember, to do your research and do what’s best for you and your goals.
A good reference is Wikipedia—it has an exhaustive list of crowdfunding platforms you may want to consider.
Once you’ve selected the crowdfunding platform that’s right for you, it’s time to start thinking more about the audience, or community, that will support and help you promote your product before, during and after the campaign. Be prepared! Fewer than 40% of approved campaigns ever end up getting fully funded.
I don’t want you to be part of this statistic so I’ve created a crowdfunding guide that will set you on the path to success. The guide will take you from plan to launch, with no step missed, answering all your burning questions.
Grab this free guide here. It’s 24 pages of essential crowdfunding tips that you need to know before launching your campaign.
Have any questions? Just leave a comment and I’ll be happy to provide some help.