The concept known as Crowdfunding has begun to accelerate and has come to be seen as a viable alternative for the small business and entrepreneur to raise capital to fund a new project or idea. This revolutionary idea is driving new growth as many are turning to it rather than approaching family members, friends, banks, venture capitalists, and even their own savings accounts.
The basics of Crowdfunding 101
Crowdfunding operates on the premise of multiple individual cash donations to a project or idea. This is known as donation-crowdfunding and is the most popular, and most used, form of crowdfunding. Those entrepreneurs and companies looking to fund a particular project start by contracting with one of the various crowdfunding websites that are designed to allow you to get the word out about your project and to track your progress.
Keep in mind that all sites are not created equal. Check them out and see which ones specialize in your type of project. Many sites just specialize in the art, music, and film. Entrepreneurs need to scout for those that are designed to support the fundraising for their type of project.
Some sites will select participants based on certain requirements such as the amount of capital someone is looking to raise. From there, you can go and create a profile over and above your planned marketing efforts. You must, also, set a money goal and the length of time you want your fundraising campaign to run.
Research shows that asking for smaller amounts, with short time frames, have the best chance of success. Asking for less than $30,000 and soliciting for less than 45 days has shown the most successful results. The site you are engaged with will automatically track your progress and inform you of how close you are to your goal. The site usually makes their money from a commission charged on how much money you raised. Most sites tend to be in the 5% range.
Donation-crowdfunding can be a great way to raise small amounts of capital and increase your potential customer base. In addition, you do not have to worry about surrendering equity or paying out interest on shares bought.
However, many a careless entrepreneur fails to calculate the true costs of their project and, thus, ends up asking for far less than they need. When this happens the pressure increases with regard to delivering the product and delivering it on time. Preparation and planning is everything.
Pebbles Watches dives in head first
Pebbles wristwatches have become an innovation and a true crowdfunding success story. Founder Eric Migicovsky was originally looking to raise about one hundred thousand dollars to start production of 1000 units of his cutting edge watches. What he ended up with was over ten million in donations. In fact, at one point he collected over one million dollars in just 28 hours.
The watches have downloadable interchangeable watch faces that can be customized as well as feature any manner of app and can easily receive notices and updates that the user has customized. The watch connects and functions with iphones and android phones. The watch can alert users to incoming calls, call waiting, email, and social media updates and messages.
Mr. Migicovsky, 25, commented that he could not believe that over 80,000 contributors have donated to the project, ordered, and who expect delivery on, a watch that did not even exist prior to his crowdfunding operation. The response has been overwhelming as Mr. Migicovsky had to push back his production date several times and get someone to help them with the overwhelming response. He had to have someone answer nearly ten thousand emails just for starters.
Mr. Migicovsky, and his partners had approached about ten venture capitalists with no result and no hope of getting funded. In April of 2012, they headed out and decided to start a crowdfunding campaign and that has generated a response beyond all expectations. They are now looking to produce somewhere in the neighborhood of one hundred thousand watches. As of now, production continues in China as they attempt to fill the massive order.
The do’s and don’ts of a campaign
There are certain suggested ways of going about putting together a marketing campaign in an effort to raise money at one of the crowdfunding sites:
- Have some manner of pre-marketing campaign going and try to attract friends and relatives to openly commit to purchasing whatever it is you are going to sell. This will help with the, all important, trust factor. You must look trustworthy and respectable. You must put your social media pages to work for you by sending out announcements to your follower base that you are getting ready to launch this crowdfunding campaign. It creates positive buzz for you and your project and you will be able to tap immediate donations. That, too, can have a snowball effect as potential investors see that others are taking the calculated risk.
- You must present yourself in a likeable and engaging way. They that fund such projects really want to feel that they know the person who is asking for the money. They want to like the person and feel that they are capable of pulling the project off. The use of short videos, a couple of minutes in length, is highly favored and recommended. It allows potential donors to see you and get to know you. You must be engaging and convincing. This is your Superbowl commercial and your actions, speech, dress, and deportment are critical to attracting donations.
- There must be some manner of reward for the donation. In the example of the Pebble watches, donors can buy them at a huge discount. Offer free copies of books. Give them visible credit at the end of a film that is being produced. Free t-shirts are a popular reward. This exchange of some tangible reward is offered mostly because it is not legal, as of now, to offer any manner of equity in a project.
Be prepared and staffed to handle the response and delivery
The Diaspora Project was a venture looking to, finally, get launched about one year ago. Diaspora is an open source platform for establishing networks and online communities. The founders had hoped to launch a serious challenge to Facebook. The software supposedly offers users more control over the network and serious user privacy controls.
The software was launched by Max Salzburg and four fellow students at New York University. They were mathematics students who felt that one social network should not be so dominant. They decided to write and launch the new software in 2010 but the young math majors were not prepared for entrepreneurship.
They figured that they had to raise around ten thousand dollars to launch the software platform formally. Mr. Salzburg and his partners decided to try and raise the money through using PayPal. In just a few short days, they had raised over $45,000 but PayPal froze their account without explanation. After receiving a huge number of complaints from donors, as well as threats to possible legal action, PayPal unfroze the account.
The young would-be entrepreneurs, however, decided to venture in to the crowdfunding arena and ended up raising over $200,000. The idea for this open source software that kept control, and strict privacy, in the hands of the users was incredibly popular. Even Mark Zuckerberg, founder of Facebook, donated money.
That was when their troubles began. Mr. Salzburg explained that, originally, he and his friends thought the software would be a project to do over their summer break. However, Mr. Salzburg related, the team became so overwhelmed and bogged down just answering email and trying to produce t-shirts to give to the donors, that the development of the software took a back seat and ended up languishing. They were simply not ready, or prepared, to handle such an overwhelming response and such overwhelming obligations.
There was some backlash as Mr. Salzburg explained that a perception had developed that they had simply wasted all of the money. He said that people wanted to know where all of the money went. He said that, despite the amount, the partners spent two years living pretty much hand to mouth as they tried to ready Diaspora for the market.
It became such an unbearable situation for the young men that they decided to sell their code and what they already had and try to start another project. They were simply unprepared and understaffed to handle the enormity of the response work once their project went viral.
So, as vital, and successful, as crowdfunding can be, it remains imperative that those entrepreneurs that venture out there be prepared. It is not for the faint of heart and those that succeed know the risks, and responsibilities, and have prepared for very contingency.
Article by Kevin Sawyer
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