What is crowdfunding
Joel Schwarzbart
By: jschwarzbart
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What is Crowdfunding and What Can It Do For My Business?

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You’ve probably heard of Kickstarter, Indiegogo, and GoFundMe. These are all popular crowdfunding platforms. But what is crowdfunding?  And more important, what can it do for my business?  

Glad you asked.

You might have heard that crowdfunding is free money for businesses. Wouldn’t that be nice! But it’s better to think of it as a way to boost your sales dramatically at very low cost. Especially if you have a new product that people really like or a project that people relate to. It works much better for products than for services, so if you are in a service business you will need to create a product that relates to your business.

The Basics of Crowdfunding

The idea of crowdfunding has been around for a while. It’s basically communities helping out individuals, families, and now, also businesses. An old-fashioned Pennsylvania barn raising is an example of an early kind of crowdfunding (minus the cash, of course), where a community comes together and donates their time and labor to help a new family get started.   

The concept got kicked up a notch, and morphed, by the internet. Indiegogo was founded in 2008 to help innovative tech projects get funding. Kickstarter was launched in 2009 by three co-founders who wanted to help artists get funding from their friends, families, and communities at large, for worthy projects that otherwise couldn’t get funded. They created a website where sculptors, painters, photographers, writers, filmmakers, comic book artists, playwrights, interpretive dancers, and whatnot could tell their followers about their projects and request funding.

If you don’t fit into one of these categories, it doesn’t mean you’re out of luck. But it does mean you will have to put more energy and creativity into figuring out how to make crowdfunding work for you.

To sum up:

  • Crowdfunding is project or product based. It can be a charitable campaign, like raising money to buy furniture for a women’s shelter or help someone during a tragic episode. It works best when contributors know what their contribution is paying for.
  • Crowdfunding requires a (virtual) community. No matter how cool your project is, it isn’t going to get funded if people don’t know about it. Some folks will stumble on it, but if you need to raise $10,000 or $25,000 or more, then you need to make sure people know about it.  

An Example: The Holographic Coffee Mug

Let’s pretend I’ve been working on a holographic coffee mug. There are tiny silicon chips embedded in the glaze (I’m just making this up). The hologram contains images: when the mug is hot it displays the images, and as the mug cools down the images fade or change colors. People can select the images they want on their mugs, uploading them from their laptop or Google drive. I have made a few prototypes and gave them to my friends for Christmas last year, and they love them! Now I am thinking about selling them. The only problem is that all of the contract manufacturers I spoke with need a minimum order of 5,000 units. Because of the cost of the chips and the complexity of embedding them in the glaze, the manufacturer has to charge $10 per unit. That means I need $50,000 to get started. Once I complete the order, II can sell the mugs for $25 each, either through Amazon or on my website. But where am I going to get $50,000 to start?

Crowdfunding to the rescue. But which crowdfunding platform best serves my needs? It all depends on the type of product you’re manufacturing or the goal you want to achieve with the funding. Keep on reading for specific cases.

Which Crowdfunding Site Do I Use?

Different crowdfunding sites serve different needs:  

  • Personal Emergency of Charitable Causes – GoFundMe helps people when they find themselves in need. The case of seven-year-old Ryder from British Columbia gives a heart-warming example. After seeing homeless people without rain gear, he used this platform to launch a campaign to buy rain boots for people in need. GoFundMe is also used to raise donations to save struggling businesses.
  • Projects that need backing – Kickstarter and Indiegogo are the two primary project-oriented crowdfunding sites. Project backers are generally offered rewards in exchange for their contributions.  
  • Business in need of startup funding – Raising money to start a new business can be very expensive. What if you don’t already have millions of dollars to spend on lawyers and other high priced professional services?  If you need anywhere from $500,000 to $200mm, you can use an equity crowdfunding service like WeFunder. There are a lot of people who want to invest in exciting young businesses. Favorites include craft brewers, alternative energy, health, novel solutions to problems that aren’t on other company’s radar, and of course, technology.

How to Launch A Campaign on a Crowdfunding Site

Let’s pick up my example where I left if. Based on my market research I believe I can sell more than 20,000 holographic mugs. The problem was finding the funds for that initial order of 5,000. Once that first order has been completed, the manufacturer will accept orders as small as 500 units.  

To get the ball rolling I’m going to use either Kickstarter or Indiegogo to pre-sell 5,000 units (even if the mugs haven’t been manufactured yet). Technically, I’m not actually selling anything. I’m using Kickstarter or Indiegogo to solicit donations. But in order to entice donations, projects are encouraged to reward their contributors.

In project-oriented sites like these you have to follow these steps:

  1. Create a page on the website of your choice that describes your product or project. The page explains how much money you need to raise, and by what date.  
  2. The page also lists different awards for different contribution levels. In my case, I’ll have a nice hand-signed “thank you” card for $10 donations, one mug for $30, and 2 mugs with a remote for $100. And I’ll create a special “Founder’s Circle” plaque with 4 matching mugs for donations of $250.
  3. Tweet about it! Let your social media followers know about your project. The most successful crowdfunding projects have lots of followers. For best results, start telling people about your project before launching your crowdfunding campaign. In my case, I’ll post pictures on Instagram of happy friends drinking from their holographic mugs.  
  4. If your campaign is successful, the money will be deposited into your account. Send a “thank you” note to all of your backers. Communication is very important!
  5. Take the funds, finish the project, and distribute the promised rewards to your backers.
  6. Be sure to send out progress reports as you go through each step. Be sure to let your backers know if there are any delays. There will be! It’s completely normal, so don’t try to hide it. They will feel they made the right decision to back you when you are open and upfront with them.

Two Final Tips

  • Aim low. Some campaigns can be incredibly successful. But you need to be realistic about the popularity of your project, the amount of time you have to run your campaign, and the number of people you can actually get before creating your crowdfunding page.
  • Build up a following platform before creating the crowdfunding page. Your campaign is guaranteed to fail if you don’t have social media or email followers who are pumped up before you launch.

We wish you the best of luck in your crowdfunding project! Want more tips and resources to grow your business? Visit our blog for guidance on Marketing, Management, and Financials.

 

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