Crowdfunding brings large numbers of small investors together to raise capital for entrepreneurial ventures.
A new term has come into common use in entrepreneurial and creative circles. It refers to a new way of funding ideas, projects and initiatives by leveraging small investments from many people. Crowdfunding, as it is called, uses online platforms to promote and share campaigns for funding that raise small amounts of money from a large number of people.
There are primarily two types of funding mechanisms that prompt investors to participate: perk- or reward-based investing, and equity investing. Perk investing is now used relatively often through popular sites like Kickstarter and Indiegogo. In these instances, the many investors select their level of investment based upon their interest in promised rewards (a sticker, a t-shirt, a prototype, etc.), while creators weigh the costs of fulfilling these rewards against the proposed investment levels and, once funded, go to work on completion of the funded project.
Equity investing gains the investor an ownership stake in the company being formed. The proposed U.S. rules just coming online allow startups and established organizations to raise a maximum of $1 million in 12 months via crowdfunded investors. These investors are subject to spending limits of $2,000, or up to five percent of their annual income or net worth. Over a 12-month period, SEC rules would limit these investors from making securities purchases beyond $100,000 through crowdfunding.
Crowdfunding for perks or rewards offers the best opportunity for entrepreneurs, artists and creators. That’s because the monetary investment is non-dilutive; in other words, he or she does not need to share equity in the project with those individuals making the investment. With crowdfunding for equity, however, a portion of the ownership stake is transferred to the investors.
Many entrepreneurs leverage crowdfunding to do more than just raise funds. As these platforms provide a great interface for building quantitative and qualitative data, as well as gathering direct feedback from potential customers, startup marketing teams can leverage their power to validate the marketability and fit of new products. In addition, the ability to offer different packages and choices allows for the refinement of pricing models. Introducing an original concept via crowdfunding platforms can move a new company forward by establishing their brand and beginning to compile a strong customer base of active supporters.
Launching A Successful Campaign
Building a strong campaign to net funds is not easy. It takes a great deal of time and preparation, both before and after the launch of a campaign. If the end result is to be highly successful, it isn’t a “set it and forget it” process.
Launching a campaign includes building a clear vision of what the project or product will produce, and representing that vision through both video and a written narrative, as well as a strongly-crafted rewards structure. These elements should connect the potential investor/supporter to the project, introduce yourself and your team, and build their belief in your ability to deliver the project to fruition. There is risk involved for rewards or perk investors in that the creators are not formally contracted to provide anything. There is currently a great deal of discussion on this topic, as some very successful crowdfunded projects have failed to launch, leaving those expecting rewards holding the proverbial bag. Therefore, setting an achievable goal becomes the first step in a successful crowdfunding strategy.
Creating a sensible reward structure is where most of the costs come into play. Great rewards can drive greater investments. Some choose to build tiered rewards (higher-level rewards also gain all of the rewards for the levels beneath), while some choose to section rewards, allowing the investor to pick and choose. It’s important to provide value for value. Keep in mind the costs involved, the real-time constraints of creation and manpower, the costs of distribution (and time involved), and paying production providers.
Start by building a base of followers who can help promote your campaign, and begin to actively market and manage your campaign. The more people involved in spreading the word, the stronger the potential for success. Do not forget to leverage traditional and online media to help promote the campaign. Be diligent about keeping up with email (consider employing someone to help), as overlooking an opportunity to promote a campaign can lead to real dollar loss.
Last but not least, the most important thing for the creator in all of these steps is to be genuine. Whether through building your pitch video, designing rewards, or interacting with supporters (especially after funding), the stronger your presence connects as a real person (or team) with a viable idea, the more support you will reap. iBi
Amy Lambert is a cofounder of Startup Peoria.