Startup 101 - Getting started with Crowdfunding
You might be familiar with the likes of Kickstarter, Indiegogo, and Fundable. These are all what we call crowd-funding sites, that allow you with an idea, to leverage the appeal of the wider internet.
Crowdfunding allows entrepreneurs to seek and engage potential investors en-mass, and rather than having to woo each investor on an individual date, you get to do it once, to a greater audience.
You gain the benefits of having to test your idea out to the public right from the start, gauging the public's perception as to whether your idea actually solves a pain or not. You also get to work with investors who may come from different backgrounds to traditional angel-investors, may be normal citizens who are looking to get into micro-funding.
Each of the types of crowd-funding websites work a bit differently, which I will quickly summarise:
- Kickstarter allows you to set up a funding goal for your project (whether it would be an app, or a hardware idea), a timeframe to reach that goal, over a short period of time (usually a month or two). In that time-frame, people can invest money, and if you reach your goal, people get debited the amount they pledged. If you don't reach your goal, all investors keep their money. This is what is called All or Nothing.
Kickstarter take 5% of money raised.
- Indiegogo is another crowdfunding community, with fixed or flexible goals. What that means is, you can opt for flexible goals where even if you don't reach your goals, you will still be able to claim the funds from your backers, as long as you can fulfil your promises.
Indiegogo take 4% of money raised.
- Fundable is more technical or business-oriented, and rather than providing fixed or flexible goals, it allows for funds to be raised by reward or in the form of equity. The latter is more common if businesses need to raise more than $50k, and this crowdfunding company charged $179 per month for reward-based campaigns.
Fundable don't take any percentage of money raised.
Crowdfunding, for manufacturing-type projects also provides the benefit of knowing ahead of time what the demand is like for your product, thus reducing inventory stock to a more accurate level. It also increases your brand awareness, through exposure, as it has been the case with many startups, like watch-maker Pebble.
With crowd-funding campaigns, you usually set a video that is used as your promotion, and story-telling is the key to this. You can see some of the videos out there, that introduce the concept, the product, the vision.
With pledges, remember, you aren't pledging to millionaires, but rather, looking to get $25 or $50 or so from normal every-day people. This is important because you need to set what the pledge amount should be, as well as clearly what the reward would be (product, or equity). You also need to be weary of giving away too much equity, so this is something you shouldn't think about and do the next day. It requires careful consideration.
When you tell your pledgers what your goal is, tell them why that goal is what it is. That is, how did you come up with that number. Is that what it costs to manufacture, to pay for labor? They are your investors, so you need to provide transparency in return.
And speaking of transparency, make sure you communicate constantly to your pledgers, who you should consider your shareholders. Provide regular updates, as it instills confidence, and not to mention gives you a good name.