Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.
Crowdfunding enables businesses to seek financial backing from anyone. It can be a useful tool, both for idea validation and soliciting/accepting customer pre-orders. Many people are familiar with Kickstarter, one of the largest crowdfunding websites. A donation or reward-based crowdfunding site, Kickstarter has invigorated the crowdfunding market space and become a viable fundraising method for many businesses. (I’ll be discussing Equity Crowdfunding in a separate article.)
What is Crowdfunding?
Crowdfunding serves to facilitate the provision of financial backing to businesses and individuals from other individuals. The backing usually comes in the form of a donation or investment. Most often, the sums are relatively small. Crowdfunding is conducted online, which can help small businesses to reach larger audiences. It’s become a popular method of seeking support for new products and artistic endeavors.
Crowdfunding can be effective for a wide variety of startups, however, it’s important to find a website aligned with your business and goals. For example, not all crowdfunding sites will accept service businesses. For those offering a product, whether an app, a fun card game, or the perfect suitcase for air travel, crowdfunding platforms and campaigns can help to offer an overall proof-of-concept. Some inventors even utilize crowdfunding to generate product pre-orders and thereby illustrate the level of need and/or interest in the market.
According to statistics from Fundable, the average successful crowdfunding campaign amounts to $7,000. However, individual campaigns have certainly earned more. A couple of campaigns on Kickstarter have even pulled in over $1 Million. Quick momentum is essential for success. Campaigns able to achieve at least 30% of their goal within the first week are most likely to succeed.
Pros of Crowdfunding
Rewards-based crowdfunding enables:
- Businesses to fundraise without ceding equity
- Businesses to receive backing from strangers
- Backers to easily share your campaign on social media
- Interested parties to leave useful feedback on your campaign
- Businesses to validate their unique value proposition
Cons of Crowdfunding
Crowdfunding may sound great so far, though it’s important to keep these potential negatives in mind, as well:
- A good campaign requires time and effort to both create and sustain. Often, businesses work for months on their campaigns prior to launch.
- “Donations” may be taxable.
- Some sites require that you meet your goal in order to receive your funding.
- Most sites charge a fee, as do their payment processors.
- Dealing with “rewards” can be time-consuming and expensive.
- Rewards-based crowdfunding is not appropriate for B2B startups.
- Rewards-based crowdfunding is not suitable for large fundraising requirements.
- If your ideas are not properly protected, they may be stolen. Ensure that you have the necessary patents and copyrights in place, as appropriate.
- Most campaigns fail to reach their goals. Depending on the specific platform, 1 in 3 campaigns or fewer will be funded. Kickstarter has the highest success rate.
Tips for Launching a Successful Crowdfunding Campaign
Not every campaign succeeds. To give yourself the best opportunity, follow these guidelines:
Determine which crowdfunding site is best for you
Not all crowdfunding sites are equivalent. Some provide strict guidelines on who may and who may not list their product or business. Others only disperse funds if and when the entire monetary goal is met by the deadline. Fees also differ between sites. Ensure that you understand each site’s rules, how and when you’ll receive your funding, and all details pertaining to the associated fees.
Determine how much capital you require and consider all relevant fees
Prior to launching a campaign, you should set a clear monetary goal. If you know that you need $10k to produce your widget, then you should plan to fundraise $10k plus the site’s fees in order to be certain of covering your expenses. If you’re offering rewards for funding, you might also consider those additional associated costs and any applicable taxes. While taxes vary, a good rule of thumb is that if the rewards you’re offering are comparable to market price, then those “donations” will be counted as income and are taxable. If the “reward” is something such as a thank-you card or small-ticket item that is not in line with the donation amount (such as a calendar for $50), then those donations are considered to be gifts and are not taxable unless they exceed a value of $14,000. A skilled accountant with crowdfunding experience can help you to better determine exactly what may fall under which category and whether your incentives will require taxes to be paid. If they do require payment of taxes, you should add that line item to your budget so as to ensure that you raise sufficient money to cover all expenses.
Craft your Pitch
Getting attention for your business or product can be difficult. In order to hook potential donors, you should tell a good story that clearly illustrates your product, service, or business. Many of the sites listed below offer tools and tips to aid businesses in finding crowdfunding success. You must determine the best way of communicating your vision. In addition to plain text, you should also plan to utilize photos or video. If you have a product, you should show a prototype or model. As an entrepreneur, you must clearly demonstrate why others should care about your business by thoroughly informing them of the problem you’re solving.
Reward Them Well – Entice…
Crowdfunding campaigns have proven to be useful for ensuring that a market exists for a particular product. Offering your product as a reward for a certain amount of sponsorship helps to demonstrate that your business idea is viable and also serves to provide you with pre-orders. Those pre-orders can help you to obtain more traditional financing later on.
In order to achieve traction, you’ll need to advertise and market your campaign. Your entire social network should be made aware of it, as well as the networks of any co-founders or partners. You should already have informed any interested parties that you’ll be launching a campaign. Early traction from personal networks can illustrate to strangers that your product or idea is viable and worth a look. Strangers are more likely to fund projects that have already secured at least some backing. Your company website and social media accounts should all link to your crowdfunding campaign. Backers will – hopefully – also share your campaign on their own social accounts.
Some crowdfunding sites permit you to add to your active campaign description in order to keep funders and potential funders apprised of progress. This can make it more exciting for your backers and may even encourage follow-up donations. Plus, it demonstrates that you’re passionate about your campaign and may facilitate a greater level of identification with you and your business amongst potential backers.
Additionally, you should continue to share your campaign and build interest throughout its runtime. This can be time-consuming, but is absolutely essential for success.
One of the most popular crowdfunding sites, Kickstarter has raised over $3 billion globally to help fund projects. In order to be eligible to run a Kickstarter campaign, an entrepreneur must be involved in a creative pursuit. This includes inventing a new product (or app) or publishing a book. In order for a product to be listed on Kickstarter, a prototype must exist and a photo or video of the product must be shared on the campaign. All Kickstarter projects are time-limited and must meet their entire stated goal in order to receive any funding.
Before a project goes live on their site, Kickstarter must screen it and not all campaigns are approved. Once campaign approval is received, Kickstarter will only collect a fee if it’s fully funded. Kickstarter collects a 5% fee, and its payment processor Stripe collects a fee of 3-5% depending on payment type and country of origin. That equates to the fee potentially ranging from 8-10% of the total amount pledged. Once a campaign achieves its goal, it will remain live until its deadline, thereby enabling additional funding to be pledged.
Indiegogo offers more flexibility than Kickstarter. To start, the site allows you to determine whether you prefer your campaign to be of the flexible-funding or fixed-funding type. The former permits you to retain any money pledged to your campaign without regard to whether you hit your goal. For the latter, you must hit your goal in order to receive any money.
Indiegogo has a section on their site highlighting successful small business campaigns. According to the site, companies focused on design, food, fashion, and crafts have thrived on their platform.
Indiegogo shares a “Field Guide” with interested campaigners to help them perfect their campaigns. Including both general pointers and a checklist, it’s a useful guide for enumerating the necessary steps for launching a campaign.
Indiegogo collects a 5% fee on all contributions. Additionally, payment processors also charge a fee on each contribution. Taken in combination, these fees can total 8-10% per contribution. Should your campaign fail to collect any money, you won’t be charged any fees.
Indiegogo recently partnered with MicroVentures to form First Democracy VC, an equity crowdfunding platform currently run on the Indiegogo site, which I’ll cover in another post.
Fundable offers both rewards and equity fundraising. It’s an all-or-nothing platform, meaning that you only keep the funding if you reach your goal. Fundable is the only listed crowdfunding site focused solely on startups and businesses.
Fundable operates on a different model from the other listed sites. Rather than charging a fee on funds raised, Fundable requires a monthly subscription in order to utilize the site. The base price is $179 per month, though a range of add-ons (such as consulting) can increase that price.
Most users on GoFundMe are seeking to raise funds for personal use or on someone else’s behalf. There are, however, some business users raising funds on the site. For businesses, the greatest indicator of potential success is having an active social base which is willing to support the campaign.
GoFundMe permits campaigns to retain all pledged funding, regardless of whether they achieve their goal. As with Kickstarter and Indiegogo, GoFundMe charges a 5% fee. Their payment processor charges an additional fee of 2.9% + $0.30 for a total fee of 7.9% + $0.30 per donation.
While businesses are not GoFundMe’s primary users, some have found success on the platform. For individuals with strong social ties, GoFundMe may provide a useful means of gathering donations for working capital.
Getting Help With Your Campaign
Because running a crowdfunding campaign may constitute a difficult endeavor, savvy entrepreneurs have created businesses to help others with launching their own campaigns. Whether you need help writing copy or with creating a video, there are plenty of businesses specializing in crowdfunding campaigns. Some digital marketers will assist with launching campaigns. Also, hiring a freelancer with crowdfunding experience to monitor your campaign may help to ensure that you’re receiving the level of visibility you need.
Crowdfunding has grown in popularity and will continue to do so. However, that doesn’t mean that it’s necessarily the most appropriate choice for every startup or business. Weigh the pros and cons prior to committing to a crowdfunding campaign. Should you choose to launch a campaign, prepare carefully and plan to fully engage with your target audience throughout the process.
About the Author
Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (www.GoodField.com).
Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.
Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to www.JoeJohnson.com.