The Way We Work
January 16, 2012 by Julia Camenisch

Is your business idea so great that you find yourself making elevator pitches to total strangers? Does your great idea have so little financial backing that you also scrounge around that elevator looking for spare change? Well, do not let meager resources continue to hold you back. Now is the time to turn to a new source of startup funding – the public!

Thanks to the leveraging power of the Internet, every person you meet is a potential investor. Crowdfunding sites have opened the doors for micro-investors (people who contribute small amounts of money) to be involved in startups; you no longer need to rely solely on venture capital or deep-pocketed investors.


 

Crowdfunding 101

Here is a simple description of how crowdfunding works:

  • You have an idea for a product, film, book, album, etc.
  • You create a business plan, then post your plan on one of the various crowdfunding sites.
  • You set a goal for the amount of money you need to raise, as well as your timeline for raising the funds.
  • Investors then have the opportunity to learn more about your project and, if they like it, they can contribute anywhere from $5 to $500+ towards it.

This type of funding will not work for every type of business or product idea. Where crowdfunding shines is in short-term, smaller projects that need relatively small amounts of capital (under $150,000). Examples of successfully funded projects include producing eco-friendly sandals, starting a doughnut restaurant, recording an indie rock album and developing a car-locating iPhone app.

Meet the Investors

Crowdfunding sites are not created equal; each one has a different focus and is best suited for a certain kind of project. Each site also has different fee structures. Here is a rundown of some of the options:

  • Kickstarter:
    Focus: Creative projects in areas as diverse as technology, music or photography.
    Fees: 5% to Kickstarter if successful; 3 to 5% to Amazon for credit card processing.
  • CrowdRise:
    Focus: Non-profits and fundraising.
    Fees: 5%, plus $1 for donations under $25 or $2.50 on donations over $25.
  • IndieGoGo:
    Focus: Investment in any and every type of creative or entrepreneurial project.
    Fees: 4% if campaign is successful; 9% if it is not. You are also charged a 3% payment processing fee.
  • RocketHub:
    Focus: Small business, fashion, music, non-profits and scientific research.
    Fees: 4% for successful ventures; 9% if funding goal is not reached. There is also a 4% transaction fee.
  • ulule:
    Focus: The arts and humanitarian projects, heavily weighted towards the European market. Ulule also allows you to fund a project through pre-sales.
    Fees: 8% from credit card donations; 5% from PayPal donations.

Tips for Successful Crowdfunding

Posting a project on any one of these sites is simple; receiving all the funding you need is not quite as easy. Here are some ideas about how you can run an effective campaign:

  • Get advice. This post is just a bare-bones synopsis to get you started. Do your own research by talking to others who have used these sites. They can give insight into what did and did not work in their campaigns.
  • Lay the groundwork for success. While it is easy to want to post your project immediately, resist the urge. To have a fully-funded project, you need to do some legwork beforehand. First, work to build your fanbase through other social media venues. Second, decide how you are going to reward your investors; think through what would best fit the types of people who would be interested in your project. Finally, think short; the nature of crowdfunding requires projects with relatively short turn-around times. If your product is a long-term investment, get funding for particular steps of the project instead of trying to fund the whole thing.
  • Have a cool reward. Your investors are also shoppers – offering a reward they will want is a big help. For example, if you are recording an album, give investors an exclusive copy with extras. If you are opening a restaurant, offer gift certificates.
  • Share more than facts. Share your story. People are not simply investing in a project – they are investing in you. You need to convince them that you have both the passion and the skills to bring your idea to life. So share your story: Talk about who you are and your passion for the project that drives you. Then communicate the product’s story and what makes it different. A great example of this type of storytelling is from Lunatik watches (which received funding via Kickstarter).
  • Do your own public relations. Encourage supporters to spread the word to their friends, then give them the tools to do so. Devise a good tease line for supporters to tweet and share on their social networks. Make a promo video that can be embedded in blogs. Build a project website they can direct their friends to. Make sharing your story as easy as possible.
  • Think beyond funding. Not every project will receive the necessary funding – but missing that goal does not mean you have failed. Remember, you will have connected with people who are very interested in your project; leverage that fan base by staying in touch. In some cases, the network you create may be of more value than the funding you were trying to raise.

Thanks to the Internet, the barriers between companies and their customers continue to fall away. Crowdsourced funding is a perfect example of that.

Would you invest in a business through one of these sites? Or have you gotten your project off the ground thanks to crowdfunding? Share your experiences in the comments section below.


Julia Camenisch

Contributing Author

Julia Camenisch is a freelance technology and business journalist. She also works as an editor and copywriter for a wide range of clients, including national magazines, small businesses and nonprofit organizations. Julia brings to oDesk a passion for empowering small businesses through the innovative use of technology.