Cash from the Crowd

How to crowdfund your ideas and gain fans for your success

Sally Outlaw

• Publisher: Entrepreneur Press
• Year: 2013
• eBook ISBN: 9781613082607
• Topic: Business
• Subtopic: Finance
• Index: Business

CROWDFUNDING–raising capital in small increments from a large number of people– will inject over $5 billion into the economy this year and is becoming a powerful way to fund new ideas and generate buzz for new products and ventures. Although crowdfunding has the potential to be an amazing boost to entrepreneurs, only 40% of projects succeed in reaching their funding goal. Crowdfunding platform founder Sally Outlaw reveals how entrepreneurs can shift these odds in their favor.
Want to know which marketing efforts result in a 35% higher rate of contributions? OR, what is the best time and day to launch or promote a campaign? The answers to these and more are here.

chapter 1

CROWDFUNDING EXPLAINED

Reality Check: Having a good idea is not enough—you
have to convince the crowd.

While the term “crowdfunding” is seemingly self-explanatory—funding from a crowd—it can also be misleading and might in part be to blame for why the majority of funding campaigns fail. For the most part, crowds are not roaming these funding platforms looking for random projects to support (but yes, you can attract strangers to your campaign by employing the tips and techniques covered in this book). For crowdfunding to work, you need a combination of elements, including a great idea, an engaged following, compelling thank-you perks, and several months that you can dedicate to your campaign.

Crowdfunding is where you raise money by asking the crowd to directly fund your idea or venture in small increments (e.g., $25 or $50 per person), and then pool this money to meet a funding goal. You post your idea on a crowdfunding website and use its built-in templates to create your presentation, including things like a funding goal and fundraising timeline, an explanatory video, and thank-you perks you offer as incentives to contribute, and use the provided social media tools to promote your posted project to the world. Success requires a strong community from which you can draw support, whether you are lucky enough to start with one or must build one before you begin your campaign. Project owners must take an active role in running what is truly a full-fledged fundraising campaign, including consistently promoting their project page via every channel imaginable. Think politics—do you see those campaign ads just once?

History and Overview

Crowdfunding is not new; it’s been successfully used by politicians soliciting campaign donations and by social organizations raising money to meet the needs of victims of tragedies. Long before technologies and social media advanced, publisher Joseph Pulitzer used crowdfunding in 1885 to raise the $100,000 needed to complete payment of the pedestal of the Statue of Liberty. When efforts to raise $250,000 for the granite base fell short, Mr. Pulitzer used his newspaper, The New York World, to solicit donations from 160,000 readers (with each giving a dollar or two) and got the capital needed to complete the task. This great demonstration of the power of the crowd to come together to make something happen is on display every day in the New York Harbor as a reminder of what we can do when we each give just a little of what we have to support each other.

Technology has made connecting with each other ubiquitous and introduced easy online payments, and as a result, a robust crowdfunding ecosystem is developing. When we started our crowdfunding website peerbackers.com, there were only a handful of active funding platforms; now there are hundreds of sites. Third-party providers supporting these platforms are quickly expanding as well, offering services such as reward fulfillment, marketplaces for completed crowdfunded products, background checks, and industry trade associations.

We have seen thousands of success stories emerge from the crowdfunding ecosystem, from the 3D printing pen that started with a goal of $30,000 on Kickstarter and ended with well over $2 million, to the more modest (and more customary) achievements of entrepreneurs like Margot Broom, who raised the $10,000 she needed on peerbackers to move her growing yoga studio into a new space (see Figure 1.1). Crowdfunding is not only a viable and relatively rapid way to get the financing you need for your venture, it is also an exciting way to develop your business or products in collaboration with those who back you.

NOT ALL CROWDFUNDING IS ONLINE

There are an increasing number of off-line events that are adding a live crowdfunding component. For example, Jason Calacanis’s annual LAUNCH Festival, where startups pitch for investment, included a real-time, live crowdfunding element this year. Potential investors could commit virtual dollars via a phone app during the entrepreneur’s onstage pitch. The investors could then follow up post-pitch to discuss their interest. Although any audience member could virtually “invest,” due to SEC regulations, only accredited investors could actually follow-up with real dollars.

The advantage over online crowdfunding is exclusivity and engagement. Investors attending a live event have exclusive access to the investment opportunity; online, anyone with internet access can discover an emerging venture. And meeting entrepreneurs in person—seeing their energy, having them answer questions on the fly—can go a long way to building comfort and strengthening the connection between entrepreneur and investor.

Live events comprise a small share of the crowdfunding ecosystem, but the trend is expected to grow. You can host your own live crowdfunding event by throwing a campaign launch party for your friends, family, and early supporters. Whether they donate on or offline during the party, it’s a great way to make them feel an intimate part of the campaign!

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Figure 1.1 Margot Broom’s Crowdfunding Campaign Page

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There is a lot more disruption in the financing world to come as we all prepare for the full implementation of the April, 2012 JOBS (Jump-start Our Business) Act in which crowdfunding for equity was approved. For the first time, all Americans, no matter their socio-economic status, will have the right to invest in private companies—in other words, buy shares in those companies. Until this new legislation, only “accredited investors”—individuals with annual income of $200,000 or net worth of $1,000,000 or more—had this privilege. Now, everyday Americans will be allowed to buy shares in promising startups through crowdfunding platforms. I cannot understate the enormity of this development for small businesses. If even 1 percent of the investments that Americans currently hold are moved to these small businesses via crowdfunding platforms, it will represent $300 billion moving into the hands of dedicated entrepreneurs. This is certainly one way to jump-start our economy again!

Benefits Beyond Capital

Even though attracting capital is usually the primary reason people crowdfund, there are additional benefits that go beyond funding. Whenever I bet even $10 on a horserace, I want very much to see that horse cross over the finish line first. Imagine how that translates into a willingness to evangelize by those who bet on your business. Those who back your campaign feel invested in your success and are often happy to take an active role in sharing your story and supporting your growing business.

Keep these additional advantages in mind when considering if crowdfunding is right for you:

■ Brand awareness. Your campaign can build brand awareness as you spread the word about your product or venture. Only a portion of those who see your campaign will back you, but everyone who sees your campaign may remember your product or share your page.

■ Customer attainment. In addition to becoming long-term customers, those who do back you can be evangelists for your brand as they talk up your product and tout their role in bringing it to life.

■ Market testing. Crowdfunding has turned the product manufacturing process on its head. Under the old, yet still prevalent model, a product designer sells his or her product to store buyers who in turn order inventory and hope for sales. Through crowdfunding, product designers can now test-market their products through pre-sales.

■ Product feedback. I’ve heard from many crowdfunding entrepreneurs that the specific input they received from backers on improvements or desired product features was more valuable than the capital.

■ Skill-sharpening. You will strengthen your social media and marketing skills, and increase your fans and followers.

So keep in mind that dollars are just one aspect of the value you can derive from crowdfunding.

If It Sounds Too Good to Be True, It Probably Is

For all the positive implications of crowdfunding, there is a downside. This financing approach is not a good fit for every business owner, and there have been numerous horror stories of campaign owners failing to fulfill their campaign promises, such as not shipping their promised rewards. The majority of these failures have been as a result of things like poor planning, under-budgeting, unreliable manufacturers, and not due to intentional fraud. But they can still damage the entrepreneur’s reputation and deliver a crushing blow to an emerging business. There are stories in the industry of project creators being sued by backers and even declaring bankruptcy due to the fallout from failed projects. Taking money from the public isn’t something to enter into lightly.

GAINED CONFIDENCE

“I just solidified a partnership that I think will make my business truly scalable with high growth potential. I don’t think I would have had the confidence a year ago to approach this person with my partnership idea, but after mastering “the fearless ask” with my peerbackers campaign, I am so glad I followed through.”

—Tara Coles, raised $3,700 for ClusterArt,
an online platform for turning memories into one of a kind art.

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Additionally, given that crowdfunding is by its very nature a public event, failing to meet your campaign goal can also have a negative impact on your brand. This is particularly true if you have hopes of raising angel or venture capital; investors may read this missed goal as a lack of interest in your offering as well as a lack of marketing prowess on your part.

The last area where some project owners express concern is in protecting their ideas, especially when they are inventing a new product. Although I personally believe that it is not really the idea that is of value but the implementation of that idea, there’s certainly a risk in sharing the details of a yet-to-be-produced product. I would encourage all entrepreneurs who are promoting a new product to at least take the step of filing a provisional patent before posting publicly for capital.

While I’m excited about the democratization of the flow of capital to small businesses, crowdfunding is not a total panacea. Even though we all hear of wildly successful campaigns that raise millions of dollars, please note that these are the exception to the rule. Case in point: Out of the 100,000-plus projects posted on Kickstarter, less than 50 as of this writing have hit $1 million or more. The average raised throughout the entire industry across all reward-based crowdfunding platforms—Kickstarter included—is just over $7,000 per project.

Additionally, getting money from the crowd rather than angel investors and venture capitalist or by joining incubators, can also mean that you miss out on valuable advice, mentorship, and even the rigors of creating a business plan, all of which would go hand-in-hand with securing more traditional financing. So if you do choose the crowdfunding route, be sure to outline at least a minimal business plan and seek advisors who can guide you. One of these advisors may possibly even emerge from the crowd who backs your project!

Convincing the Crowd

You’ll have to passionately and creatively sell your idea to your crowdfunding page viewers. Seeing a crowdfunding video of two co-founders knowledgeably and enthusiastically demonstrating their product beats watching an entrepreneur sitting in their kitchen telling me about their cool idea. If your project or venture is particularly meaningful—it would have a social impact or be a change-maker in some way—it may be easier to provoke a stronger emotional bond with viewers and entice them to back you. One of our clients ran a coffee roasting venture called Second Chance Coffee company, and although his crowdfunding campaign told us about his great, hand-roasted coffee, he also emphasized that his company employs ex-prisoners who need a second chance at life. As in the coffee example, if you have passion and purpose, and can enthusiastically communicate the problem that your business is solving, you are ripe for crowdfunding!

I FEEL YOUR PAIN

When my business partner and I sought out to launch peerbackers, I thought it was only fair that I personally go through the process of crowdfunding if I was going to be in this business. How could I fully understand the process, or advise others, if I had not run a campaign myself? When I crowdfunded, I did some things right ... and some things wrong. I was a newbie, after all!

What I did right was to frame my message to communicate that I was asking for backers to help me help others, rather than fund me, per se. I made it clear that by supporting my launch of a crowdfunding platform for entrepreneurs, contributors...

Table of contents

• Title Page
• Acknowledgments
• Preface
• Introduction
• chapter 1 - CROWDFUNDING EXPLAINED
• chapter 2 - TYPES OF CROWDFUNDING
• chapter 3 - PREPARING A SUCCESSFUL CROWDFUNDING CAMPAIGN
• chapter 4 - THE ART OF THE ASK (CAMPAIGN LAUNCH)
• chapter 5 - KEEPING YOUR BACKERS HAPPY
• chapter 6 - EQUITY OFFERS–SHARE IN THE FUN(D)
• conclusion
• appendix a - CROWDFUNDING TOOLKIT
• appendix b - FREQUENTLY ASKED QUESTIONS
• ABOUT THE AUTHOR
• Teaser chapter
• Subscribe to Entrepreneur Magazine
• Copyright Page