Q: “Dude – I am just finishing up my video for my Kickstarter. I am going to post it in a few days and I figure that I will get the $5,000 I need for my project by next week. Crowdfunding is so amazing!”
A: That is the essence of a conversation I had with a friend of mine last week. I was sorry to tell him that crowdfunding doesn’t really work that way, though many folks mistakenly think that it does.
Indeed, there is some magical thinking out there that goes something like this: ‘All I have to do is launch a campaign on Kickstarter, post a video, and a bunch of strangers will fall in love with my idea and will fund my business / project for free.’
First, let’s be clear about what crowdfunding is. Traditionally, there have been two ways to fund a business from outside sources:
- Debt financing is what it sounds like – you take on debt to finance the business. The debt becomes part of your operating expenses and will need to be paid back in due course.
- Equity financing is where you sell a piece of the business to an outside investor for some capital. Here, while you won’t be taking on any debt, you will have a different burden – a partner or partners in the business.
The beauty of what is called “rewards-based crowdfunding” (as opposed to equity crowdfunding, a different animal for a different day) is that it created a third process for getting a business funded. Instead of taking on debt or selling equity, you give someone a reward or benefit of your business in exchange for some money.
Example: Last year, my podcast engineer Jonah wanted to go into the studio and record his first album. That was going to cost him about $10K. So he launched a crowdfunding campaign. In exchange for $50, people were to receive Jonah’s album when it got finished. In exchange for $100, they got an autographed album and liner notes. And $250 got you into the launch party. It took a ton of effort on his part, but Jonah eventually did get his dream funded and now has that album under his belt.
There are two things in particular to notice about Jonah’s story. The first is that it took “a ton of effort.” That is the part most folks don’t get. A crowdfunding campaign is like any other marketing effort in that you typically get out of it what you put into it. My musical friend networked and marketed and emailed and social media’ed for three months before he launched his Kickstarter, and then even more during the campaign.
The second thing is that a rewards-based crowdfunding really serves two functions. In the case of Jonah, it was a way to fund his project. But an equally important, and sometimes overlooked aspect, is that it is also a great way to inexpensively test-market a product. You can use your new product as the reward and thereby use your crowdfunding campaign as a test to see if there really is demand for what you are selling.
For example, my colleague Stone Melet invented an affordable, useful product that makes ironing clothes easy, and almost (dare I say) fun. The traditional way he might have brought his invention to makerket would have been to make a prototype, get backers, produce 10,000 units, get it on some store shelves, launch, test, repeat. Instead, today, he is using Kickstarter. Is his EZ Press as cool and useful as he hopes? The crowd will decide.
If you think crowdfunding might be right for you, I would encourage you to check out the many platforms that are available. Kickstarter and Indiegogo are the big kids on the block, but they have recently been joined by a slew of other sites, many grouped by industry. A search will help you discover which one is right for you.
So there you have it. Crowdfunding is in fact a powerful new option in your funding toolkit, but as with anything else in business, it will take time and work to get it right.
But once you do, watch out. The crowd can be a powerful thing.
Today’s tip: I recently hosted a roundtable discussion for Dun & Bradstreet Credibility about crowdfunding. If you want to learn more and hear our in-depth discussion, you can watch it here.