Crowd-Funding – Start-Up Businesses Need To Take Note
Crowd funding is a game-changer for entrepreneurs the cash-strapped world over. It could be the difference between failure and success for your start-up idea. In the last two years I’ve had considerable exposure to the world of crowdfunding and have been lucky to meet a number of crowd-funding CEO’s and experts. I have seen first hand how effective it can be and not just for raising finance, but for marketing, business administration and in a host of other ways. In the piece below I’ve explored how beneficial crowd-funding could be to your start-up’s future….
My inner geeky child does cartwheels when I come across new technology or applications that change the world or the way we live.
Massive examples of world changers are how Google changed the way in which we find information; how Facebook changed the way in which we interact with our friends and family; how LinkedIn has changed the way in which business is conducted. Or my favourite of the day, how the iPhone has changed the way in which I have access to everything I need when I’m on the move.
Traditional funding is dead and gone, its with O’Leary in the grave!
Traditionally as an entrepreneur with big idea’s you would have slaved away developing your business idea, if you’re smart you’ll have created a business plan before creating your product (software or a physical hardware prototype). Then after all that hard work, you’d have to file for patents, trademarks or copyright protection if applicable. Once your business plan and some form of proof of concept are complete and ready, you may have gone and talked to your bank manager about what they could do for you – after all, for the last 6 months you’d been working flat out, and you were just about out of money.
They will offer you a loan application form in all likelihood, and perhaps a fake smile because they know that with their credit so tight and your lack of proven track record it’s unlikely “in this economy” they will loan you money. You may have explored angel investment or tried to approach Venture Capital funds. Neither would have been interested (in most, not all cases) because your business to them is un-proven. You don’t have customers yet, hell you mightn’t even have a product yet! IF your business idea and the team behind your business, interests them enough to compel them to become involved, the chances are you would have to give up a huge equity stake in the company.
And so a catch22 situation is created: You need funding to get your business up and running so you can make money, but to prove its a sound business you need a product, customers and revenues. Now you are in a state of inertia, because you don’t have customers to significantly provide market feedback on your product.
Prepare yourself for abject poverty!
I was at an entrepreneurial innovation seminar about a year ago in Dublin and one of the speakers, who is a serial entrepreneur got up and said: “For all of you in the audience today who are thinking about becoming entrepreneurs, prepare yourselves for abject poverty”
This traditional funding paradox I can only imagine has led countless entrepreneurs to abandon their dream and surrender themselves back into paid employment in order to once again pay their bills and avoid said poverty.
The good news is that the “Social Media Revolution” has fundamentally changed the world as we know it and we are only now starting to see some of the butterfly efffects. Now it’s possible to leverage your “network” to raise the capital you need to break through this inertia and get to a stage where your business is up and running and making you money. The best part of all is that in some cases this can be achieved without giving up any equity in your company.
Enter Crowd funding stage left.
What is Crowd-funding?
To explain the basic concept of how and why it works, we need to look at some numbers:
Let’s say in your (hypothetical) business plan you’ve surmised that it’s going to take you €20,000 to get setup, and get a working prototype produced. You have forecast that you are going to be able to sell 1000 units in year 1, and your product is going to sell for €40 per unit. If your forecast bears fruit you will have doubled your money and made a gross profit of €20,000 in year 1.
BUT, you still need to come up with the initial €20,000, to get the ball rolling. The odds are that your bank isn’t going to give it to you. The numbers are far too small for a VC (Venture Capital) fund to talk to you, and besides it’s much too early in the process for them. You may find an Angel investor who will look at your business plan but given that you haven’t even developed a prototype yet and you are an unknown quantity, if you can secure angel investment the price in equity will be extremely high.
With crowd funding you use a platform to list your business idea, how much investment you require and a video of you talking about what you are going to do, your product and its features/benefits. You also list the different ways in which people can get involved with funding you.
Below is an example of possible deals you could offer people willing to pledge money to fund your project:
€30 – Autographed 1st edition of the product
€50 – 2 autographed products, and a product branded t-shirt
€100 – 3 products in a hamper basket of merchandising (t-shirts, mugs, etc)
€250 – Perhaps there is a more unique or higher quality version of your product you can offer
€500 – etc etc
In the above example, you would need to find between 40 and 660 people willing to pledge an amount of money to your project. Most crowd funding platforms work on a mechanism whereby project owners get no funding unless their target milestone is reached (in our example this is €20,000). This mechanism is deliberate and is to guarantee a concept known as “The Wisdom of the Crowd” (ref: The Crowdfunding Revolution), which is there to protect funders.
Raising your funds isn’t the really powerful part!
So you’ve made your video, listed your project on a crowd funding site, worked your social media so that your friends, family, followers and fans have all given you a small investment. You’ve reached your funding milestone which means you have a green light and you can begin the real work.
That’s going to be a big day for you, and rightly so, but what a lot of entrepreneurs don’t realise is that there are two MASSIVE hidden benefits to raising your seed capital this way.
Firstly – you have now recruited an army of brand advocates for your new product. When you have completed it, you will have somewhere between 40 and 700 people itching for the chance to talk about your product favourably online. They are invested in the product, they want to see it become the massive success they already believe it will be, which is why they invested. Normally speaking it would cost you an arm and a leg to generate marketing buzz online like you will be able to create, for free, around the launch of your product.
Secondly – the exact moment you hit that funding milestone and you have a “crowd” of people who have voted with their wallets (and purses!) that they think your product is awesome, something almost magical happens. At the exact same moment, VC funds and Angel investors will sit up and pay attention to the opportunity you now embody. You have not only just gotten funded, you’ve also achieved market validation, in principle at least!
Have you ever considered using crowd funding to get a business idea off the ground? What platforms did you try?