Crowdfunding for startups - The reality of startup crowdfunding
Straying away from the traditional financial resources usually provided by banks, business angels or venture capital firms, a new method of financing has emerged in the past decade. Crowdfunding has established itself as a viable financing mechanism for startups, aiming to launch a product or scale up the business. Crowdfunding for startups is the much-needed opposite of the mainstream approach to business finance. With the growth of the internet, crowdfunding has become an increasingly popular way for startup businesses and entrepreneurs to raise funds.
The lure of crowdfunding is strong, especially for startups. Many entrepreneurs wrongly believe that completing a crowdfunding round successfully doesn’t take much – you simply put your idea in front of millions of backers and the pledges start rolling in. Unfortunately, that’s not the case. The truth is that most crowdfunding campaigns fail to meet their goal – a fact that often remains unnoticed amidst the hype and press coverage around the successful ones. According to Kickstarter, just 1 out of 3 projects ends its crowdfunding round successfully. Moreover, a large number of all projects fails to raise even a fracture of the amount needed.
If you think crowdfunding is easy, guess again: It’s definitely not. It’s actually pretty scary, because you have to be prepared to put yourself out there on display [for the public].
Jane Jensen, Pinkerton Road: A Year of Adventure
Before you jump into the deep waters of crowdfunding, you need to take some things into consideration: is crowdfunding the best options to fund your business; even if it is, what type of crowdfunding should you choose – donation, rewards, equity or lending-based? In the lines below, we’ll explore each of these questions.
Crowdfunding for startups - What to consider before crowdfunding
Before you decide to crowdfund, you need to ask yourself a set of questions, which will indicate if crowdfunding is the best option to raise finance for your startup business.
- How good is your idea – does it solve a particular problem for a specific audience?
- Does a product like yours already exist? If so, what is your USP (unique selling point) – what differentiates you from your competitors?
- Are users of similar products hungry for a better solution? Are there enough hungry users to fund your project?
- Do you have a minimum viable product (MVP)?
- How well do you know your industry and your target audience?
- Is your business plan solid?
- Have you calculated exactly how much money you need?
- Have you considered all costs related to the crowdfunding campaign – taxes, payment to the crowdfunding services, costs of rewards fulfillment?
- Are you completely certain that you can fulfill all the promises covered in your crowdfunding pitch – timeframes, rewards, quality?
- Are you ready to invest in a high-quality crowdfunding video?
- Do you have attractive rewards in mind to offer at different donation/ investment levels?
- Do you have strong marketing strategies prepared for the different stages of the crowdfunding – pre-launch, during the live campaign, post launch?
- Can you ensure that at least a couple of your personal contact will back the campaign to give it an initial push?
If you believe that you will be able to deliver on all points, you have good chances of success. If you need the opinion of a crowdfunding expert, we are here to help. You can take advantage of our crowdfunding consultations for free. Book a time with our crowdfunding experts if you are ready to discuss your idea. In the meantime, let’s explore another important startup crowdfunding questions – how to select the best type of crowdfunding for your startup business.
Crowdfunding for startups - Selecting the best crowdfunding type for your business
Crowdfunding isn’t for all projects, or projects of all sizes. With the success of crowdfunding, should a publisher of Activision’s size suddenly say, let’s go do the next Call of Duty on Kickstarter, or offer a super-long pre-sale? Not likely.
-Jordan Weisman, Shadowrun Returns
Small business startups typically go through a lifecycle of clearly defined stages. In the lines below, we will focus on the 3 main stages by outlining the key resources for each stage and defining the type of crowdfunding that’s best suited to meet these requirements. If you are not familiar with the different types of crowdfunding, we would suggest you to read our previous article before you proceed.
- Pre-startup stage
In the pre-startup stage, the entrepreneur has an idea and is considering the opportunity to build a profitable business around it. The focus here is on extensive market research, identifying the target audience, developing a strong offer that solves a particular problem for that audience. During this stage, funding is needed mainly for research, product development and testing. Taking all these factors into consideration, the best type of crowdfunding for startups at this stage is donation-based and we will give you two reasons why:
– Most of the startups in this stage don’t have a minimum viable product (MVP), financial plan and a track record. The risk at this stage is at its peak and the creator is not in a position to offer tangible or monetary rewards in return for the pledges;
– The donation-based crowdfunding is typically characterized by small individual donations and low expectations. Overall, the risk of disappointing the crowd is low. The funding targets are usually also small, but enough to move the startup to the next stage of the cycle.
- Startup stage
The transition from the pre-startup stage to the startup stage is marked by the proven feasibility of the idea and the credibility of the business model. At this point, the efforts are focused on turning the prototype into a minimum viable product and building upon the revenue model. The key concerns that the entrepreneur is facing are related to validating the product and its place within the market. During this stage, resources are typically required for large-scaled tests, to hire employees and manage operations, and to invest in establishing the product on the market. In the light of this, for the startup stage we would suggest reward-based or lending-based crowdfunding.
Let’s discuss the logic here. At this stage, you already have a viable product as well as proven early traction. Therefore, you now have credibility to offer specific rewards (pre-sales) and even monetary interest. In addition, the non-monetary benefits of these types of crowdfunding (getting estimates about the demand, receiving valuable feedback from the target audience) perfectly align with the product/ market validation.
- Growth stage
The growth stage of a startup is defined by having a profitable business with good market penetration and product validation. As the name suggests, the focus here is on fueling further growth. Therefore, the financial injection is needed to scale up the business. In this scenario, the capital required is high, which often makes equity crowdfunding the best option for this stage. With production and sales already in place, the entrepreneur is in a position to present verifiable information about the business and pitch it as an intriguing investment opportunity.
Crowdfunding for startups - Examples of crowdfunding startups
There is no better way to understand the impact of Crowdfunding for your startup than looking at those who did it and were successful at it.
Pulp – Case Study
Pulp have developed a unique app which helps people to discover their taste and sends them wine recommendations carefully tailored for them. A start-up business that sought crowdfunding to raise awareness of their brand and build a trustworthy network. The Pulp crowdfunding campaign skyrocketed to being 100% funded on day 1 and was also featured on Indiegogo’s homepage. After their crowdfunding campaign, they generated a great amount of press, receiving praises from the Sunday Times, EveningStandard and Great British Chefs. They are now preparing for the release of their new feature “My Wine ID” while still holding events for the WeWineTour, which helped them build their customer base.
Sunstone – Case Study
Sunstone Systems is a UK-based tech company focused on designing unique solar-powered solutions for a wide range of high-valued industries – from defence and oil companies to telecommunications giants. Their groundbreaking technology provides surveillance and wireless telecommunications to the most remote and harsh locations around the world, while assisting organisations in reducing their carbon footprint. With a track record of successfully delivering the desired results, Sunstone have impressed and secured an elite list of long-term clients.
The Sunstone Systems crowdfunding campaign went live with a “boom” – 67% of their target goal was already pledged during their private investment round. With such a strong start, the crowdfunding campaign was promising to be a smooth ride. The campaign had consistent momentum, reaching the £500k target on day 24. Even after the campaign was fully funded, Sunstone decided to keep the ball rolling for a couple more days until they closed at £590,960, topping their initial goal by 118%.
Dame – Case Study
Dame has created a singular reusable no carbon applicator, that works with almost all tampons and is so easy to use, clean and storable. It uses self-cleaning technology so women can enjoy the comfort of an applicator without the plastic waste. Dame crowdfunding campaign garnered the attention of most backers through their rewards options with reasonable pledge goals. Dame ended their campaign with the support of 2,251 backers which pledged £55,913. Crowdfunding helped Dame start a new discussion of the safety of environmentally aware female products and raise funds to push their brand forward. They were labelled by the press as the “period product of the 21st century” and are available for purchase on Indiegogo.
Do you need advice on how to create your crowdfunding campaign?
We can help. Drop The Crowdfunding Studio are proud partners of Crowdcube and Indiegogo. We assist ambitious businesses in communicating their ideas, products and services with outstanding crowdfunding video production, campaign design and crowdfunding marketing.
To learn more about us and our services, visit our website: drop.studio
Or book a free phone workshop today and ask us anything: how to create a successful crowdfunding campaign or how to accelerate your business from zero to fully funded.