One of the most successful Crowdfunding campaigns last year was the “Pebble” smartwatch Kickstarter campaign, which was launched on April 11th 2012. For those of you not familiar with the smartwatch, it wirelessly connects Android and iPhone smartphones to display email, calendar alerts, social media updates, run apps like GPS and, yes, it even tells the time.
The “Pebble” reward based Crowdfunding campaign was an outstanding success. By May 18th 2012 the company raised $10.2 million from approximately 70,000 backers. Astonishingly $1 million was reeled in during the first 28 hours of the campaign and the rewards were various watch offerings which generated pre-sale orders of the watch proving market demand. The founder’s also used the campaign for product validation – testing colour choices and feature refinements.
In addition, another successful Crowdfunding campaign was for Spark Core: Wi-Fi for Everything. The Spark Core is an Arduino-compatible, Wi-Fi enabled, cloud-powered development platform that makes creating internet-connected hardware a breeze. This Crowdfunding campaign ran from May 2, 2013 to June 1, 2013 and gained 5,549 backers and raised $567,968 with a goal of only $10,000.
Certainly Crowdfunding was right for Pebble and Spark Core and provided many benefits beyond the capital raised. However, how do you determine if reward-based Crowdfunding is right for you?
Here are some points for and against launching a Crowdfunding campaign that will help you decide if it makes sense for you and your company.
1. Access to Capital: Well this point is a no brainer; but there is more to it than just raising money. For those companies that cannot get funding from traditional sources such as banks or angel investors, Crowdfunding is a viable alternative – if, of course, the crowd sees merit in backing the project.
In addition as the relationship between backers and the company is through reward based incentives, in exchange for money, companies do not have to give up equity; therefore, there is a non-dilutive effect on share structures. This means you don’t have to give up equity in your company.
By having cash, start-ups can do more by way of risk reduction and in validating their ventures before they tap into subsequent equity or debt capital sources. This allows for a complementary pathway along the capital sourcing value chain.
Crowdfunding campaigns take less time than traditional fundraising activities. Generally a campaign is limited to a maximum of ninety days. Therefore, there are no protracted prospecting, pitching, due diligence and negotiation cycles which is often the case when dealing with banks, Angels or VCs, perhaps even family members for that matter. Companies can get their money faster.
2. Validates Your Company and Product: As the rewards usually are product based, there is ample opportunity to demonstrate whether the offering is attractive to a company’s target audience and, thus, providing traction through pre-sales. As with the Pebble example above, companies can use the process to infuse the customer’s voice into product design decisions. This feedback is worth its weight in gold, saving both time and money, in the product development process.
3. Establishes a Customer base: We know that getting the first customer is difficult; but when your customer base looks like a ground swell of evangelists that can take your project viral – your customers become your quasi sales force. Furthermore, entrepreneurs can get a rare insight into who is buying their offering and find out why the offering resonates with them. This permits entrepreneurs to create compelling tactics to expand their respective customer acquisition strategies. It also allows for experimentation by finding out what works and doesn’t work from a customer acquisition perspective.
4. Unique Marketing Channel: Crowdfunding forces the entrepreneur to be organized in his or her marketing activities by leveraging social media, public relations, a website presence, list creation, videos and the delivery of a multitude of passionate communications. It forces messaging to be clear, concise and easily understood by the target audience to get an immediate call for action. Marketing exposure is what it’s all about and we know that sometimes early stage companies are not very good at doing this.
1. It’s Sometimes All or Nothing: In planning a Crowdfunding campaign an entrepreneur must decide the fund raising goal – that is how much money to raise through the Crowdfunding campaign. This is an important step. Why? Because many CF platforms stipulate that the funds raised from your campaign are only released when 100% or more of the funding goal is reached. Therefore, in these circumstances, it is an “all or nothing” proposition. Although there isn’t a formal penalty for not reaching the funding goal, there is still the disappointment and the loss of time and effort which has to be considered.
2. IP at Risk: Some argue that putting your Crowdfunding project on the Internet can expose a company to IP theft through the replication of the company’s concept or prototype design by a competitor. If your product is unique and this could threaten your company’s viability, then it is wise not to pursue Crowdfunding.
Yet, if this did happen, the crowd is able to see that your company was first with the idea and if a competitive brand comes to the market with a similar product the ill will this can create can backfire on a competitor. Of course, the best way to proceed is to register provisional patents, as a date and time stamp, before proceeding with a Crowdfunding campaign. This makes good sense in any event.
Sometimes by putting a Crowdfunding project out there, companies can establish interesting relationships with people or partners which would not have been possible otherwise. Opportunities can surface through serendipity with a little bit of boldness.
3. Not Right for Business to Business Products: By reviewing a litany of Crowdfunding projects featured on numerous CF platforms, it is clear to me that those projects that successfully receive funds are predominately those in business to consumer oriented sectors rather than business to business sectors.
Remember we are leveraging the benefits of the Crowd. And, Crowds represent a collection of individuals acting from their own personal belief systems and self-interests. They give to a Crowdfunding campaign because they might think it is cool, meaningful, worthy or resonates with their passion. This is in opposition to a collection of like-minded businesses which may have conflicting corporate objectives and represent more depersonalized motivations.
4. Simple not complicated: A Crowdfunding project should be simple enough for consumers to understand and allow them to get behind the Crowdfunding project. Complicated or overly technical projects can be difficult for a lay person to understand leaving them on the side line scratching their heads looking for a reason to support or back a project.
5. Large Capital Needs: Pebble scored big with their Crowdfunding campaign. However, this bonanza is not the norm for the majority of campaigns. Crowdfunding is ideal for seed capital rounds and by that I mean where capital needs are not in the millions of dollars but more in the less than $100,000 range. If your business needs a lot of capital rethink your capital raising strategy and look to more traditional sources.
On the other hand, Crowdfunding could very well be used as part of an overall capital raise strategy as it is just one more arrow in an entrepreneur’s capital raising quiver.
6. Lengthy R&D Projects: If your business is in the type of sector where lengthy R&D cycles are the norm (i.e., years not months), Crowdfunding is not for you. Backers want to see venture results quickly and be a part of the success within a short timeframe.