|What is crowdfunding?
CD: Crowdfunding provides a means for people to gather donations from individuals–usually over the Internet–for the purpose of funding their projects. For inventors, this offers an option to quickly evaluate the marketplace viability of their new product idea, as well as provide funding to fast-track their working prototypes to products.
Crowdfunding is essentially like having the opportunity to get free money. It is not a loan and these donors, also known as backers or contributors, do not own equity in your business. Equity crowdfunding will be an option down the road in the U.S., after some government hurdles are cleared. However, here we are discussing non-equity crowdfunding through websites, such as Kickstarter.
AK: Why would someone want to donate money to an inventor?
CD: People want to help other folks have the opportunity to achieve their dreams especially in a tough economy where it is challenging, if not impossible, to get a loan.
Additionally, for inventors or anyone developing products, the costs for do-it-yourself manufacturing using tools such as 3D printers are rapidly decreasing. When you combine this with the increasing availability of supportive environments, like do-it-yourself makerspaces with machining and 3D prototyping equipment, backers understand that there are some amazing possibilities for product development within reach now for relatively small amounts of money. By the way, local makerspaces can be found by checking resources such as Make Magazine’s Maker Community Groups (http://makezine.com/groups/index.csp), or websites like Makerspace (http://makerspace.com/makerspace-directory) or The Maker Map (http://themakermap.com/).
Speaking as someone who was involved in marketing and sales for Xerox Corporation during the desktop publishing revolution, it is very exciting to see product developers gain the ability to direct their manufacturing process.
AK: How does the crowdfunding process work?
CD: In a nutshell, you set up a campaign on the crowdfunding site. You describe why you and your project deserve the money, generally using video (under three minutes) and text. You select a project category, which for inventors might be design or technology. You define a fundraising goal. You offer thank you gifts, known as rewards or perks, if people pledge to donate money at certain levels. When the campaign begins, you then promote the heck out of it. By the end of the campaign (typically 30 to 60 days), you hopefully have raised all the money you need. (I will say more about promotion and calculating your fundraising goal in one of our next few sessions.)
Generally, backers’ credit cards are not charged until the campaign is over. In some cases, it may take a couple of weeks before you actually receive the money, with fees deducted. After the campaign is over, you will also receive the backer’s contact information. After that, the real work begins of fulfilling all of the rewards, while simultaneously starting your new business.
This description is, of course, a vast oversimplification but it captures the gist of the process.
Note that for some crowdfunding sites, such as Kickstarter, you have to submit your project for review upfront. If it is accepted, you can then begin your campaign. If not accepted, you can try moving your project to a different crowdfunding site, such as the ones I mentioned earlier.
AK: What are the fees involved? Also, what is fixed and flexible fundraising?
CD: Generally speaking, the fees are based on which of two fundraising options the inventor chooses upfront, which cannot be changed once the campaign starts:
Additionally, there is a credit card processing fee charged by a payment site, such as Paypal or Amazon.com. That vendor collects a credit card processing fee, currently ranging between 2 to 5%, depending on which payment vendor the crowdfunding site has chosen.
Therefore, the total in fees ranges from approximately 6 to 14% of the pledged money.
AK: Why would anyone choose the fixed fundraising model?
CD: Ultimately, you have to determine which fundraising option best meets the needs of your business. For example, if you feel that you cannot start your business financially unless you reach your fundraising goal, then having part of the money does you no good and you might as well choose the fixed option. Or, if you don’t reach the fixed funding level that might indicate that there is not enough market interest in this product idea at this point in time.
Obviously, since Kickstarter is a popular crowdfunding site and only uses the all-or-nothing model, there are enough people who don’t consider it an obstacle.
AK: What are the odds of reaching your fundraising goal?
CD: This is affected by a wide variety of factors, which I will discuss shortly. However, based on the statistics I’ve come across so far, it appears that approximately 43 to 46% of projects are fully funded. Obviously, this means that less than 50% of projects do not reach their goals.
On the other hand, some projects, especially technology-related projects like the Pebble E-Paper Watch (which raised over $10 million), can spectacularly overachieve their goals.
AK: Cheryl, the focus of your business is marketing. How does that come into play in crowdfunding?
CD: Marketing is critical to the crowdfunding process in two ways. The first is directly tied to your fundraising efforts. If you are going to have a shot at reaching your fundraising goal, before you begin your campaign, you need to figure out:
Second, assuming you actually want to manage a business full-time at the end of the campaign (as opposed to starting work on your next idea), you need to consider the issues I just mentioned but on a much broader scale. In other words, how will you continue to market beyond the campaign? You need to think this through before beginning your crowdfunding campaign. Why? If you reach or overachieve your fundraising goal at the end of your crowdfunding campaign, you are then almost immediately in business and you need to be ready to hit the ground running.
As a long-time member of the Inventors Alliance association, which you lead here in Silicon Valley, I understand the passion and intensity inventors have. With that said, running a business is a different skill set. Some inventors, like you and Stephen Key, have the ability to step back and evaluate their products objectively in terms of what can be cost-effectively marketed. If an inventor is unable to do that, then he or she may want to find some business mentors, advisors, and/or team members, before they fast-track themselves into a business venture.