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Is crowdfunding an option for my business?

posted May 29, 2013, 11:13 AM by Andrew Manzo   [ updated Jun 5, 2013, 9:43 AM ]

I received a great question from one of my subscribers the other day.

Is crowdfunding an option for my business? It seems that most of the crowdfunding is for artsy, music or non-profit projects. Would crowdfunding be right for me and my company?

Great question. Here's my answer.

    The biggest Crowdfunding platform right now is Kickstarter.com. And the majority of projects on Kickstarter are artsy, music or non-profit projects or companies like you mentioned. However, Kickstarter has also been successfully used by many for-profit business ventures like Diaspora ($200K+ raised) and Glif ($120K+ raised) who both raised a lot of money. Also, another key Crowdfunding platform, RocketHub.com, does not favor artsy/music/non-profit projects as much.

    With regards to the amount of money you can raise via Crowdfunding, $250,000 is too much to ask for. That's not to say you can't raise $250,000, but it's too much to ask for. Consider that both Glif and Diaspora set their goals at only $10,000. The key is this -- Crowdfunding raises all or nothing, and you can go over. So if you set your funding goal at $10,000 and raise $99,000, you keep all $99,000. But if you set your funding goal at $100,000 and only raise $99,000, you get nothing.

    One of the keys to Crowdfunding success is to show your donors that you can create value with just the dollars they give you. For example, you don't want to ask for money just for research purposes. Ideally, with the money, you can create some type of real product or service. And also ideally, you can offer that product or service as a "reward" to those who donate to you.

    Glif is a great example of this. Glif's founders came up with an idea for an iPhone stand. They created a prototype, but had no money to actually build it and distribute it. So, via Crowdfunding, they raised money. And importantly, as a reward for donors contributing $20 or more, the donors would receive the Glif product when it was ready for sale.

    So, in essence, Glif used Crowdfunding to pre-sell their product to a mass audience they found online, and they used the proceeds to actually build the product. (Note that in Crowdfunding Formula, we go through many Crowdfunding techniques to raise a lot more dollars than just the dollars from pre-sales).

    So, to reiterate, the ideal time to use Crowdfunding is when you can accomplish something tangible (e.g., build a sellable product or service) with just the Crowdfunding dollars you raise. That's NOT to say that this will be your best product or service (e.g., the eventual product you create with all the bells and whistles). And it's not to say that you will not need other funding to grow your business (since you clearly will).

    So, in this case (the question that was posed above), when the entrepreneur needs $250,000, he could use Crowdfunding to raise money (most likely a bit less than $250,000), and achieve key milestones with that funding (e.g., building a sellable product or service, getting customers, etc.). 

    At the same time, or just after completing the Crowdfunding raise, the entrepreneur should seek other funding sources like angel investors or bank loans. The beauty is that with the milestones accomplished from the Crowdfunding raise, the entrepreneur's chances of raising funding from angels, banks and other sources skyrockets (because when you show these funding sources that you have completed milestones, they view you as a less risky investment).