Do you have a great idea for a business, but you don't have the capital to make it happen? Is the concept for the next greatest product in your head, but you lack the resources to see that design to its fruition? Imagine if you could harness the power of social networking and let thousands, or even millions of people contribute a few dollars to your idea. Then imagine watching that concept soar.
That's the power of crowdfunding. In the older, more traditional model of doing business, an entrepreneur comes up with an idea, after which they put together a presentation. They find a deep-pocketed investor to pitch it to, and hope the investor can share the vision enough to commit to the level the entrepreneur needs. This often requires pledges into the hundreds of thousands of dollars. Sure, this method works; it's the way Uber, the upscale taxi service started, and Zappos, the shoe delivery service turned pop culture phenomenon as well. It's also helped many other successful endeavors.
Yet not everyone can secure the attention of an investor that can sink the required amount of money into your project. And it starts looking less attractive when that investor is going to want to see a return, understandable as that might be. When you start turning a profit, you'll want to be keeping every one of your hard earned drachmas for yourself!
Enter the concept of crowdfunding, which turns this model on its head. Instead of seeking large contributions from a few people, crowdfunding seeks modest contributions from larger numbers of people. There are a large number of dedicated crowdfunding sites, such as Kickstarter, Indiegogo, Crowdfunder, and Fundly, to name a very few. These sites typically work in concert with social networking sites so that the aid of friends and family can easily be solicited. When your investors contribute to the project, they may be making altruistic donations, prepaying for a product or service, or investing for a potential future ROI.
And those contribution dollars can add up quickly. Take the Veronica Mars film project, put up on Kickstarter by film producer Rob Thomas after his three-year run TV series of the same name was cancelled. Thomas wrote a film script to conclude the series, and pitched it to major film studios. It was declined.
When Thomas created his Kickstarter page, he set a goal: He needed $2 million to make the film. That goal was met within ten hours of the page being posted. In less than half a day.
Over 30 days, which was the entire period of funding for Thomas' project, over $5.7 million dollars was raised. The movie was released on March 14, 2014.
Imagine now what you can do with your project if you put it up on a crowdfunding site and publicize it properly.
How to Motivate People to Give
One good motivator for crowdfunding projects is that of rewards. For some people, it's enough to get in on the "ground floor" of a project, or to make an altruistic donation. Sometimes seeing the final project itself is enough. Others would like to see some sort of return on their investment. Many crowdfunding platforms (Kickstarter included) allow you to offer different rewards for higher levels of support. With regards to the Veronica Mars project, if you donated $10, you'd get a copy of the movie's shooting script in PDF form. If you gave $35, you'd get that plus t-shirt with your choice of a few different Veronica Mars logos. At $50, you got all the previous tiers plus a physical DVD of the movie. And if you donated $1000 to the cause, you'd score two tickets to the gala premiere of the movie in either Los Angeles or New York. Both were attended by the creators and cast of the movie, and included tickets to the after-party.
It's interesting to note, however, that many people opted for no physical reward. Instead, they chose to funnel any resources that would be diverted towards such a reward back into the project, thus making their donation completely altruistic.
That's a Creative Project — What about My Idea?
Thus far, crowdfunding has enjoyed great success in non-creative endeavors as well. Bitvore is a software platform that raised $4.5 million (well over their goal of $3.25 million) to provide a hyper-focused version of Google Alerts, gathering intelligence for business. The Owlet Smart Sock raised over $1.8 million to make a device that wirelessly transmits data about a baby's oxygen levels, heart rate and other important health information to Mom and Dad's smartphones. Other companies have been successfully funded as well, from innovative photo-sharing platforms to regional microbreweries to music discovery platforms.
The possibilities are nearly endless. All you have to do is have that idea, then get people to believe in it enough to give you $5 or $10 towards it. Get enough people to do that, and you're golden.
What Do I Need to Get Started With Crowdfunding?
It really depends on which crowdfunding site you pick, as the requirements vary from one to the other. Crowdfunder, for example, works with early-stage startup companies and more mature enterprises in the raising seed stage — Series-A and Series-B funding. They do not currently offer assistance to inception stage companies, or those without a validated business model.
In terms of documents, you'll need the following:
• Executive Summary
• Term Sheet
• Investor Pitch Deck
The next step is to create and activate your Crowdfunding campaign. Make sure it is discoverable to the site's network of investors, as you never know who might stumble upon your project and think it's interesting enough to donate to. Then link it to Facebook, LinkedIn and any other social networking sites you're on, and start promoting your campaign. The more visibility your campaign has, the more funding you'll acquire.
How do These Sites Make Their Money?
One thing to be aware of is that different crowdfunding sites have different terms of payment. Most charge fees between 4.75% and 9%. Similarly, processing fees are added to most transactions on the sites, ranging from 2.9% + 30 cents (50 cents in some cases) to an additional 4.9%. Some platforms charge an additional fee to process credit cards.
Clearly, crowdfunding is a viable model for starting a business, even as crowdsourcing is for maintaining a project. You have but to remember that less is more, in this case. And it's key to understand your audience; to pitch your company correctly; and to have a solid business plan.
Got all that? Now it's time to watch your ideas soar.