How to make crowdfunding work for fundraiser and contributors
Posted May 11, 2016
Apparently, the success of asking strangers for money all depends on how you’re doing the asking.
If you’ve turned to the Internet to raise funds through crowdfunding, you’re not alone. Studies show crowdfunding — with more than $34 billion raised in 2015 — will soon pass venture capital in overall funding generated.
However popular, crowdfunding involves more than a “build it and they will come” mentality. Those who have used the process successfully stress the value of selecting the right funding platform, ongoing contact with backers and a commitment to maximum effort before and after the campaign.
“You need to work your campaign every day,” said Nick Ondrako, founder of HIBR, an online lifestyle bedding company that used Kickstarter to raise startup funds. “Investors are intrigued by innovative products, but are more likely to back your project if you look professional.”
By most accounts, modern-day crowdfunding began in 1997 when the British rock band Marillion solicited donations from fans to underwrite a tour. That example captures the essence of crowdfunding — rather than targeting one or a few financial backers, crowdfunding relys on a large number of investors, many of whom pony up only modest amounts of money. According to the website Fundable, the average successful crowdfunding effort checks in at just $7,000, often geared to launching a particular product or service.
Business and entrepreneurship are the most popular crowdfunding categories, collecting some $6.7 billion in 2014 — more than 41.3 percent of total crowdfunding volume. Social causes, films and performing arts, real estate and music and recording arts are also common crowdfunding goals.
There are any number of crowdfunding websites that serve as meeting points for fundraisers and prospective backers, including Kickstarter, GoFundme, IndieGogo and Crowdrise (focused on charitable giving.)
“Use a crowdfunding platform specific to your industry,” said Brooke Cheishvili of EquityEats, a restaurant-specific crowdfunding company. “Kickstarter and Indiegogo are the big crowdfunding companies but they are not a one-size-fits-all model. You want a platform that understands your business.”
For the fundraiser
The essence of a crowdfunding campaign involves a pitch, often incorporating a video and other material, explaining the idea and why prospective investors should take an interest. From there, investors can participate in a number of ways, from promising to buy some of a company’s first products or acquiring an equity position.
“We built our campaign for our wallet idea, and backers were basically pre-ordering our wallets. If they pledged $42, they got a wallet,” said Jason Angelini of American Bench Craft. “The benefit to backers is that they receive our first production run, and the price they paid is significantly reduced from the expected full retail price — $74.”
But even the most attractive product or idea faces an uphill climb with crowdfunding. For instance, IndieGogo estimates that nine out of 10 campaigns fall short of their identified funding goals. One common reason for failure is inadequate legwork prior to launching the fundraising campaign.
“Test your product or idea first. Run it by people you know who can be objective,” said Eric Black of Lyla Tov Monsters, which manufactures toy “monsters” to help children feel safe at night. “If you have a product that you can make in limited amounts and sell at local craft fairs, boutiques or other vending opportunities, get out there and make sure people are interested in buying what you have to offer.”
Also, use social media to build interest and momentum.
“Don't start your fundraising campaign until you have established a social media following. I made sure that we had over 500 ‘likes’ on Facebook before we launched,” said Black. “Those followers helped us get the word out about our campaign and bring in the majority of our funders.”
As crowdfunding has grown and matured, the days of offering backers a minor trinket for their support are over. “Actually offer a return to your investors. The old model of crowdfunding where you get a high five and a T-shirt will not last,” said Ondrako. “Consumers want to earn a return as a result of investing in your business.”
After receiving their support, maintain ongoing contact with backers.
“Stay in constant communication with your potential investors,” said Cheishvili. “Making sure they know why you are offering this opportunity to them is very important.”
A potential red flag for those in the crowd of funders is a shoddy or amateurish video or other elements of the overall pitch — a sign that the fundraiser may be unable to deliver what’s been promised.
“If the goal is high enough, most places can justify spending money on getting a professional video made,” said Nenad Cuk, marketing manager of ThoughtLab, a custom website design company. “Having a professional video to show builds trust with the users viewing your page and this makes them more likely to give — you look like you have your thing together.”
That professionalism should continue in the ongoing contact with investors, particularly on the project's status.
“Investors should be looking for open communication and progress,” said Ondrako.
Investors should also pay attention to the tenor of those communications, listening for message that hint at desperation.
“Consumers want to support businesses that they believe in. They want to hear why your business is succeeding and how they can be a part of your family,” said Cheishvili. “Campaigns that scream ‘Help us or we are going out of business,’ usually fail.”
Jeff Wuorio lives in Southern Maine, where he covers personal finance and entrepreneurship. He may be reached at email@example.com, and his website is at jeffwuorio.com.