Crowdfunding for Startups Primer
When a great many people come together, each putting a small sum forward, thousands worth of financing can be gained. This is what crowdfunding is, and it usually starts with an open call on social media.
Anyone who is interested can contribute, and all donations or investments are used towards a clearly defined goal. This goal could be an object that needs to be bought or a project that needs to be completed.
Starting with Crowdfunders
Crowdfunding is very different from the more traditional forms of.
It involves working with a large group of mostly small investors, and this can be a challenging process.
Investors, also called crowdfunders, may expect a reward for their investment in the form of a small gift, interest, or a share in the profits.
Some crowdfunders may want a say in important decisions.
The way crowdfunders are rewarded is fundamental in deciding which type of crowdfunding a startup wants to get engaged in.
Choosing the Right Type of Crowdfunding (for Your Company)
Four major types of crowdfunding have emerged in the last few years:
- donation based
- reward based
- lending based
- equity based
Donation-based crowdfunding is a type of crowdfunding where investors donate a sum of money without expecting anything in return.
In reward-based crowdfunding, on the other hand, crowdfunders receive a small gift in return for their contribution.
This could be tickets to a show, for example, or a book, or a first edition of a released product by the company. What is important here is that the gift is a tangible item and it’s a one-off deal.
A third type of crowdfunding is called lending-based crowdfunding.
Here crowdfunders receive a periodical payment until the whole investment is repaid.
And in equity-based crowdfunding crowdfunders receive a share of the profits. In short, they have a stake in the company.
Proving Viability with Crowdfunding
In today’s economic climate startups can have a hard time proving to potential investors that their idea is viable, and hence financing can be almost impossible to obtain.
With crowdfunding however, companies not only have the chance to gain the financing that they so desperately need, they also get to see just how viable their idea really is.
A Beginner’s Guide to Crowdfunding
The power of social fundraising is becoming more and more apparent. Crowdfunding sites, which allow many donors to give online — usually in small amounts — to a project or cause are an increasingly popular way to raise money. Charitable crowdfunding campaigns have supported an array of causes, from conservation of the space suit Neil Armstrong wore on his historic moonwalk to emergency support for Syrian refugees. Because sites such as GoFundMe, CrowdPress, Razoo, or Indiegogo’s new site Generosity.com can potentially reach a wide swath of people, they also can help broaden awareness of your cause.
Use of the approach is growing rapidly. Globally, mass online appeals — including both charitable and for-profit projects — raised $16.2 billion in 2014, according to Massolution, a research and consulting firm that releases an annual report on crowdfunding. That’s a 167 percent increase over the $6.1 billion raised in 2013. The firm estimates that global crowdfunding in 2015 will double, reaching $34.4 billion.
Campaigns on crowdfunding platforms, which have varying costs and capabilities, are generally publicized using social media and can range from fast-paced Giving Days to campaigns that last a month or more. But running a successful crowdfunding campaign requires more than simply clicking a few buttons.
Here we’ve gathered some resources to help you navigate the crowdfunding world.
With the growing success of services like CrowdPress, Kickstarter, RocketHub and Indiegogo, crowdfunding is increasing in popularity amongst musicians, event promoters and filmmakers as a way to raise money for new projects online. The concept allows bands, soloists and managers to post short videos and descriptions of new albums, music videos and works in progress online and ask for cash donations from fans. It could represent a revolutionary new approach to the music business.
The technique has already given birth to unique records, home audio accessories and electronics. It also allows enterprising acts to fund digital singles, vinyl records and concept albums that traditional record labels might scoff at or ignore. The process lets creators trade physical keepsakes (CDs, merchandise, limited-edition collector’s sets) or unique rewards (jamming with the band, enjoying a private concert or backstage pass) for cash donations.
Crowdfunding can work. Consider the case of songwriter and producer Ed Petterson, who recently completed a campaign to produce and distribute a recording by saxophonist Giuseppi Logan, a contemporary of jazz legend John Coltrane. Logan was discovered while homeless and playing for change in Tompkins Square Park in New York after disappearing from the public for 30 years; Petterson turned to crowdfunding to launch the album after the project was considered too risky and noncommercial to garner major label support.
“I had approached several record labels, but all turned us down… without even hearing the work that we’d created,” recalls Petterson, still incensed. Initially skeptical of crowdfunding, he quickly warmed to the practice. “[Previously] crowdfunding had a tinge of begging, and the recording industry is humiliating enough,” he says. “But when it was pointed out to me that, in essence, we were simply preselling our wares to fans we already had and potentially new ones, I realized that my prejudice was silly.”
Though it is still slow to catch on in mainstream circles, crowdfunding is enjoying snowballing popularity (and perceived legitimacy) in the recording industry. Credit efforts like RocketHub’s recent partnership with Gibson guitars to give crowdfunded artists an opportunity to record and perform for industry heavyweights, plus the ever-growing audience of indie artists galvanizing around Indiegogo’s fundraising community. According to the New York Times, over $38 million has been raised for music-related projects through Kickstarter alone in the past three years, with 7,545 successful projects having raised $5,140 on average. This puts the category’s total crowdfunding tally higher than art, comics, video games, design efforts and, in fact, that of every other industry besides film and video.
Public interest is rising as well on the back of breakout hits such as the Pebble: E-Paper Watch (over $10 million raised) and the recent passage of the JOBS Act, which allows for qualified investments. Previously, rock band Five Iron Frenzy was cited as the poster children for online contributions, having raised $207,980 for an album that needed just $30,000 to be made. This week, major-label artist Amanda Palmer of Dresden Dolls appeared on the front page of Kickstarter holding a sign that read “This is the future of music” and is using the site to fund a new record, book and tour. The intiial funding goal was set at only $100,000; she’s currently raised over $690,000.
However, don’t expect all crowdfunded projects to achieve such lofty goals or be a sudden panacea for decades of shady industry dealings, counsels Petterson. “When it comes to marketing your campaign… be honest with yourself about the true reach and breadth of your project and its potential,” he says. Advising that crowdfunding isn’t a miraculous cure-all for starving bands and artists, he also advises users to study as many campaigns as possible and take the time to craft pitches. For musicians and artists, crowdfunding is a marathon, not a sprint; he and his wife spent four hours a day for three weeks after his campaign launched writing to every journalist, blog, critic and collector they could find.
As noted in the recent book The Crowdfunding Bible (free to download at the link), artists and event promoters who are considering crowdfunding would do well to heed the following tips:
• Research successful and failed campaigns to see which projects, marketing strategies and rewards connected with fans. Analyze why, and to what extent, they work.
• Consider the breakdown of rewards they offer (i.e. physical goods vs. exclusive experiences), cost structure and promotional vehicles used to spread the word about these projects (social vs. traditional media, video endorsements by noted personalities, etc.).
• Budget conservatively up front, including factoring in all costs for reward fulfillment. Leave yourself a 20-30 percent cushion for hidden expenses, then ask for the minimum funds needed to complete your project to make goals seem more attainable to backers.
• Understand who your target audience is, where fans live online and how to reach them. Know what tools you have to get their attention and prepare all supporting assets (videos, screenshots, social media accounts, etc.) in advance.
• Practice and refine your pitch until you can summarize your project in less than 20 seconds. Then build a running promotional campaign that incorporates an ongoing series of marketing activities to run throughout your project’s entire duration.
• When it comes to creating killer rewards, use a combination of merchandise, once-in-a-lifetime opportunities and personalized gifts (e.g. giving backers a bit part in your next book or video game) to generate cash and awareness. Offer attention-getting gifts at all reward levels, including impulse-buy levels, and don’t leave too many gaps between pricing tiers so everyone has a chance to contribute regardless of personal budget.
• Keep video and homepage pitches short and sweet. Presentation is everything: Don’t skimp on production values. Quickly convey what your project is, why it matters, what qualifies you to make it happen and how it benefits readers/viewers. A picture is worth a thousand words; use video and screens to communicate wherever possible, and focus on one to three unique sales points which should be reinforced in all descriptions and promotions.
• Creating a running dialogue with backers, fans and media is vital, as succeeding with crowdfunding requires that you stay at the front of minds. Social media services like Twitter can be even more effective than articles and interviews, as can keeping in constant contact with backers through ongoing updates. A mix of promotional activities should be used to generate chatter on a consistent basis.
Ultimately, says Petterson, it also pays to be relentless when it comes to promoting your new CD, single, tour or video, as crowdfunding projects can be a useful way to raise cash and awareness but seldom sell themselves on name alone. “Campaigns won’t be easy, but they can be very rewarding,” he says with a chuckle. “Not to mention exhausting, for that matter.”
[Full disclosure: The author has written The Crowdfunding Bible, a new book on how to crowdfund businesses and startups, which is free for musicians, promoters and record labels to download online.]
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