Crowdfunding works by pooling money from a group of people via online platforms, using social and traditional media. This article is about two types of crowdfunding: rewards- and equity-based.
- Rewards-based crowdfunding: Funders receive a tangible item or service in return for their money. Some businesses collect the cost of the item from customers before the product is manufactured. While others use crowd funding to beta test products or raise money in exchange for a token gift. Websites such as Indiegogo and Kickstarter coordinate the transactions.
- Equity-based crowdfunding: Investors receive a stake in the company. Currently, only friends, family and accredited investors (i.e. wealthy people) in the United States can invest in a company for equity. They can do so through websites like AngelList, CircleUp and Crowdfunder. So far, the SEC has only approved the rules and regulations regarding raising money from accredited investors, which is Title II of the JOBS Act. This may change in October 2015, when the SEC is scheduled to release the rules and regulations regarding Title III, which allows non-accredited investors to invest in small businesses.
I researched the emerging best practices and developed case studies of crowdfunding successes. I walked the walk and took the challenge of crowdfunding by undertaking a crowdfunding campaign myself. I wanted to experience first-hand what it’s like to crowdfund. I did a rewards-based crowdfunding campaign through Plum Alley. The results are detailed in Stand Out In the Crowd: How Women (and Men) Benefit From Equity Crowdfunding, and the following are some of the key insights.
1. Explore Your Fundraising Options
Crowdfunding is really hard work. Embarking on a campaign is not a decision to be taken lightly. Ask yourself if you really need outside funding in order to scale. If you can grow quickly and profitability without outside money, there’s no reason to put in the enormous effort it takes to run a successful crowdfunding campaign. Other options, like debt, require less time and effort. Learn whether your company is qualified for a loan.
That said, rewards- and equity-based crowdfunding have different value propositions. Doing a successful rewards-based campaign can validate to future investors that there is a market for your product. It can provide market feedback on features and pricing. It also demonstrates the power of your social connections and that they can be converted to real capital. Moreover, it’s an opportunity to spread your brand’s message and goals to a wider audience. The money that you receive is debt- and equity-free.
The value of an equity investment from accredited investors and venture capitalists goes beyond their money. They may also provide introductions to major customers, key employees, vendors and additional funding. Equity investors also mentor and provide strategic advice.
2. Build Your Network Before You Need It
While crowdfunding expands a company’s traditional funding pool, the vast majority of funds raised come from your network and connections. Campaigns may go viral, but that is rare. Crowdfunding companies will get the most bang for their buck by cultivating the relationships they already have rather than launching expensive advertising campaigns designed to attract new potential funders and investors.
When looking for accredited investors, start increasing your network at least 6 to 12 months in advance. Building some of these relationships, especially with influencers—investors, media and people who know them—can take upwards of two years, so start early. Clay Hebert, founder of Crowdfunding Hacks, provides 12 tips for finding influencers.
3. Tell a Good Story
“When you’re trying to influence, persuade, or convince people, nothing is more powerful than a good story,” according to Donna Cravotta, CEO of Social Sage PR.
“People don’t buy what you do, they buy why you do it,” says Simon Sinek, speaker and author of Start With Why: How Great Leaders Inspire Everyone to Take Action. Your story and your passion make you stand out in a crowd and help you connect with like-minded people, the kind of people who will support you even when times are tough.
For example, some rewards-based campaigns have been so successful that the company has been unable to keep up with manufacturing demands for the product. Such was the case with Pebbles Watch, which raised 100 times its goal of $100,000 in 2012. Its campaign went viral, raising $10 million. A huge backlash resulted when Pebble couldn’t manufacture enough watches to fulfill its rewards commitment in a reasonable timeframe. They recuperated (not all companies do) and this year raised $20 million through a rewards campaign on Kickstarter. Their goal was $500,000.
Investors and funders want to find people who are aligned with their beliefs and values. The story behind your “why” is what hooks them. Paint a picture of the dream, the vision of where you’re going. Investors want to know why you and your team are the right people for their investment.
Tell your story in a clear, engaging manner that allows people to feel your excitement and makes them want to become part of it.
4. Make a Compelling Video
Video is a powerful way to tell your story. How much a video can improve your chances of a successful raise through crowdfunding isn’t easily quantifiable, but it does improve the odds. First and foremost, a video is a chance to tell your story and convey your grand plan. It explains why you started this venture, introduces who is behind the company and explains how you will use the money. Make the most of the moment. Grab the listener’s attention immediately. Make sure the video is professional, clear, concise and only about two to three minutes long. Speak in plain English; talk in tangibles, not abstractions.
5. Choose Your Marketing Tactics Strategically
Your messaging strategy is just as important as your message. Keep these ideas in mind when you’re spreading your story.
- One size doesn’t fit all in communication strategy: Your marketing vehicles may include social media (e.g. blogging, LinkedIn, Twitter, Facebook and Instagram), phone calls, in-person networking events and public relations. Reach out regularly and consistently to potential and current investors to keep them informed about your company. Don’t forget about doing an e-newsletter. It’s a real workhorse. As you move a prospect from cold to warm, make the outreach personal, using the prospect’s preferred method of contact, which could be email, phone or in person.
- Be strategic: You don’t need a blanket presence on social media. Pick the platforms where your investors and supporters are likely to be.
- Match platform to purpose: Use LinkedIn to update your connections. You can also post a blog. Use Twitter when you want to update many people at once. No matter which media you use, make sure you communicate frequently and that your message is clear.
6. Show Momentum
If you want to succeed at crowdfunding, whether rewards- or equity-based, you have to show support from the get-go. Investors are likely to stay on the sidelines until they see that others have anted up. Before you launch, identify the people you think are likely to invest in or fund you. These include family, friends, colleagues, customers and suppliers. Target them before the campaign begins. That way, you establish that all-important momentum and are more likely to succeed.
With equity crowdfunding, investors will be attracted to your deal because other people they respect and trust are involved. These people could be on your team, other investors, advisors, board members or fans. The most powerful enticement to investors is a well-known, well-respected person as the lead investor.
Crowdfunding takes a lot of hard work, marketing know-how, project management skills and connections to ensure your success. For more tips and case studies, read the full Stand Out In the Crowd report. To see how one small business launched a successful crowdfunding campaign click here.
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