Over the last three years, crowdfunding has emerged as the unexpected champion of startup funding, so much so that its popularity is expected to surpass that of venture capital (VCs) in 2016.
Arguably the biggest innovation, crowdfunding’s democratized structure sees large numbers of people contributing relatively small sums to raise funds. Unlike other funding schemes — VCs, angel investors and loans — funds are not lent at interest and the founder retains full ownership (although equity crowdfunding platforms do exist). Instead, on sites like Kickstarter and Indiegogo, investors are customers and are often rewarded with perks or discounted products.
A typical crowdfunding campaigner does not seek investments to build a profitable company, rather they share their creative ideas directly with their audience, without intermediaries, and if the dream is well-liked and catches on, the creator gets to turn it into a reality.
While crowdfunding requires two very important elements, a supportive ‘crowd’ and an idea to raise ‘funding,’ most would-be campaigners chase only the funding and focus little of their energy on drawing the crowd. But the reality is, a crowd is far more useful than funding.
So, what are the real benefits of crowdfunding? While many focus on the immediate influx of working capital, the true power of crowdfunding lies in its ability to validate your market and build a community of loyal customers. Those benefits neglected by the masses that crowdfunding professionals recognize and value over and above the money they raise?
Market Validation and Testing
In crowdfunding, the amount you raise is down to your customers, not producers or investors. These people don’t pull apart market research and analyze current trends, they are the market. A successful crowdfunding campaign means there’s a place out there for your idea.
One of the best examples is the Veronica Mars project. Creator Rob Thomas and leading actress Kristen Bell spent around seven years soliciting and convincing Hollywood producers to fund a movie, with no success. They finally put their project on Kickstarter and raised $2 million in just 11 hours, finishing the campaign with a cool $5.7 million. Commercially-minded backers determined the project was unprofitable; the crowd proved them wrong.
Backers — who can pledge as little as $1 rewards on Kickstarter — are not investors. They don’t have any equity in the project. They want to support a project and help it become a reality. These are the people who trust you and your idea, believe that you are capable of keeping your promises, and want to play a role in your success story.
These backers (crowdfunding’s term for supporters) are your kick-starters, they will be involved in your project, share it on their social media networks, and provide valuable comments and suggestions even after you finish your crowdfunding campaign and start your business. Brands like Nike, Coca-Cola and Hershey’s spent decades (and millions) cultivating the kind of loyalty a crowdfunding campaign can net you for free (or almost free) in a very short period of time.
Buzz and PR
Crowdfunding doesn’t have a commercial image (yet), so journalists and bloggers are more willing to cover crowdfunding campaigns from Indiegogo and Kickstarter — they make better news than the product announcements put out by most corporations. Crowdfunding is full of compelling success stories about people who believed in their dreams and started to share their passion with the world. Who wouldn’t want to read about that?
It takes time to acquire customer trust and receive enough pre-orders from partners and customers to meet supplier thresholds. But not with crowdfunding. Here, it is possible to receive thousands of pre-orders and the money to manufacture them.
However, you must be organized and honest with your backers to avoid failures like the infamous Coolest Cooler campaign. Once one of the most successful crowdfunding campaigns ever, it raised $13 million, but miscalculations and poor management mean that, years later, nearly two-thirds of backers are still without their product. A damning blow to the brand’s reputation was further ruined when the product appeared on Amazon months before backers received their products. Not cool, Coolest Cooler.
Many well-known venture capitalists actively watch the crowdfunding world, waiting to see who will succeed there. It makes sense, the risks for companies with a successful campaign behind them are minute compared to untested startups. Take Oculus Rift, for example. It raised $2.4 million in crowdfunding, caught the eye of Zuckerberg’s team, and was later acquired by Facebook for $2 billion. While many entrepreneurs focus on immediate financial gains, savvy ones understand that a successful crowdfunding campaign can also attract investors who are watching the crowdfunding space for proven ideas
This just goes to show, that there are more benefits to crowdfunding than only raising money (although money always helps).