When should your startup consider crowdfunding?
Last updated: 2021-05-28 (originally published on 2017-10-03) — by Alex Tanglao
Achieving a series of successful fundraising rounds has become a key marker of startup success. A simple Google search will throw up multiple articles about the various funding rounds such as seed round and Series B round. Startups seek fundraising not only to acquire the capital to achieve their goals, but also to obtain resources to improve the quality of their product and/or service and compete with other businesses on the global stage.
Related reading: Angel investors vs venture capitalists
However, fundraising via the traditional method of courting venture capitalists isn’t for everyone. Venture capitalists typically desire a high return and will only invest in startups that offer sufficiently high returns commensurate to the level of risk associated with investing, and usually wield power in influencing business decisions. A startup might simply not be a good fit for VC investment for a number of reasons:
- The startup lacks rapid, immense growth in the near future necessary for high returns;
- You as a business owner are not willing to cede any control over how the business should be run;
- If your startup is still in its infancy and has yet to establish a name for itself, it may be hard to convince VCs that you are the ‘unicorn’ they are looking for.
If the VC route isn’t for me right now, what other options do I have?
Other than grants, another popular method of raising funds from external parties is crowdfunding. Crowdfunding and VC funding are sometimes thought of as polar opposites. While VC funding consists of large amounts of funding from a small pool of sources, crowdfunding consists of small amounts of funding from a large pool of people. Online crowdfunding platforms allow people all over the world to make contributions to financially support numerous causes, ventures, and ideas.
Several top companies and products have managed to raise significant funds through these crowdfunding platforms. Virtual reality startup Oculus VR raised $2.4 million on crowdfunding platform Kickstarter for its Oculus Rift headset and was bought by Facebook a year and a half later for $2 billion. Similarly, the makers of the Pebble Time smartwatch managed to raise $20.3 million in Kickstarter crowdfunding, making it the most funded project ever on Kickstarter.
If you are were to advertise your product or service on a crowdfunding platform, you’ll find yourself in good company. However, it is important to first answer the question of whether crowdfunding is for you. Just because your startup isn’t suitable for VC funding doesn’t necessarily mean that crowdfunding should be your default strategy. Here we have compiled a list of pros and cons to help you decide whether or not crowdfunding is for you:
The pros of crowdfunding
1. Comparative ease of use and low barriers to entry
Registering on and advertising your product or service on a crowdfunding platform is marginally easier compared to organising and preparing for a meeting with VCs or applying for a grant or a loan. There are a range of reliable fundraising sites that are relatively straightforward to use.
Kickstarter, touted as the hottest crowdfunding site on the Internet, accepts all kinds of creative projects in a whole host of categories ranging from Art and Design to Technology. The application process involves registering for an account and filling out your project details, which will then be reviewed by Kickstarter staff. Kickstarter charges a small fee for every successful project, in addition to credit card processing fee.
2. It’s an excellent marketing tool
Putting your product on a crowdfunding platform has the potential to provide you with far-reaching online exposure on a global scale. Crowdfunding platforms thus lend themselves well to viral marketing and can help you identify key opinion leaders that can lead to further opportunities to increase your online presence.
Seen in this light, crowdfunding is not just a means of fundraising, but is by itself also a platform for market research. You will be able to access data on how the market will react to your service or product before you take the plunge in investing the resources to produce it. The worst that could happen is that the campaign fails to reach its fundraising goal before the fundraiser expires and the money raised is returned to your backers.
3. Retain control over business decisions as a startup founder
Unlike fundraising via courting VCs, you don’t have to cede power or rights over how to run your business. Given that your potential pool of funders is so much larger, there is no expectation for you to cater to the whims of a backer that paid $50 to your campaign.
The cons of crowdfunding
1. Ease of access and low barriers to entry
That’s right, ease of access is a double-edged sword. The homework that all startups have to do when courting VCs – developing a coherent business plan, five-year forecasts, SWOT and Cost-Benefit analyses, and ROIs (all backed by solid numbers) – are not required when it comes to crowdfunding.
As such, many crowdfunding campaigns are launched by passionate people who lack both a million dollar idea and substantial business experience. If you forgo doing the homework that you would have done for a VC, you may find that you are way in over your head when you go about delivering on your promises to your backers. Many crowdfunding campaigns that raised their target goal have subsequently failed to deliver because they underestimated the cost and complexity of doing business and distributing a product or service.
Looking for tips on how to prepare and deliver an executive summary to potential investors? Download our free eBook Make Your Pitch:
2. The marketing costs can add up
Marketing is a major factor in the success of a crowdfunding campaign. Backers of any crowdfunding campaign typically donate for the following reasons: the rewards that come with backing the project, an attractive and catchy product and service concept, and/or a mission statement that people can identify with. To be an attractive proposition to potential backers, you may have to invest in marketing efforts such as professionally produced videos and graphics to create a visually stimulating campaign. Adding on the fact that you have to set aside funds to deliver on your promised rewards to your funders, these marketing costs can certainly add up.
3. It only works if your product has mass appeal
Source: Oculus VR
While your idea may be worth a million dollars, it may not be a ‘sexy’ million dollar idea. Products like the Oculus Rift and the Pebble Watch successfully obtained funding because they are sexy ideas that captivated the attention of backers. If your product doesn’t captivate people in the same way, but still has the potential to realize high returns, it may be better for you to focus your energy on more traditional methods of fundraising.
Do you have any tips on how to go about a crowdfunding campaign?
Share with us in the comments below!