The Phenomenon of Crowd Funding
Author: Kent Thune
The power of the crowd is real. And now that power is transforming the landscape of business financing through the game-changing emergence of crowdfunding. But what is crowdfunding and how can entrepreneurs today leverage its power for their own benefit?
First consider a common scenario: Let’s say you want to launch a new business and you’re confident that you have the best idea since sliced bread. You put together what you believe to be an outstanding business plan and take it to the bank, where you’ve held personal accounts since you were a child. About a week later, the bank representative calls and proceeds to tell you that the underwriters in the corporate office reviewed your business plan and have rejected it because your credit is less-than-stellar and your idea is untested in the marketplace. Therefore, you are too much of a risk for the bank to offer you the financing you need to turn your dreams into reality.
The number one reason that small businesses fail is that they run out of money. But that’s only assuming the business gets the initial seed money it needs to get started. Even the best of ideas have almost no chance of surviving the initial planning phase if there is not sufficient capital to get it off the ground.
Enter crowdfunding, a new option for entrepreneurs to bypass traditional financing by raising funds from a large number of investors online. No credit check, no underwriters, and no limitations on your dreams. Here’s how it works: The entrepreneur initiates or proposes a project or idea to be funded on a crowdfunding site; the crowd supports the project by pledging cash in return for rewards; the entrepreneur markets the project in hopes of hitting their financial goal that will turn the project or idea into reality.
The top three crowdfunding sites today are GoFundMe, Kickstarter, and Indiegogo. GoFundMe is the world’s number one crowdfunding site with over $780 million raised. According to Entrepreneur.com, a whopping $1.4 billion has been pledged on Kickstarter since the crowdfunding platform’s inception in 2009.
But there is a difference between how much is raised and how much is pledged. Although Kickstarter’s billion-dollar-plus pledge total is impressive, only 40 percent of projects have gone on to become fully funded. Also, 20 percent of projects submitted are rejected, which means it’s closer to one-third of all attempted campaigns that get funded.
Therein lies part of the risk to the entrepreneur. With some crowdfunding sites, if the project does not reach its goal, the entrepreneur does not receive the money that was pledged by the crowd. In different words, you don’t just throw an idea on a crowdfunding site and wait for the money to roll in. To have a successful campaign, it is crucial to plan in advance and work to make it happen.
But if roughly one-third of crowdfunding campaigns are successful, that’s still better odds than securing a bank loan. Smallbiztrends.com estimates that less than 20 percent of all small business loans at big banks are approved. And these loans typically require the entrepreneur to come up with at least 10 percent of the needed funds proposed in the business plan. With crowdfunding, entrepreneurs can potentially raise thousands of dollars with only a few hundred dollars in out-of-pocket expenses.
Entrepreneur.com advises that entrepreneurs should start working six months prior to a campaign’s launch and to keep communication clear and concise: Explanations of the project or idea should be no longer than a few sentences; videos should last no longer than three minutes; the total length of a campaign should be 30 days and the financial goal should remain low. Put simply, successful crowdfunding campaigns will start early, keep it short and aim low.
Of these crucial crowdfunding campaign elements, the most important is the video. Therefore it needs to be something watchable and illustrative but also something that evokes emotion, such as excitement, humor, or sympathy, depending upon the nature of the project. At a minimum, the video should be engaging enough to get people to share it with their friends. Some videos may need a significant financial investment, while others may not.
Hilton Head Island entrepreneur Lisa Bernstein, known to her friends and customers as “Bernie,” recently ended a successful crowdfunding campaign on Kickstarter to expand her growing homemade cheesecake business, Baby Cakes.
“Only about 10 percent of the people who helped fund my project were people that I didn’t know,” said Bernstein, who was able to raise more than $35,000 to expand Baby Cakes, which she hopes to launch later this year. This means the vast majority of the crowd is people you know—a key point to remember.
Her video was brief and low-budget, but charming and entertaining. “I had a friend do the video for cheap,” she said, adding her initial thoughts on her campaign. “If it works, great. If not, that’s okay. It’s worth a try.”
Her campaign was 30 days, which is within the recommended range for crowdfunding. In addition to the video, she paid a nominal fee to a marketing group for extra social media promotion beyond her own self-promotion on Facebook, Twitter and Instagram.
Another key aspect and requirement on most crowdfunding sites is the offer of incentive to the backers. Bernstein offered backers of her Baby Cakes campaign rewards for various pledge amounts. “People pledging $17 get their name on my new kitchen wall. For higher dollar amounts, I offered my cheesecakes, T-shirts, or aprons; and for the highest level, at $3,500 or above, the reward is to have an official dessert cake named after them!”
By now, you know that crowdfunding platforms are not magical cash machines. They’re simply a more efficient and more effective way for people to reach many potential backers, as opposed to calling them on the phone or meeting them in person, one at a time. These backers will primarily consist of friends, family, fans, followers and customers who want to help fund your project. And you will increase the odds of success if you offer rewarding incentives and you can get your network to share your project with their respective networks.
If you have no existing audience for your campaign, it’s not going to matter how entertaining your video is or that your idea is amazing. You are unlikely to raise the money to fund your campaign.
Another local and recent success story with crowdfunding comes from John Cranford of the popular Hilton Head Island Southern rock band, Cranford Hollow. “We needed money to finish our third studio album, Spanish Moss and Smoke, and to help keep us on the road through the end of 2014,” said Cranford, who was able to attract over $18,500 for his band from fans and other backers.
Cranford used the crowdfunding site, Indiegogo, and had a positive experience. “I liked the ease of use, the connectivity to social media, and that there was no all-or-nothing requirement for funding a project, as with other crowdfunding sites.”
But crowdfunding is not just for entrepreneurs and artists. For example, the family of a 9-year old Hilton Head Island boy Alex Arrieta set up a fundraiser at GoFundMe.com to help relieve the family’s financial pressures as Alex fights for his life against Acute Myeloid Leukemia. Diagnosed on February 8, 2015, Alex will make many extended trips to the Children’s Hospital at Memorial Health University Medical Center in Savannah, Georgia, for chemotherapy. The crowdfunding proceeds will be crucial in covering the family’s added expenses over the next several months.
In summary, a key lesson drawn in these local crowdfunding experiences is that each crowdfunding site has different fee structures and benefits to the users. Therefore, part of the planning involved in raising money for a project is determining the best crowdfunding platform to use for the particular purpose.
And don’t forget the most important aspect of crowdfunding—the crowd! Have a marketing plan in place and be ready to get the word out. As Bernstein discovered in her Baby Cakes crowdfunding campaign, “You have to keep your eyes on the prize!”
Kent Thune is a Hilton Head Island entrepreneur who owns an independent, fee-only investment advisory firm, Atlantic Capital Investments. He is also a freelance writer and is currently working on a book to be published later in 2015. You can follow his musings on mind, money and mastery of life at TheFinancialPhilosopher.com or follow him on Twitter @ThinkersQuill.