Crowdfunding Isn't Magic: How to Get It Right

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Running low on working capital? Need to raise a quick round of funding to boost your startup to the next level of its development? Many entrepreneurs have been in this situation, without access to the capital they need to grow and unsure of where to turn.

Many early stage companies in these circumstances have found success on online funding platforms such as KickStarter, IndieGogo, and GoFundMe. In addition to offering a way to raise a seed round from friends, family, and online supporters, these platforms are also a valuable and inexpensive way to validate your product. It quickly answer the question: is anyone willing to pay for your new product or service?

How Crowdfunding Works

When you use crowdfunding, you post your "project" to one of several website such as KickStarter. You make a profile including text and a short video in which you lay out your financial goal, describe what you're trying to accomplish (launch a new product, open a restaurant, record an album) and introduce yourself to the online funding community. If the site accepts your project, small investors have an opportunity to help you make your dream a reality within a set time frame.

Although many great success stories have made the rounds online, it's important to understand that crowd funding isn't a magical fix for your funding problems. Simply posting your project is not a guarantee that you'll get the money you need. In fact, simply posting is virtually a guarantee that you won't reach your goal. Continue reading for tips that will help you get the results you desire.

Make Crowdfunding Work for You:

1. Do your research first.

Even small start-up companies need market research. It's not enough to just rely on your friends and family to tell you if your venture is a good idea. They likely share many of your opinions and habits and are unlikely to tell the whole truth because they don't want to potentially hurt your feelings. Get more objective opinions before you start your crowdfunding campaign. Michael Kleinmann of the Young Entrepreneur Council writes in Forbes about his experience with KickStarter and offers some great insight. He suggests forming a focus group, taking the idea to your existing customers (if applicable), and having an "elevator pitch" ready for potential investors.

2. Don't forget the non-disclosure agreement.

It may seem like a mundane detail, but make sure to have everyone involved in the new product sign a confidentiality/non-disclosure agreement. This applies to vendors, also. You've worked too hard to have someone steal your idea at the 11th hour.

3. Spend time and effort on your video.

Your crowdfunding campaign will succeed or fail in large part due to the strength or weakness of your project video. Ideally, invest in a professional video crew for the shoot and hire an experienced editor. If this isn't an option, take care to approach the project as professionally as you can. No matter know good your idea is, if you present it in a way that looks sloppy or unprofessional you won't gain the confidence of potential supporters.

4. Don't aim too high. 

About one-third of the projects submitted to KickStarter actually succeed, according to Forbes contributor Carole Tice. Of these, the vast majority are asking for funding of $10,000 or less. This is where crowdfunding excels. Asking for too much can turn off potential investors who want to make a significant contribution but may doubt your ability to meet your goal. If you need $100,000 or more for your project, you should probably look to other funding sources.

5. Remember that you still need a marketing plan. 

It's natural to hope that if you post your project on a crowdfunding site potential backers will suddenly be fighting over the opportunity to invest in your company. However, that's not quite realistic. Instead, you need to help your funding project along by making everyone you know (and everyone they know) aware of what you're trying to do and involved in helping you reach your goal. A presence on Facebook, LinkedIn, and other social media platforms is vital for drawing attention and support to your crowdfunding page.

Crowdfunding as Market Validation

Two of our SparkLabKC graduates have run very successful crowd-funding campaigns. Not only did they raise the capital they needed to reach a new stage of development, their experience with crowd-funding was a great way to validate their existing product and gauge consumer interest.

ToastyTote, a graduate of SparkLabKC's Class of 2014, raised over $15,000 (exceeding their goal) from 177 backers in one month with their Kickstarter page. Their profile is a great example of how to do it right: in-depth product information, lots of high quality photos, and a personal touch that helps potential backers feel invested in the people behind the product. ToastyTote's crowdfunding success allowed them to begin production of their product and provided a platform for great customer feedback that validated their product and marketing efforts. If they hadn't reached their goal, they would have learned that it was time to step back and re-evaluate their product and messaging. Happily, their efforts were rewarded with the funds they needed and verification that they were on the right track!

With the right preparation and dedication to achieving your goals, you too can use crowdfunding to boost your startup to the next level!

Do you have experience with crowdfunding? What tips would you share? Let us know by tweeting @SparkLabKC!