Entrepreneurs thinking about raising money through crowdfunding should think carefully about what their business needs not just financially, but in terms of expertise, and then consider whether this type of fundraising will provide it.
On top of that, says Jeff Sohl, director of the Center for Venture Research at the University of New Hampshire, they should think about how crowdfunding could affect subsequent investment rounds, since some angel groups will walk away from a business whose first round was obtained through crowdfunding.
“If I think I need $50,000 or $1 million and that’s all I need and I’ll be good to go, I’ll be an attractive takeover target and everyone will be happy,” Sohl explains. “But if you’re going to use this money to just get started, you’d better think carefully about from where that next round is coming and from whom, so you can structure the deal so it doesn’t mess up the next round. If I’m an investor looking at two equal deals and one is a crowdfunded round and the other has two investors who understand the market, I’ll go with the one with two investors.”
That’s true for companies that include equity in their crowdfunding approach, says Richard Swart, a specialist in crowdfunding and research director at the Fung Institute for Engineering Leadership at the University of California-Berkeley. But he also says that those who have successfully raised money through pledge- or donation-based crowdfunding have actually had angel investors cold-calling them wanting to set up a meeting. He notes that more than 150 companies have raised more than $1 million using pledge-based crowdfunding.
“If you can, don’t give away equity, just sell some product or sell some service you’re going to provide,” he advises. “Demonstrating capacity and demonstrating market acceptance though a successful crowdfunding campaign is a great way to attract professional investor interest.”
- Do Your Homework: Have other companies in your space had success with crowdfunding? Look for other businesses doing what you want to do, not just in the U.S., but in Europe and other countries, as well. The types of things you find in Apple stores – games, consumer electronics, lifestyle aids – generally find the most success.
- Be Clear About the Amount You Need: Once you factor in the costs, will crowdfunding be enough, or will you need to go after institutional money?
- Study the Competition: How have they marketed it? Networking can be a part of your success, so if you only have 30 people following you on Twitter and 200 Facebook friends, crowdfunding probably isn’t for you.
- Ask Yourself: Is Your Product Understandable? A nanotechnology polymer film for surgical applications might be a good medical innovation, but unless you’re a specialist, you won’t understand what it is. That’s not shareable on social media. If you have a specialized technology or product, you need a niche platform.
- Prepare a Campaign Calendar: This should look out over three to six months, and include video marketing and social media strategy. This really is a marketing campaign and you need to dedicate staff and time to it. The average company spends about 80 hours planning their campaign and 20 to 25 hours a week running it. You don’t just set it and let it run. You have to actively manage it.
- Be Wary of Self-Appointed Experts: There’s only a handful of people in the world with true expertise in crowdfunding, but there are hundreds who position themselves as crowdfunding consultants. It’s just like when social media first appeared and everyone was positioning themselves as a social media guru. Today, people who were once Twitter consultants are now calling themselves crowdfunding consultants. It’s very hard to determine whether someone’s credible or not. Be skeptical.