|Boy wearing Oculus Rift via Wikipedia|
I just finished a new book, “A Crowdfunder’s Strategy Guide,” by Jamey Stegmaier, one of the biggest thought leaders on crowdfunding, and who has also run seven successful Kickstarter projects, that together have raised more than three million dollars. He starts out by outlining five reality checks for the uninitiated who are too quick to jump in with both feet:
Community building has to happen before collecting cash. He points out
that the word crowd precedes funding in crowdfunding.
Entrepreneurs who don’t focus on what people really want and need to know,
before trying to collect money, are unlikely to be successful. Startups need to
build a large passionate group of fans before the campaign.
It’s not easy money, so expect to work harder than you ever have.
Don’t expect to run a crowdfunding campaign in your free time. Stegmaier
recommends that you start by writing a regular blog, joining a few related
campaigns, building a high-quality video, and completing up to a hundred
additional lessons before you even launch your own project.
You need a polished, tested concept, not just an idea. If you want
money, rather than just feedback, you need to actually design, develop, and
prove that you have something worth people’s hard-earned funds before you
launch your campaign. Crowdfunding to gauge demand is not recommended, since
failed campaigns don’t usually recover later.
Making something awesome will cost more than you expect. Don’t assume
that any money collected from a winning campaign will go into your pocket. It
usually takes more than you can collect just to build and deliver the product.
Startup revenues come later. Of course, if the campaign does not meet or exceed
the funding objective, you get nothing.
- Crowdfunding is just the beginning of your business launch. Crowdfunding success does not mean business success. Many successful crowdfunding campaigns, just like many startups funded by angels and VCs, fail miserably due to normal business challenges, including inventory buildup, marketing, competition, and customer support.
The latest surge in expectations is just now occurring, as the SEC has finally “democratized” everyday citizens (non-accredited investors) to participate in equity crowdfunding. This means that instead of getting a memento or pre-order for a funding contribution, people can now get a portion of the business ownership, which may someday be worth millions for the next Facebook.
At this point, equity crowdfunding is still surrounded by many rules and restrictions on how much one person can invest, and what every startup must document and disclose to protect equity investors. Non-accredited investors can contribute a maximum of only 10 percent of their income, so they can’t lose it all on a single startup. We still have no experience on how well this will work.
Despite the unknowns, I’m definitely a proponent of crowdfunding, to support the upswing in the number of entrepreneurs and startups, and a new focus on entrepreneurship in every university and every community development organization. I don’t see crowdfunding replacing or crowding out angels and VCs in the near future, as there is never enough money to feed the startup beast.
The ultimate truth is that it takes about the same amount of effort and discipline to present a convincing story to investors, whether they be angels, venture capitalists, or ordinary members of the crowd. The odds of crowdfunding success are as low as the alternatives, despite what you hear about the response to Pebble Watch, and the Oculus Rift acquisition by Facebook for $2B. There are no shortcuts to success.