Crowdfunding is helping businesses launch like never before, but not all platforms are created equal. Which one is right for your business?
When Ryan Grepper set out to raise support for his new invention last year, he could never have imagined that more than 63,000 strangers would be willing to chip in more than $13 million dollars to help make his start-up, “The COOLEST”, a reality.
Ryan’s idea was simple—although somewhat revolutionary—to make a 21st century cooler that does way more than just keep drinks cold. Ryan’s COOLEST is more like a portable party disguised as a cooler, bringing blended drinks, music, and fun to any outdoor occasion. His vision was to make a cooler that was so useful and awesome, he would literally “look for excuses to get outside and enjoy it.” The COOLEST has just about every bell and whistle imaginable, including a Bluetooth speaker, USB charger, two separate inner compartments with LED lighting, plates, blender, handles and tie downs, and of course, a bottle opener.
Ryan was convinced his cooler would be a hit across the country, but his lack of capital to build up a sizeable inventory before launching nationwide was his only obstacle. In order to raise enough money to get his product launched, Ryan pledged a campaign on Kickstarter to raise the $50,000 he would need to get his business of the ground. The response he received was overwhelming. Backers could choose to give as little as $5, or as much as $2000. If you donated at least $185 to the cause, you would even get your very own COOLEST sent right to your home. This was a savings of $115 off the retail price, and Ryan saw more than 50,000 people take advantage of his special offer.
For Ryan, Kickstarter was the perfect platform to launch his business, because he could offer backers their own share of the product (presuming he could raise the $50,000 minimum limit he set) in exchange for their support. While Kickstarter remains the world’s largest funding platform for creative projects, there are a variety of other crowdfunding options to suit different types of business endeavors. Choosing the wrong platform can be an easy mistake to make, especially considering the rapid rise of crowdfunding’s popularity. In 2014, North American crowdfunding and peer-to-peer lending campaigns raised an estimated 9.5 billion dollars, up 145% from 2013. So before you go out and start asking for money, consult our guide to help you capture the right crowd.
Seek Donations
Suppose you have an idea to help the world (or yourself) but you don’t have a product or service to give to investors? In this scenario, you are basically asking for charitable support, but luckily for you, there are specially designed crowdfunding platforms for precisely such a purpose.
Crowdrise
Crowdrise is an excellent choice for charity minded business ideas. For example, when part–time pastor Kenton Lee visited an orphanage in Kenya, he was shocked when he witnessed the children’s tattered footwear. Many children had cut open the tops of their shoes because their feed had grown too big to fit. Lee’s observation led him to invent a solution: The Shoe That Grows. The specially designed shoe was made to last five years and expands five sizes using a series of adjustable sandal straps and buckles. Lee opted to raise money to build a prototype on Crowdrise rather than a site like Kickstarter because he didn’t want people to pay to receive his product. Rather, he states, “We just wanted people to donate to help make our shoes for kids around the world.” Within a month, Lee was able to raise over $100,000, and he is now considering turning the Shoe That Grows into a mission-focused business with a donation component similar to Toms Shoes.
GoFundMe
If you are trying to raise money for a personal cause, look no further than GoFundMe. With more than 1 billion dollars raised since the company was founded back in 2010, GoFundMe is the largest personal fundraising site in the world. The range of causes to support on GoFundMe includes everything from medical bills and student loans, to volunteer projects and wedding expenses. Be advised that the site is filled with sad stories and worthwhile causes, so you will want to make sure your request for funds does not come across as frivolous or profit oriented. Visitors to the GoFundMe can even search for projects in specific geographic areas such as their hometown to help fund local initiatives if they are so inclined.
Share Equity
For certain businesses, raising capital by sharing ownership can be the best way to expand further. While sharing equity does not come without complications, this can be a great option for companies that are already off the ground and are looking for an added growth push.
CircleUp
CircleUp was founded as a way to provide financing to fast-growing businesses that are too small to attract interest from traditional private equity firms. Since 2012, the site has helped businesses raise more than $100 million, but the serious nature of equity sharing makes getting a listing rather difficult. CircleUp typically accepts less than 3 percent of companies that apply. This platform is best chosen if you have an established consumer-product company and you’re looking to fund a new project. Popular product categories include cutting-edge food, clothing, and other trendy consumer goods. Companies with at least $500,000 in annual revenue can apply to be registered in the CircleUp listing of accredited investors—which could get your product in front of partners such as Procter & Gamble and General Mills.
AngelList
Similar to CircleUp, AngelList allows investors to co-invest with angels and venture capitalists in exchange for a 20 percent “carry”. A short term for carried interest, carry is a share of the profit of an investment that is paid to the investment managers. Twenty percent may seem like a high fee to pay on your investment earnings, but if a 100k investment eventually has a 100k return, the investor will see an additional 80k back in return after paying their carry. Also, investors only need to pay a carry on profitable investments. Syndicate investors do not invest directly in the company, rather, they invest in a special purpose fund that is created specifically for each investment. The fund then invests in the company in the form of an LLC. AngelList is free for companies to begin listing. “You pretty much need to list here if you’re expanding, especially tech companies”, says Richard Swart, a crowdfunding researcher with the University of California, Berkeley.
Reward Backers
If you have a buzz-worthy product to bring to market but need to ensure enough sales before getting your business off the ground, a rewards based platform is almost surely the way to go. This platform is the most common choice for aspiring entrepreneurs and businesses for good reason—you can essentially lock in sales to cover your initial costs of R&D and inventory—ensuring that you won’t be left with unsold products before at least breaking even.
Kickstarter
As was mentioned in the earlier example of The COOLEST cooler, Kickstarter has established itself as the world’s largest funding platform for creative projects. Kickstarter’s model allows you to promote nearly any project that can be shared with others such as a physical product, an art exhibit, or even an experience. The platform does not allow for the donations of funds for charity or offering financial incentives such as equity. When a project involves manufacturing and distributing something complex, such as a gadget, Kickstarter requires a portrayal of a realistic prototype to share with potential backers. The reason that so many backers are willing to support projects on Kickstarter is because they can get something special in return for their willingness to support a company or product. Only once a company’s funding goal is reached will consumers be charged for their commitment. Kickstarter is an all-or-nothing platform, meaning that if you fall just short of meeting your funding goal, you won’t get a penny of it. If you do meet you goal, Kickstarter collects 8 to 10 percent of donations as their share, including card fees.
Indiegogo
If you want to keep the money you raise despite not reaching your goal, consider starting your campaign on Indiegogo. Unlike Kickstarter, Indiegogo allows for charitable projects and caters to businesses with social components. The downside for some businesses that fail to meet their goal, however, is that they may be held liable to deliver products that they can’t afford to actually make. Notable high profile campaigns include film, tech, and community-based ventures. One current campaign involves raising money for the people of Greece adversely affected by their country’s financial crisis and staggering unemployment. The unemployment rate for Greeks age 16–24 is an astounding 50%. The goal is set at €1,000,000, and donors who pledge their support will receive various tiered gifts based on their contribution. For instance, for €3 you will receive a postcard from Greece, €25 will get you a bottle of Greek wine, and €5,000 earns you an all-inclusive holiday to Athens for two. All funds are to be distributed through the Greek foundation Desmos. The foundation’s primary aim is to get as many 18-28 year olds into the workforce as possible, and Desmos also coordinates with a host of other local charities to distribute surplus goods to those in need.
In today’s world, it pays to take advantage of potential investors in every way possible, but choosing the right crowdfunding platform is rarely such a straightforward decision. To start, you should determine whether you want to ask for charity, share equity, or offer a reward to potential investors. From there, consider the pros and cons of both platforms, and go with the one that fits your brand and your mission most naturally. We hope this guide helps you with your decision, and that the power of the crowd may always be in your favor.
Article contributed by Brian Kenny
brian@p7r.68b.myftpupload.com