Startup entrepreneur tips

The success stories of Crowdfunding may have inadvertently branded it as the sure-fire method to raising capital. At a time when the traditional methods have become increasingly complicated, ambitious entrepreneurs are now looking at Crowdfunding as the platform for them to achieve their dreams.

The overzealous entrepreneur could hastily jump on the Crowdfunding bandwagon and overlook certain factors that can easily make or break her campaign. The rules are many, but the key principles are a few. Here are five winning tips that all Crowdfunding enthusiasts should abide to when planning their campaign:

1. Passion, not hype
This may be the most advocated principle of successful Crowdfunding, but it can never be advocated enough. The value of genuine passion is innumerable. Talking about your journey and the road to starting your Kickstarter or Indiegogo campaign can make the mere participation in your project the ultimate reward. Sometimes all the backer wants is to be part of your journey, and that depends at how you are able to passionately convey it.

2. Know who your audience is
Perhaps the indisputable factor to successful Crowdfunding is clearly defining your target audience and the channels to reach it. Once this is in place, you are guaranteed that the most meaningful reward for your backers would be to see your project vision come to fruition, and any other reward on top of that would be the icing on the cake.

3. Calculate the costs of rewards
When setting the financial target of your Crowdfunding project, it is important to include the cost of rewards. This will ultimately give you a clear picture of the finances needed to mobilize your campaign. By overlooking the cost of rewards, you could find yourself using the money raised from your campaign to distribute rewards, and in effect eating up capital that can be otherwise used for your project. This raises the risk of eventually not having enough capital to mobilize the project after all funds have been raised, and nothing is more detrimental than the backers not seeing their funds transpire into the end goal of the project they initially believed in.

4. Monetary rewards never work
Giving out rewards in the form of money is ineffective. As a principle, rewards should always be related to the product your project is about, and consequently monetary rewards usually do not bear any relevance. But the biggest pitfall of monetary rewards is how they can make you look uncreative and not managing funds well. Contributors do not want their money to go back to them, since that’s how monetary rewards are usually perceived.

By Mo Saiid and Lyn Blanchard

One of the most successful Crowdfunding campaigns last year was the “Pebble” smartwatch Kickstarter campaign, which was launched on April 11^th 2012. For those of you not familiar with the smartwatch, it wirelessly connects Android and iPhone smartphones to display email, calendar alerts, social media updates, run apps like GPS and, yes, it even tells the time.

 Dick Tracey you gotta get this watch!

 The “Pebble” reward based Crowdfunding campaign was an outstanding success. By May 18^th 2012 the company raised $10.2 million from approximately 70,000 backers. Astonishingly $1 million was reeled in during the first 28 hours of the campaign and the rewards were various watch offerings which generated pre-sale orders of the watch proving market demand. The founder’s also used the campaign for product validation – testing colour choices and feature refinements.

 Certainly Crowdfunding was right for Pebble and provided many benefits beyond the capital raised. However, how do you determine if reward-based Crowdfunding is right for you?

Here are some points for and against launching a Crowdfunding campaign that will help you decide if it makes sense for you and your company.

 Pros

 Access to Capital

 Well this point is a no brainer; but there is more to it than just raising money. For those companies that cannot get funding from traditional sources such as banks or angel investors, Crowdfunding is a viable alternative – if, of course, the crowd sees merit in backing the project.

In addition as the relationship between backers and the company is through reward based incentives, in exchange for money, companies do not have to give up equity; therefore, there is a non-dilutive effect on share structures. This means you don’t have to give up equity in your company.

 By having cash, start-ups can do more by way of risk reduction and in validating their ventures before they tap into subsequent equity or debt capital sources. This allows for a complementary pathway along the capital sourcing value chain.

 Crowdfunding campaigns take less time than traditional fundraising activities. Generally a campaign is limited to a maximum of ninety days. Therefore, there are no protracted prospecting, pitching, due diligence and negotiation cycles which is often the case when dealing with banks, Angels or VCs, perhaps even family members for that matter. Companies can get their money faster.

Validates Your Company and Product

As the rewards usually are product based, there is ample opportunity to demonstrate whether the offering is attractive to a company’s target audience and, thus, providing traction through pre-sales. As with the Pebble example above, companies can use the process to infuse the customer’s voice into product design decisions. This feedback is worth its weight in gold, saving both time and money, in the product development process.

 Establishes a Customer base

 We know that getting the first customer is difficult; but when your customer base looks like a ground swell of evangelists that can take your project viral – your customers become your quasi sales force. Furthermore, entrepreneurs can get a rare insight into who is buying their offering and find out why the offering resonates with them. This permits entrepreneurs to create compelling tactics to expand their respective customer acquisition strategies. It also allows for experimentation by finding out what works and doesn’t work from a customer acquisition perspective.

 Unique Marketing Channel

 Crowdfunding forces the entrepreneur to be organized in his or her marketing activities by leveraging social media, public relations, a website presence, list creation, videos and the delivery of a multitude of passionate communications. It forces messaging to be clear, concise and easily understood by the target audience to get an immediate call for action. Marketing exposure is what it’s all about and we know that sometimes early stage companies are not very good at doing this.

Cons

It’s Sometimes All or Nothing

 In planning a Crowdfunding campaign an entrepreneur must decide the fund raising goal – that is how much money to raise through the Crowdfunding campaign. This is an important step. Why? Because many CF platforms stipulate that the funds raised from your campaign are only released when 100% or more of the funding goal is reached.  Therefore, in these circumstances, it is an “all or nothing” proposition. Although there isn’t a formal penalty for not reaching the funding goal, there is still the disappointment and the loss of time and effort which has to be considered.

 In the next blog I’ll cover more on how to select a Crowdfunding platform because not all of them are the same and they vary with regard to this “all or nothing” policy along with other guidelines.

 IP at Risk

 Some argue that putting your Crowdfunding project on the Internet can expose a company to IP theft through the replication of the company’s concept or prototype design by a competitor. If your product is unique and this could threaten your company’s viability, then it is wise not to pursue Crowdfunding.

 Yet, if this did happen, the crowd is able to see that your company was first with the idea and if a competitive brand comes to the market with a similar product the ill will this can create can backfire on a competitor. Of course, the best way to proceed is to register provisional patents, as a date and time stamp, before proceeding with a Crowdfunding campaign. This makes good sense in any event.

 Sometimes by putting a Crowdfunding project out there, companies can establish interesting relationships with people or partners which would not have been possible otherwise. Opportunities can surface through serendipity with a little bit of boldness.  

 Not Right for Business to Business Products

By reviewing a litany of Crowdfunding projects featured on numerous CF platforms, it is clear to me that those projects that successfully receive funds are predominately those in business to consumer oriented sectors rather than business to business sectors.

Remember we are leveraging the benefits of the Crowd. And, Crowds represent a collection of individuals acting from their own personal belief systems and self-interests. They give to a Crowdfunding campaign because they might think it is cool, meaningful, worthy or resonates with their passion. This is in opposition to a collection of like-minded businesses which may have conflicting corporate objectives and represent more depersonalized motivations.

 Simple not complicated

 A Crowdfunding project should be simple enough for consumers to understand and allow them to get behind the Crowdfunding project. Complicated or overly technical projects can be difficult for a lay person to understand leaving them on the side line scratching their heads looking for a reason to support or back a project.   

 Large Capital Needs

 Pebble scored big with their Crowdfunding campaign. However, this bonanza is not the norm for the majority of campaigns. Crowdfunding is ideal for seed capital rounds and by that I mean where capital needs are not in the millions of dollars but more in the less than $100,000 range. If your business needs a lot of capital rethink your capital raising strategy and look to more traditional sources.  

 On the other hand, Crowdfunding could very well be used as part of an overall capital raise strategy as it is just one more arrow in an entrepreneur’s capital raising quiver.  

 Lengthy R&D Projects

 If your business is in the type of sector where lengthy R&D cycles are the norm (i.e., years not months), Crowdfunding is not for you. Backers want to see venture results quickly and be a part of the success within a short timeframe.  

 Crowdfunding has specific rules of engagement. I’ll cover these in my next post entitled – “How Crowdfunding Works” For more information on Crowdfunding read my white paper which I wrote last September. You can download it for free at www.creekstoneconsulting.com

What has been the driving force behind the rise of social media has been the power of the crowd to express satisfaction or dissatisfaction about something by using technology to broadcast messages instantly to anyone willing to listen.

On-line marketplaces such as Kiiji (open market trading), OpenTable (restaurant reservations), Match.com (dating), Ebay and Amazon (products) have eliminated inefficiencies in connecting buyers and sellers by making transactions more accessible through the use of technology. 

 Not surprising then, the power of the crowd and on-line technology have been the drivers in launching a new way of raising money – Crowdfunding. As defined by Forbes, Crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet”. And this is the topic of the next series of blog articles that I will write for you.

With Crowdfunding Platforms (CFP) supporting the raise of an estimated $2.78 billion in project funding in 2012 and forecasted to generate $5.18 billion worldwide in 2013, the sector is particularly strong, boasting double or triple digit growth rates.

With such favorable fundamentals, Crowdfunding just shouldn’t be ignored.  

For those of you not familiar with this rather unique way of micro-financing; let me start with a quick definition and then describe the types of Crowdfunding models in operation today.  There seems to be a lot of confusion about the differences and it’s important to have a good starting point to get at the right facts as a foundation.

Crowdfunding refers to an exchange between a person and/or a company (initiator) that has an idea, project, social/political cause or product prototype and for which they are looking for funding support from third parties (backers/crowd). Crowdfunding is the means by which small contributions are collected from many parties in the crowd so the initiator can reach a specific funding goal. Sometimes the contribution amounts are very small $5 and some can scale to $1000’s of dollars depending on the project.

All parties in this marketplace use on-line Crowdfunding technology platforms to broker these transactions. These platforms have been developed by companies that handle the exchange. Examples are Kickstarter, Indiegogo, RocketHub, CrowdCube, Kiva, FundRazr, CircleUp and hundreds of other sites that have been developed since the Crowdfunding concept got its start in 2005.

Now, here is where the confusion arises with regard to Crowdfunding and its opportunity.

There are essentially four types of Crowdfunding models in the market today. They are very distinct in terms of profiles, risk orientation and regulatory limitations. So if someone talks about Crowdfunding you must seek clarification on what type of model they are referring to because there are important distinctions to consider of each.

Here are the four types.    

Donation based Crowdfunding is philanthropic or sponsorship oriented which is very much commonly recognized. If there is a cause, event or charity a donation is provided by a backer and there is no expectation of compensation or financial return other than the satisfaction of contributing. Well, OK, there might be a tax receipt issued and a financial benefit (Smile).

Reward based Crowdfunding involves the exchange of non-monetary rewards such as gift or the opportunity to pre-purchase the initiators product or service. The backer does not expect a financial benefit in return for his or her financial contribution. These backers are fans or evangelists of the initiators project. This type of Crowdfunding has been the most popular and widely used by entrepreneurs from artists, musicians, film producers to designers of products.

Lender based Crowdfunding is based on advancing a loan to an initiator with the expectation that it is paid back in regular installments which include the original principal investment. Examples of some sites are LendingClub.com and Prosper.com. This is the least popular of the models.

All three of the Crowdfunding types mentioned above are legally employed. The following model is not.

Equity based Crowdfunding is the model where funders receive an interest in the company in the form of equity or shares and may also share in revenue or profit-sharing arrangements. This type of Crowdfunding is being touted as a new phenomenon that will put the current traditional equity funding mechanism such as Angel investment on its head. But, the problem right now is that the various Securities Commissions have yet to approve its use and therefore this type of Crowdfunding is illegal in various jurisdictions.

For example, equity-based Crowdfunding is widely legalized in several countries in Europe, as well as Australia, but not yet in Canada. And although the United States, through the Jobs Act, is working toward a legalized standard for equity Crowdfunding the regulators are slow in implementing a functional law and by that I mean rules employed to implement it into law. The SEC, which is already late with its submission, will probably continue to delay for the unforeseen future. Equity Crowdfunding on ice!  

You can now appreciate why Crowdfunding is often referred to as the democratization of funding. It allows a greater opportunity for anyone to fund a project and participate in turning dreams into reality.

You now know the different types of Crowdfunding models. Why is this important? Because knowing the varying types will allow you to assess if one of these models is the right fund raising channel for you.  

Crowdfunding has several advantages and disadvantages. I’ll cover these in my next post entitled – “Crowdfunding – Is it right for you?”

As part of our research into business incubators and accelerators, we talked with Greenberg Traurig LLP Intellectual Property Attorney Chinh Pham, whose firm is one of many providing in-kind support services for participants in MassChallenge, a Boston-area accelerator, partnered with Startup America, that calls itself the largest accelerator competition in the world.

As one measure of the program’s value, MassChallenge notes that the 111 startups supported in the 2010 accelerator raised over $100M in outside funding and created about 500 new jobs in under 12 months.

We talked with Mr. Pham about the opportunity and challenge of developing an accelerator program in Boston. (more…)

Over half of all startups are dead in the water within 2 to 5 years. This certainly may help explain the exponentially popular appeal of business incubators and accelerators, which promise to boost the chances of individual startups to raise capital, get to a positive revenue stream and provide community benefits like higher regional employment.

There were about 12 incubators in 1980 and today they number in the thousands in the USA alone. Some of the most famous ones are Y Combinator or TechStars. Even governments are getting into the act: the Obama administration in White House has launched Startup America to facilitate public and private partners investing in American entrepreneurs.

In different ways, incubators and accelerators aim to leverage high-quality mentorship and access to funders to produce dramatically different results; but do these methods actually work? (more…)

While researching a feature on business incubators and accelerators, we came across Chris Hexton, an entrepreneur with Invc.me who has been through the accelerator process and was able to share insight from his own experience.

Having recently progressed through the Sydney-based accelerator Startmate I can safely say that it has certainly been one of the most worthwhile experiences of my life – both for my startup and myself personally.

Before joining Startmate my business partner and I ran our own consultancy and Invc.me (our startup product) was nothing more than a pre-alpha prototype that we used internally. We had no real plan and no real momentum. Things are a lot very different now and, upon reflection, I feel there are there are three key things that we have learnt through Startmate that have changed our approach to building a product.

1. Focus. It’s not impossible to build a startup on the side whilst maintaining a day job but, having tried both, I can attest to the fact that spending 3-4 weeks solidly testing your concept and assumption with real customers is the best way to figure out if you startup has any chance of success. Bootstrapping is a fine way to fund your startup but in the future I know I will always take a few weeks to spend 80% or more of my time validating a concept new concept before I go any further. (more…)

I’ve got a lot of respect for the ideas presented in author and entrepreneur Alexander Osterwalder’s Stanford University series on the business model canvas. As he points out (and as I try to remind my clients), “great products are becoming a commodity. It’s the combination between great products and a great business model that is going to keep you ahead of the competition in the coming decade.” (more…)