Crowdfunding - the essentials

Posted on 19 Apr 2017
Reader Question:

Doctor Digital, my business is running a bit short on revenue this month, should I run a crowdfunding campaign to make up the difference?


Doctor Digital Says:

In case you missed the memo, crowdfunding is a method of raising capital from a large group of small individual investors rather than single large or institutional sources.

Crowdfunding emerged with the design of online platforms that were able to connect to social media and engage massive groups of like minded people who were willing to financially commit to funding a product/service or cause. 

Typically a campaign will have a set objective, a target amount to be financed, and reward investors with a range of ‘perks’ or rewards which may or may not include the product or service being funded. These perks are made available to backers once the campaign has concluded. Campaigns run over a fixed period of time initially, and then, depending on the platform, may continue to run ‘in demand’.

While crowdfunding was initially used primarily by startups and entrepreneurs looking to prove their ideas in the market and fund early prototyping, it has evolved to span not only tech and startups, but also medium, large and established businesses, creative, artists, entertainment, charity and personal causes. There is a common misconception that creating a successful crowdfunding campaign is as simple as hitting submit and waiting for it to go viral.  While this can happen, the vast majority of projects require a decent amount of effort, and the results you get for your campaign are commensurate with the planning that goes in first.

Crowdfunding can be used for many different causes, but for all of them, the outcome is raising capital for your business.  Traditional institutional lenders such as banks and credit unions are one way to get capital, friends and family are another, using short term credit such as a credit card or an overdraft is a common way for businesses to harness some early capital to startup, introduce a new product line or expand. For small and startup businesses with limited trading history, often these options are not available, which is where crowdfunding can be the answer.

Aside from providing capital for your project, a successful campaign means you are also able to demonstrate in the case of a new product or business, the extent of market traction you are able to achieve which can validate your claims to a potential or future investor.

Crowdfunding is also a good way to pre-fund a new product or service, ensuring that when you get into production you already have existing orders and the revenue to pay for them up front.

Some of the reasons you might crowdfund for business are to:

•       prove a concept

•       test or build a prototype

•       prove market traction

•       guarantee pre-sale

•       raise matched funding

•       purchase plant and equipment for significant expansion

A successful crowdfunding campaign is entirely reliant on planning. When planning a strategic campaign give yourself at least 3 - 6 months planning time. You need this to ensure that the following key elements are in place so when you launch, every single day of the live campaign period can be fully utilised. Here are some key points to consider:

Timing: When are you going live and why – how does the timing suit the launch + campaign length. Establish the end date and work your planning back from here, make a timeframe to launch and make it detailed with key major and minor milestones and who is responsible.

Team: Gather a team around you. The best successes are collaborative, and you need to be surrounded with people who have complimentary skills, are invested in your business or project already, and are committed to putting in the hard yards during the planning, execution and fulfilment stages.

Networks: These are built before your program launch, and begin with all of your existing supporters and evangelists. Cast your net wide, as you never know what groups and affiliates may show up through people you already know but had never asked for help. And do ask.

Brand and Social Media: At the beginning of the planning phase for your campaign, you need to have your brand ideated, designed and protected, you need to have your digital and social media assets such as your website, blog, FacebookInstagramTwitterPinterest and Linkedin established and be working those channels to build followers, likers and potential customers.

Product or Service: Your product or service is the centerpiece of your project, so you need to have it developed, tested, ready for market, and a production supply chain locked in. This must be done prior to the campaign going live, and there is significant evidence of the success of projects that have market ready products.

Fulfillment: How is your product going to reach your backers? The cost of shipping, especially to an international market needs to be established and factored in to the campaign reward costs. Bulky or heavy items, those with customs implications, timeframes between overseas manufacture, receipt, packing and shipping, all of these have to be worked through long before your campaign launches.

Crowdfunding cash flow into your existing business is not usually a good idea, as if you have a cash flow problem, you have a business problem, and a crowdfunding campaign isn’t going to fix that. Sorry.

Want to know more about the nuts and bolts of running a successful crowdfunding campaign? Click here for the factsheet.