Crowdfunding is the hot new vehicle for raising money to support your entrepreneurial efforts, with over 1,250 website platforms around the world to help you, according to a 2015 industry report. In fact, the report suggests that the total amount raised annually (over $30 billion) now exceeds the funding from venture capitalists during the same period. How can you go wrong?
The most popular platform examples are still a couple of the earliest, Kickstarter and Indiegogo, but you can find a comparison of many others online. In addition to funding, the good news is that all of these provide aspiring entrepreneurs with an opportunity to perfect their marketing pitch, get some valuable target-customer feedback and improve visibility to other funding sources.
While all this is definitely a boon to entrepreneurs, it does come with its own set of challenges. Here are seven lessons I’ve accumulated from real-life experiences on how crowdfunding can lead you astray—and guidance on how to offset these potential negatives:
- Keep your attention on the business model as well as the solution. Crowdfunding interest, by definition, stems primarily from non-professional investors who are more focused on features and value, rather than the financials of your business. Several crowdfunding successes have failed as businesses. Project your costs as diligently as your revenue.
- Don’t underestimate the amount of funding actually required. An advantage of professional investors is their validation of required amounts for marketing, inventory and staffing. Understating or overstating your request will likely kill your credibility or your startup in lieu of follow-on requirements. Get funding sizing input from senior advisors.
- Be prepared to manage a crowd of inexperienced investors. Every entrepreneur with multiple contributors will tell you how hard it is to communicate effectively with a couple of investors. With crowdfunding, the number may be hundreds, all expecting current status and results. You need a professional team and additional funding just for this effort.
- Resist the temptation to skip the business plan. Many new entrepreneurs believe the myth that a business plan is only required to satisfy professional investors and can be skipped with crowdfunding. In reality, the value to you of a detailed plan is even greater when you won’t have investors challenging it. Get professional help to validate the plan.
- Make sure the crowd response represents your target demographic. Crowdfunding is still an early-adopter phenomenon, and these people may mislead you on requirements for the mass market or the size of the opportunity. On the other hand, if your solution is aimed at boomers or requires in-depth technical knowledge, crowdfunding may be futile.
- Be extra careful with your intellectual property. Crowdfunding platforms don’t have the facilities to handle non-disclosure agreements that you might expect from every professional investor. With a large number of unknown investors demanding details, you are highly exposed to potential competitors. Keep all IP details close to the vest.
- Don’t forget to account for the time and cost of crowdfunding campaigns. Naïve entrepreneurs believe crowdfunding is essentially free. They forget about the platform fee—typically 5 percent—taxes on pledges, preparation and social media commitment to prepare and execute the campaign, and the give-back required if you don’t meet your goal.
Overall, there is now no question that crowdfunding is here to stay, and it represents a major new source of funding for innovative new businesses, non-profits seeking donations and artists looking for some recognition for their creative efforts. However, like every opportunity, this one comes with huge risks and much hard work.
So far, the crowdfunding failure rate on all platforms to achieve funding has been well over 50 percent. Many more of the funded startups fail to achieve business success, even with the money. With odds like these, you can’t afford to make all the same mistakes that others have endured before you. A lesson learned from others is a mistake you don’t have to pay for.
Image credit: CC by Michael Mandiberg