In a recent conversation with a group of SCORE volunteers, as we were talking about the new landscape of small business lending and finance, we spent some time talking about crowdfunding.
As a result, I’d like to address three of the big myths associated with this relatively new source of funding and dispel some common misconceptions called crowdfunding.
Regardless of whether you opt for a gift-based campaign or go the equity route, a crowdfunding campaign is typically not structured as a loan. IndieGoGo (one of the bigger crowdfunding sites) will tell you it isn’t panhandling either. It’s a way to get your idea in front of a lot of people who can contribute to your idea, validate your idea, share the success of your venture, and maybe even get something in return—a t-shirt, an early version of the product, or in the case of equity crowdfunding, a small piece of ownership.
Myth #1: The Crowd Magically Appears to Fund my Idea
The over-simplified version of how crowdfunding works suggests you signup on a platform, list your idea, and the contributions start rolling in. If it were really that easy, everyone would be doing it, right? The truth is more like how Thomas Edison would describe it, “…disguised as hard work.” In fact, a lot of work goes into a crowdfunding campaign before it’s ever posted for public view. Two very important things that need to take place before your campaign goes live are:
1. You need to craft a very persuasive pitch: Think of it in much the same way you would if you were sharing your business idea with a potential investor. Video is a very compelling way to tell your story online, and the businesses that find success crowdfunding are good at using video to tell their story. Don’t be discouraged because you think you need to reach Hollywood production values though; good storytelling is the real key. Many of those who have been successful just get in front of the camera and tell the audience what they want to do. Spend some time looking at current campaigns to see what the more successful businesses are doing.
2. Pre-seed your campaign: Momentum can be very helpful. Before your campaign goes live, make sure you’ve invited your friends, and others in your personal network, to support your business. If you can get commitments ahead of time, so when things get launched you can show that you are already well on your way to your goal—even better. Some sites take an all-or-nothing approach. Meaning, if you don’t reach your goal, you don’t get anything. Pre-seeding the campaign by pitching your network of friends and family first will give you a jump-start and say to others who view your campaign, “This is a good idea.”
Crowdfunding is a great way to access capital, even for those who are just getting started or are still in the idea phase. Nevertheless, nothing magically happens. Be prepared to roll up your sleeves and go to work.
Myth #2: Crowdfunding is just for kids
Even though crowdfunding is relatively new and has been embraced by a lot of young entrepreneurs, it’s really about energizing people around a good idea, not about how old you may be. And, there are even seasoned entrepreneurs who are finding success with crowdfunding platforms.
Crowdfunding also provides a great way for entrepreneurs to see if their new product or business idea is something that will resonate with potential customers. As thousands of people are exposed to your idea, you’ll be able to learn first hand about the viability of your idea based upon how many of those viewers are interested in contributing to your campaign. That’s something that will resonate with new and veteran entrepreneurs.
Myth #3: Crowdfunding is the funding choice of last resort
That couldn’t be further from the truth for many entrepreneurs. Not only is crowdfunding not the choice of last resort, for many business owners (particularly those in the early stages), it could be the first choice. Unlike securing a small business loan that may require at least a year or two in business, verifiable annual revenues, and a good personal credit score, the success of your idea with the crowd is based upon your ability to motivate people to back your great idea. That’s not to say it will be easy. The business owners with successful crowdfunding campaigns have worked hard to earn every dollar.
Crowdfunding is one of the options available to startups that wasn’t available just a few short years ago. If your business hasn’t been around for at least a year or two, it can be hard to find a small business loan, but can find a lot of success going to the crowd. And, many established businesses are able to find capital to launch new products or explore new business ideas with crowdfunded projects that might have otherwise never seen the light of day.
Regardless of whether you are a seasoned veteran looking for validation of a new product or an idea-stage entrepreneur trying to find capital to launch the next great idea, it’s important to understand some of the myths associated with this new source of capital so you can evaluate whether or not it’s a good idea for your business.