Crowdfunding Guide 101: Everything You Need To Know to Get Funded!
Last December, Nur-E Farhana Rahman sat in an Uber car in New York City, tears streaming down her face. Her months-long project to raise $30,000 on Kickstarter, to expand production at her jewelry company, was about to end in failure. Rahman had thought she was prepared to crowdfund: After she and her mother started Knotty Gal, which handmakes knotted necklaces and other accessories, she intensively researched successful campaigns and planned her own. More than 120 people gave her almost $18,800–but by Kickstarter’s all-or-nothing rules, falling short of her goal meant the entire campaign had come to naught.
“We probably picked the wrong platform,” says Rahman, referring to a Kickstarter audience that tends to favor gadgets over jewelry. “We chose Kickstarter because it had more users, but more doesn’t mean better quality if it’s not the demographic you’re trying to target.” It’s all too easy to make that mistake, especially as crowdfunding’s popularity–and seeming accessibility–grows so rapidly. Last year, North American crowdfunding and peer-to-peer lending campaigns raised $9.46 billion, up 145 percent from 2013, according to consulting firm Massolution.
So how do you know which platform is right for your startup? Pay attention to pricing, the type of campaign a platform specializes in, and what sort of users it attracts, says Jason W. Best of #Crowdfund Capital Advisors. We’ve compiled these details along with fundraising estimates for U.S. platforms. So before you start asking for money, consult our guide to cultivating the popular crowds. *Source: Data on funds raised per platform and per sector is according to the companies and Massolution estimates.
If you have an idea for helping the world–or just yourself–but no product or service to give backers, you’re basically asking for charity. That’s OK: A donor platform lets you fundraise with no obligations to investors. Common uses range from the selfless (starting nonprofits or socially conscious businesses) to the more, well, self-centered (including medical bills and vacations).
Use it if… You have a charity-minded idea–especially if you can swing some sort of a celebrity endorsement.
But watch out for… Some backers have been turned off, Lee says, by the cavalier tone of the CrowdRise tagline: “If you don’t give back no one will like you.”
Total funds raised since founded (2010) More than $200 million
Total funds raised in 2014 $180 million
Founders A celebrity power couple (actor Edward Norton and producer Shauna Robertson) and a fraternal pair of online entrepreneurs (Robert and Jeffrey Wolfe, founders of the outdoor-apparel retailer Moosejaw), who wanted to raise money for a wilderness charity.
Known for Star power: Celebrities including Lady Gaga and Seth Rogen have used it to raise money for their causes.
Pricing About 3 percent of donations for individuals; up to about 8 percent, including credit card fees, for charities.
Use it if… You’re rebuilding after a disaster or creating a product with a charitable impact, and you want to tap a very wide audience.
But watch out for… GoFundMe is filled with sad stories and requests for vacation funding that can seem frivolous. So consider whether asking for business financing here sends the wrong message to potential backers.
Total funds raised since founded (2010) More than $1 billion
Total funds raised in 2014 $470 million
Founders Brad Damphousse and Andrew Ballester, who wanted to create an online savings account for vacations.
Known for Almost anything: Medical bills, student loans, volunteer projects, and wedding expenses are some of the requests on GoFundMe, which now claims to be the world’s largest crowdfunding platform by money raised in 2014. It also gets pulled into social and political issues. For example, this spring GoFundMe banned “discriminatory” campaigns after some users raised funds for businesses that violated state laws by refusing to serve same-sex couples.
Pricing 8 percent of every donation, including a 3 percent credit card processing fee.
Making the Shoe Fit
When part-time pastor Kenton Lee visited an orphanage in Kenya eight years ago, he was shocked by the children’s tattered footwear: Many had cut open the tops of their shoes because their feet had grown too big to fit. Back in Idaho, Lee eventually came up with a solution: the Shoe That Grows, footwear designed to last five years and expand five sizes, using a series of adjustable sandal straps and buckles.
Lee raised money to build a prototype by running a campaign on CrowdRise, rather than on a better-known site like Kickstarter or Indiegogo. “We didn’t want people to pay to receive our product,” he says. “We just wanted people to donate to help make our shoes for kids around the world.”
Within a month, Lee raised more than $101,000, far surpassing his $50,000 goal. And although he didn’t give out products as a reward, the campaign also ended up getting U.S. parents interested in buying the shoes for their own kids. Now Lee is considering turning the Shoe That Grows into a mission-focused business with a donation component, like Toms Shoes.
This is the next level of crowdfunding for many businesses–and the most complex, since it mimics some parts of the stock market. That can mean complications, from pending regulations, for example, but also serious money. Use an equity platform if your business is already off the ground and you need capital to expand.
Use it if… You have an established consumer-product company and you’re looking to fund a new project.
But watch out for… A rigorous screening process makes getting a listing tough; CircleUp says it accepts fewer than 3 percent of companies that apply.
Total funds raised since founded (2012) More than $100 million
Total funds raised in 2014 $40 million
Founders Private equity executive Ryan Caldbeck and Rory Eakin, who wanted to provide financing to fast-growing businesses too small to interest traditional private equity firms.
Known for Cutting-edge food, clothing, and other consumer goods. Companies with at least $500,000 in annual revenue can apply to be listed for CircleUp’s network of accredited investors–which could also get your product in front of CircleUp partners Procter & Gamble and General Mills.
Pricing Commission, typically around 5 percent of the total amount successfully raised.
Use it if… “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. AngelList now boasts 200,000 startups and 30,000 investors.
But watch out for… If you’re considering this as an alternative to traditional venture funding, be aware that most crowdfunding investors won’t take board seats or active mentoring roles, Swart warns.
Total funds raised since syndicates launched (2013) $153 million
Total funds raised in 2014 $104 million
Founders Naval Ravikant and Babak Nivi, who started a precursor blog in 2007, launched AngelList in 2010, and introduced its group fundraising syndicates in 2013.
Known for Helping along seed-stage tech companies.
Pricing Free for companies; investors pay expenses plus 20 percent of the profits on their syndicate investments.
The Social Investor Network
In 2014, Oz Alon raised $10 million for HoneyBook, his online platform for event planners, the traditional Silicon Valley way: through venture capitalists. But he decided to augment that seed round with online fundraising, nabbing another $1 million from 80 investors via an AngelList syndicate. Alon says he wanted a fan base of connected people who would build online buzz for HoneyBook, on a platform where the 55-employee company found three new hires. HoneyBook has since gone on to raise $22 million in additional venture capital, but Alon remains a big fan of AngelList’s group fundraising syndicates. “Today, the network is everything,” he says. “That’s my weapon as a CEO.”
The Kickstarter model, this is the most common platform for businesses or aspiring entrepreneurs. If you have a cool but complex tech product, then a rewards-based site can help you test the market, presell goods, and drum up some buzz. But be careful–some of these venues let you keep the money only if you meet your fundraising goal.
Use it if… You want to keep the money you raise even if you don’t meet your goal, or you have a social component to your business.
But watch out for… If you’re preselling an item but don’t meet your goal, you may be on the hook to deliver products you can’t afford to make, U.C. Berkeley’s Swart warns.
Total funds raised since founded (2008) More than $500 million
Total funds raised in 2014 More than $223 million
Founders Former investment banker Danae Ringelmann with consultants Slava Rubin and Eric Schell, who wanted to raise money for arts projects and cancer research.
Known for Creativity plus charity. High-profile campaigns include film and tech ventures; and unlike Kickstarter, it allows charitable projects.
Pricing 7 to 14 percent of donations, including card fees, as of presstime; will be 8 to 10 percent starting July 15.
Use it if… You have a cool technology product or arts project to test on the crowd.
But watch out for… Sometimes backers change their minds between the time they pledge to support you and when you meet your funding goal.
Total funds raised since founded (2009) More than $1.5 billion
Total funds raised in 2014 $444 million
Founders Perry Chen, Yancey Strickler, and Charles Adler, who spent years working on a way to pool money to fund arts events– eventually creating a site that’s synonymous with crowdfunding and the big money it can net.
Known for Creative projects, especially films, games, and tech gadgets. No operating expenses for charities, and it allows you to keep your money only if you raise all of it.
Pricing 8 to 10 percent of donations, including card fees.
Taking a Flier
Helen Greiner started CyPhy Works in 2008 to make military and commercial drones–but this spring she wanted to see whether a new technology would, well, fly in the consumer market. So she asked for $250,000 on Kickstarter: Spend $5 and receive a CyPhy bumper sticker; $25 for a T-shirt; $395 for a discounted drone–or $585 for one with an extra battery and other accessories. Rewards-based crowdfunding “makes sure we’re getting the right product to sell at retail, and builds an early fan base,” Greiner says. Though the campaign is scheduled to continue through mid-June, it blew through its goal in three days–and gave Greiner a better idea of her target customers and the price they’re willing to pay ($600). “It’s a way to know we’re selling the right product,” she says.
“Running a crowdfunding campaign is much like launching a company,” says Daniel Haarburger, a student entrepreneur who has run two successful Kickstarter campaigns and coaches other entrepreneurs. His advice:
Expand your in-crowd Friends and family go only so far. Before a campaign, use social media to reach out to influential leaders and bloggers in your industry. Haarburger, who built a smartphone mount for bicycles, cultivated design bloggers and people in biking groups.
Make it a full-time job You can’t just ask for money and then walk away. Carefully track your campaign to answer questions and stay in touch with donors. Haarburger tracked his contacts and interactions with spreadsheets, which ensured he was taking consumer feedback into account.
Give yourself wiggle room Many people underestimate the time and cost of making and shipping a product–so adjust your financing requests and timelines accordingly.
Plan your endgame Before you launch a campaign, know exactly what you want: Are you starting a long- term company, creating a standalone product, or trying to realize a more finite goal?