Setting off on a mission to start your own business can be a daunting task, and sometimes it’s too scary a prospect for people to make it past the idea phase. Often, the most substantial obstacle is the financial wall between your dream and putting your product in front of consumers.
There are many ways to get a business up and running. Dime-a-dozen experts suggest various methods, steps and checklists that are designed to guide you in the right direction as you embark on your journey of becoming an entrepreneur. Regardless of which guide you choose, it is not going to be easy.
Let’s say that you have taken the dive into the startup pool and have crossed all your t’s and almost dotted all the i’s. You have come up with the perfect idea, coupled with research, market testing and positive feedback. The business structure is in line, federal and state tax ID numbers generated, permits, trademarks, licenses.… Your checklist is littered with blue checkmarks. You have written an extensive business plan and may have even had a lawyer look it over for you. But in the back of your mind, one question remains… “How do I pay for this?”
Traditional methods that have been around for generations are within reach. These include small business grants, investor groups, a bank loan or even self-funding. But these options are not available for everyone and can sometimes involve more risks than a newer method that is growing in popularity: crowdfunding.
Crowdfunding is a startup method that uses the donation of money from the public, or “crowd,” to finance a new business. Essentially, you post your business idea or “campaign” on a crowdfunding website (such as Kickstarter.com or Indiegogo.com), and people who are interested in your product donate money to help get your business started. It’s almost like a “GoFundMe” for business startups — the main difference being that with crowdfunding campaigns, the customer, or “backer,” will receive something in return for their donation. Most often, the backer’s contribution acts as a pre-order for the product the company will eventually provide. Sometimes these donations can include discounts on a finished product, exclusive access or something else as a token of appreciation.
Crowdfunding took off in the video game community around 2012. Historically, video game development and marketing are paid for by large publishing companies like Bethesda, Nintendo and Sony, among many others. But the popularity of crowdfunding techniques gave smaller publishers and independent developers a means to successfully generate funding and exposure to release their own video game titles.
Now, crowdfunding is becoming a prevalent method for business startups.
When utilizing crowdfunding to establish your initial capital, you eliminate some of the negatives that exist with other methods. For example, you likely won’t have to worry about losing a stake in your new company to an investment group or a big-pocketed partner who negotiates a percentage of your business in exchange for their money, because crowdfunding is non-dilutive. The anxieties of borrowing thousands of dollars from a bank are avoided, plus you don’t have to worry about the payback of that loan cutting into your bottom line.
Michael Iseman, chief relationship officer for Startup Junkie, is an expert on crowdfunding and how advantageous it can be to start a business. “Crowdfunding flips the model to the company’s advantage and facilitates a more intimate relationship with their customers,” he says. “Using customer money is the best money to grow a business with.”
Iseman is quick to point out another benefit of crowdfunding, which regards the unfortunate truth of potential failure. According to Iseman, the number one reason startups fail is that they create a product that nobody wants. But “by working with customers to fund the project, [crowdfunding] forces the startup to validate their product/market fit before actually going to market,” he explains. This alleviates the wasted time, money and effort that may have resulted if the company went directly to the market first with a product that was not ready.
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Andrew Gibbs-Dabney recently chose the path of crowdfunding to launch his new clothing company, LIVSN, here in Arkansas. Gibbs-Dabney developed such a strong base of support that he and his team have raised over $75,000 to date, decimating their original $30,000 goal.
One of the reasons Gibbs-Dabney chose crowdfunding was because it allowed him to launch directly to his customer base, without the complexities of retailers. A more traditional method would have resulted in an extra six months of lead time, according to his estimates.
For anyone researching methods to launch a crowdfunding campaign successfully, LIVSN is as good a place to start as any. According to Iseman, successful campaigns receive at least 30 percent of necessary funding by the second day; LIVSN raised 53 percent of their goal on day one.
Earlier this year, LIVSN began a selection process for “brand ambassadors,” who would get in front of potential customers without having to spend a fortune on marketing costs. Ambassadors were provided a LIVSN branded sticker pack, which they were encouraged to use and post photos of in action on social media. They were also given exclusive product sneak peaks, their posts were shared on LIVSN’s website, and in some cases, they were able to engage in product testing.
This gave LIVSN the opportunity to transcend the limitations of only reaching their individual friends and followers and gave them the chance to reach people across the country.
“The most important thing we did was to start marketing and gathering fans long before we launched,” Gibbs-Dabney notes. “We’ve maintained a presence on social media since early in the year, but what was the most advantageous were our efforts toward building an e-mail list.”
With that e-mail list, they created a quick and easy way to stay up-to-date on LIVSN news, including reminders and updates about their Kickstarter. To incentivize this, they promised free sticker sheets to all who subscribed. LIVSN had more than 13,000 people signed up to their e-mail list by the time their Kickstarter launched, which is a big reason for their first-day success.
Not everything they did is going to apply to every startup, but the main idea is to do the little things and put in the work to build a base and to cultivate passionate interest in your product, so customers are excited to back your campaign once it goes live.
The most significant selling point of crowdfunding may lie with the intimate relationship that you can establish with customers before the product is even in their hands. When someone donates to a startup campaign, not only are they showing their support for a great business idea, but they feel like they are helping to make it happen. They have a vested interest in the success of that company and are much more likely to share it with their friends and family. Since crowdfunding relies heavily on word of mouth to get a campaign in front of as many eyes as possible, this is priceless.
Gibbs-Dabney says the feedback he hears from the Kickstarter community is that they “like to be a part of the story,” and that it provides the customer with “a deeper connection to [their] belongings than if you just picked it up at the store.”
As Iseman puts it, crowdfunding “changes the dynamic from a one-way value chain to more of a shared journey, which adds a story and sentiment to the product the customer receives.”
That relationship goes both ways. Most businesses owe their existence to the customers who choose to buy their product, but with crowdfunding, it’s much more personal. The team at LIVSN recognizes this unique dynamic, and Gibbs-Dabney does not take that for granted.
“Our backers/customers are actively making it possible to create this brand,” Gibbs-Dabney says. “We couldn’t purchase our initial inventory without this campaign, and the backers are part of the reason we exist.”
The option of crowdfunding campaigns is an excellent opportunity for startups of the future to ensure that their dreams are not cut short by a lack of track record, investment capital or bank credit. A great idea combined with hard work and building a base of interest can mean that anyone with the drive and motivation can launch a successful brand.
Iseman forecasts that we will see more concepts brought past the idea stage and increased the odds of successful product launches thanks to crowdfunding.