May 11 2012

Crowdfunding: a Fountain of Venture Capital for Startups

By using the small-dollar investments of many, startups have the ability to tap into a viable new source of funding.

Crowdfunding is a phenomenon that will change the financial paradigm forever. Startups no longer have to rely solely on traditional sources of working capital to get their businesses off the ground.

But crowdfunding is not a panacea; it won’t turn poor startups into great startups. It will simply enable them to fail more quickly. Entrepreneurs who lack the skills to run a business won’t suddenly become billionaires. They must be able to run a successful business, with a terrific product and quality customer service to back it up. Crowdfunding is simply an alternative source of funding for getting that business off the ground.

The true value of crowdfunding is that it delivers far more than just hard cash. Obviously, the money you raise is important; why else would you launch a crowdfunding campaign? But there are plenty of other reasons to dive into crowdfunding.

How Crowdfunding Can Benefit Your Startup

If you work your campaign effectively, you could benefit in a number ways that will help you launch and grow your business, and even support your community or social enterprise in the future.

First, you can leverage crowdfunding to conduct market research about your product or service. By asking people to invest in your startup, you can establish whether or not there is a market appetite. If people are willing to give you money so you can create a product they want, then you have a winner. It certainly helps further down the line too, because you can demonstrate proof of concept when you reach out to raise additional funding.

You also build an engaged community of customers. These people are not only willing to pay you to start your business but they’ll likely tell their friends about you as well. Building testimonials from this supportive crowd means you start your business with some positive and powerful case studies to underpin your marketing efforts.

The reward for a crowdfunding donation is often the product or service in development, so in effect you are generating a healthy pre-sale order book for launching your business (just look at the success of the Pebble watch: $10 million and counting). Not many businesses can boast that they started out with a full order book.

The fact that crowdfunding relies on social media (which is free and always inexpensive compared with traditional public relations or advertising) means word of mouth might also provide some newsworthy media coverage for your business.

All of these benefits stack up when you need to raise later-stage funding from banks, angel investors or venture capitalists. You will be in a much stronger position to negotiate, having already provided the answers to many of the questions you’ll be asked.

Keep the Ball Rolling After the Initial Funding

It’s important to remember that a crowdfunding campaign is not just a one-off activity. It should be part of your communications and marketing strategy from the get-go. Links to your project should be embedded in every other form of communication you have. It should be included in every presentation you deliver, mentioned in every conversation you have and shared in every connection you make.

Whether your project succeeds or fails, you can’t simply halt all these social communications and forget the community you have worked so hard to build. Continue to engage with your prospective customers and build on the support they’ve given you to forge ahead. And in the end, there’s no reason why you can’t crowdfund again later.