Can’t Comprehend Kickstarter? Find the Form of Crowdfunding That Really Fits Your Startup

From Kickstarter to GoFundMe to Indiegogo, over the last decade, crowdfunding platforms have exploded as a quick and easy option for raising money. But while these sites may be great to raise money for a friend in need or sell your new smartwatch, are they really a viable option for scaling startups?

Kickstarter has proven itself as a viable platform, raising almost $4 billion since its launch. However, success on the platform is very much dependent on what type of product you have, and what you are looking for from crowdfunders.

At the same time, the blockchain has opened the door to crowdfunding via initial coin offerings (ICOs), with startups having raised more than $5 billion in this manner in 2018 alone. However, simply creating tokens and writing a whitepaper may not be the answer when regulatory issues and well publicized cases of ICO scams are putting this channel of funding in the spotlight for the wrong reasons.

In its many different forms, the crowdfunding model has proven to be extremely effective and has proven that millions of investors around the world are willing to back early stage companies and ideas. But it is extremely important for entrepreneurs to assess their business models, needs and long-term aims to accurately choose the right crowdfunding channels that truly fit their business.

Here are some reasons why:

Related: The New Revolution for Women Entrepreneurs: Crowdfunding Hacks

The lowest hanging fruit is often not the best option

When it comes to crowdfunding, non-equity platforms like IndieGoGo, Kickstarter or GoFundMe are definitely the easiest to get started with. Designed for all types of projects, the platforms are designed to be as accessible as possible. And, the fact that Kickstarter has 4.8 thousand repeat investors demonstrates that these platforms have engaged communities who are willing to put their hands in their pockets.

Projects on these non-equity platforms are designed for shareability on social channels, which can make it quick and easy to reach hundreds of thousands of potential investors, depending on the size of a startup’s social network. For startups with large social networks, a large range of products on offer, and willingness to put in the time and energy to do these campaigns right, the potential returns are huge.

Just look at CMON, the board game startup that raised more than $35 million over the course of 28 campaigns on Kickstarter.

However, when it comes to startups raising seed funding, often the lowest hanging fruit is not the best option. A report from The Crowdfunding Centre shows that between 69 and 89 percent of non-equity projects fail to reach their targets, and on platforms like Kickstarter (which has an all or nothing policy) means startups would walk away with nothing.

And while some projects (such as the Oculus Rift) have raised millions, most successful campaigns raise less than $10K, according to Kickstarter. This is considerably less than the average seed or even pre-seed round raised through traditional fundraising channels from VCs or angel investors, and with the current rate at which startups are burning through funds, most VCs would not even consider investing such a low sum.

Choose the right crowdfunding model for your business

It is important to realize that non-equity crowdfunding platforms are less suitable for certain types of startups. Much of this comes from the rewards system offered to crowdfunders. Those who contribute to non-equity campaigns are generally awarded either a gift, such as company swag, or a product for cheaper than it would sell full price on the market. When investors are only being offered a gift or an individual product as a return for their investment, they are more likely to invest small figures to “support” a company or product that they find interesting, but are less invested in the long-term success of the company.

This limits the chance of success for startups that don’t sell physical products, need seed funding with a view of developing products in the future, offer SAAS or services, or have more conceptual ideas. So virtually any startup that is looking for funds for research and development, or for scaling up talent from just a founding team, may have trouble meeting their goals.

If a company wants investors who are willing to put their money behind an idea, as something that will mature and be able to scale, then it is best to look at different types of crowdfunding options such as:

Using equity-based platforms, investors are rewarded with shares of the startup they are backing, and peer-to-peer contributors are guaranteed a return on their investment over a set time period, plus interest. However, one pain-point in this model has been the fact that, traditionally, investors in early stage companies need to wait years for the company to mature, go public or get acquired before they can reap benefits.

However, over the last year, a number of players have deployed secondary market functions which effectively allow investors to sell shares in companies they’ve invested in to other investors on the platform, allowing them to exit earlier, and trade startup shares like on a stock market.

Unlike non-equity platforms, many P2P and equity-crowdfunding sites are specifically designed for early stage startups, which means that their investor networks are more savvy about the way startups work and mature, and willing to invest more money in companies they think will be able to scale.

There are multiple examples of more conceptual ideas which have raised in prototype stage with great success. Revolut, for example, raised upwards of $18 million from 40,000 investors in two round on two different equity platforms.

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Choose support that goes further than just capital

One of the overarching benefits of more traditional fundraising channels, such as VCs, angels and incubators, is the mentorship which comes with capital investment. For early stage startups, being able to count on the expertise of investors with years of experience in their industry, as well as taking advantage of their existing networks, is invaluable.

In the crowdfunding environment, in which startups could raise capital from hundreds if not thousands of different participants, this has traditionally been more challenging. However, forward-thinking equity platforms are trying to bridge the gap between startups and their community of investors in a range of different ways.

On most leading equity crowdfunding platforms, startups are required to offer quarterly updates, and have set up various different channels to bridge the gap between investors and startups. Many platforms allow investors to ask questions to founders about the progress of their projects, and any other concerns, and also offer added extras such as roadshow events, where investors can meet promising startups face to face. This gives promising projects the space they need to impress potential investors, thus improving their chances of meeting their funding aims.

So, while Kickstarter might not be the best option for your SaaS startup, don’t give up on crowdfunding platforms yet. The first step is to find the model which suits your company, your project and your overall mission for the future.

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