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The Idealog 2015 guide to crowdfunding
Ask any wannabe entrepreneur: in 2015, crowdfunding is where it’s at. The seeming golden ticket for a million would-be start-ups, crowdfunding seems to promise a no-catch ‘crowd in the cloud’ solution for those looking for an easy way to finance their next big project.
And crowdfunding is big business. According to the 2015 Massolution Crowdfunding Industry Report, US$16.2 billion was raised in crowdfunding pledges last year alone, with the same report predicting that figure will balloon to US$34.4 billion this year.
Like anything however, there are pros and cons. And there are many subtleties around running a successful crowdfunding campaign. So Idealog has put together this up-to-date guide for entrepreneurs looking to get their slice of the crowdfunded pie.
Friends with benefits
If you’re looking to launch a project or product, there are plenty of reasons to consider the crowdfunding route. For one, it works – mostly. Gone are the days when raising money was all about banks, venture capitalists and accredited investors. Now, it’s a short step from a great idea, a decent plan and a bit of chutzpah, to real money in the bank. Crowdfunding also hedges financial risk for start-ups, allowing entrepreneurs to launch their ideas quickly, validating the market as they go, and maybe just building a customer base in the process.
Bad news first
Crowdfunding is not all champagne and roses however. With crowdfunding, the bar to entrepreneurial participation is significantly lowered, meaning more ideas get funded than can ever hope to offer real returns. For some backers, this can be a negligible issue –especially if investment is low and all parties are aware of the risks. When backer investment is high however, investors need to be careful, knowing exactly what they are doing (or seeking expert guidance) and of course, never laying down more money than they can afford to lose.
The risks are real for entrepreneurs, too. Dilettantes can easily be overwhelmed by the sheer amount of work required to maintain a crowdfunding project once it’s begun. Likewise, cost of fulfilment can be wildly underestimated, leaving entrepreneurs with hordes of disappointed backers baying for blood, and perhaps facing bankruptcy and legal proceedings.
In either scenario, an unsuccessful campaign equals a lot of time, effort and perhaps money, all for nothing.
With the right planning however, some great marketing and a clever idea, anything is possible, and if you’ve read this far, you’re probably ready to take a few risks to strike the jackpot.
So which platform works best for who?
There are, essentially, three main kinds of crowdfunding options available and your particular product or business model will dictate which one is best for you.
The first is donation-based. This is, more or less, charity. With donation-based crowdfunding backers make donations and receive tokens of appreciation, depending on the amount they donate (small donations may receive nothing at all). This is an option best restricted to feel-good projects. You’re operating very much on goodwill here and the audience expects little concrete, personal reward in return.
The second is reward-based crowdfunding. This is the option most of us think of when we think crowdfunding. Think a Kickstarter campaign that offers some sort of tangible reward – give us $5 and we’ll give you a CD – in return for pledges. This is the most popular form of crowdfunding and its greatest strength is that it lets start-ups sell something that hasn’t been created yet. You ask backers for pledges and once you’ve got enough to start production, you make the item and ship it to your supporters.
The final type is equity crowdfunding. This is where you raise funds by offering shares in your business to the public. The benefit of this type of crowdfunder is that you avoid a lot of the complexity, cost and labour associated with traditional equity fundraising options, and you get the support of invested, sometimes passionate, shareholders, who are very much interested in your success or failure – and may be interested in buying your product too.
New Zealand law changed last year and equity crowdfunding is now fully regulated in this country, meaning that to participate you’ll have to be a registered New Zealand company and you’ll need to provide documentation like a business plan, financials for up to the last three years, and projections for the next three years. You can also expect background checks to be run on all directors of the company.
So which platform is for you?
Creative and quirky projects often do well using big overseas donation- and reward-based sites. Making hats for cats? Think Kickstarter, Indiegogo and now, Etsy.
If your project is especially niche, there’s a wealth of specialty platforms out there to suit, servicing everyone from artists to scientists to anything else you can think of.
For the serious Kiwi start-ups however, there are a few well-known local options that make more sense, such as Snowball Effect, PledgeMe and Equitise. All three have supported successful campaigns to date. Less well known New Zealand competitors include Liftoff, Crowdcube and My Angel Investment.
Ready, steady, not so fast
So far, so good, but before you start taking product shots, let’s get our ducks in a row.
Are you ready for your idea to become public knowledge? Now might be a good time to trademark your business and product names, talk to a patent attorney and get any advice about protecting your intellectual property before the big launch.
It’s also a good idea to research crowdfunding by backing a few campaigns yourself. This doesn’t have to be more than a couple of bucks, but watching how others tackle the myriad issues, and their success or failure to produce results, might be an eye opener. Cherry pick ideas from the best ones: Who’s got a great video? Who communicates best? Who managed to upsell you? Which projects went south and why?
Follow several local crowdfunded projects, then research them online to see which media channels picked them up, what angles those media outlets chose and the way they were covered.
That old chestnut about reading the fine print doesn’t hurt either, and every crowdfunding platform has its own specific terms and conditions so read them from end-to-end before clicking ‘okay’.
There are few hard and fast rules about crowdfunding, but here’s one: You can’t have a successful crowdfunding campaign without a crowd. Even the best idea is headed for the crowdfunded toilet if there’s no one there to see it. A cold crowdfunding launch is a dead crowdfunding launch.
When it comes to launching a successful campaign, your audience is your greatest asset, so, like any typical marketing initiative, you’re going to need to research your market.
Talk about your product, get potential investors onto your mailing list from the very beginning and every moment ever after. Update them often, monthly is a nice round figure, in the lead up to your launch.
Kiwi crowdfunding advisors Multitude liken a pre-launch strategy to teenage ‘pre-loading’ drinks before a drunken night out. ‘Pre-load’ your backers before the party starts by running an email campaign, hitting social media hard and making as many connections as you can, well in advance of your launch.
You’ll do well to consider that only the tiniest percentage of backers are likely to discover your project via your chosen crowdfunding platform itself. Regardless of how it may appear, there are few overnight successes in crowdfunding. Time and time again, the wisdom of creating networks before you launch have been proven correct. Don’t run the risk of sinking a lot of time and money into an unsuccessful project because you didn’t build your crowd first.
Watch your tone
We all know the value of hype when it comes to marketing, but crowdfunding is a little different. Crowdfunding works on transparency. Investors want to know your costs, they want to be aware of the challenges you are facing and they want to know what you’re doing about them. Promising backers that it’s all plain sailing, and defiantly assuring them there will be no hiccups whatsoever, is a great way to burn through the precious goodwill you’ve accrued. Optimism is good, but honesty is better.
Speak like a real person with a great idea (that’s what you are, after all), not like a salesman, and focus on making that emotional connection.
How much should you ask for? There are no hard and fast rules, but many first-timers make the mistake of asking for too much. A good rule of thumb is, instead, to ask for only as much as you need to get your project started. As long as you hit your target, you’ll get the money and you’re away. Everything else is icing.
Note: You are expected to be transparent with how you are going to spend the money, so tell your backers you are only asking for the minimum to get up and running – or to get you to the next stage.
The campaign itself
The secret to great crowdfunding communication is simply to make sure you do it. Backers want to know what’s going on, whether that news is good or bad. Potential funders will research whether you’re openly communicating during the campaign to help them decide whether to back you, so it’s well worth the extra effort of actually creating a communication schedule (one or two updates a week is a nice round number) and sticking to it for the life of the campaign.
Things you should talk about: the benefits of your product, every single new milestone you reach, new features you’re adding, successes you’re having, plans for the future, cool stuff you’re going to give your backers, and anything else that adds to the story.
What you shouldn’t talk about: How desperately you need the money, frustration that you’re not gaining media interest, fear that it’s all turning to custard.
Be scrupulously honest and follow through on any and all promises you make. Trust is everything.
“Always be closing,” a great man once said and it’s true, so make sure you include a strong call to action that tells your audience exactly what you want them to do.
Success! Now what?
So you’ve hit your target. Feel free to do a quiet fist bump with yourself or business partner.
If you’ve been a running a donation- or reward-based campaign, it’s time to start production.
If you’ve been running an equity campaign, your first move is to contact your new shareholders with a celebratory message, and start working through the paperwork. Talk to your new investors about what they expect, what they want to get out of the relationship, and don’t forget: they are a resource. Find out who they are and what they can do. They have a vested interest in your success, so take advantage of the new connections you’ve made.
Success? Not so much
If it hasn’t all gone to plan, don’t despair. There’s nothing to stop you from trying again, immediately, six months from now, or further down the track. Examine what you did right and try to recognise what you did wrong. Did you build a crowd? Did you botch your comms? Did you ask for too much?
As Edison said, if you learn from your mistakes, they’re not mistakes at all.