Small-business owners look to the cloud for crowdfunding

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Costco Connection Magazine | By Gord Woodward | September-October 2014 Edition

 Pennies and dollars from heavenENTREPRENEURS HAVE traditionally turned to banks, family and friends for business financing. But a new source of funding has emerged: complete strangers.

It's called crowdfunding, the raising of money a few dollars at a time from the general public (“the crowd”) through the Internet (“the cloud”) and social media. And Canadians are using it to fund businesses and products through sites such as Kickstarter and Indiegogo.

“It provides quick access to capital and, more importantly, customer validation before significant resources are committed to projects,” says product designer Tom Korzeniowski, of Design Directive in Waterloo (learn more), Ontario. He raised $8,865—more than twice his goal—on Kickstarter for the launch of the Beer Ranger Badge, a combination keychain, bottle opener and money clip he developed. His pre-Christmas campaign attracted 431 backers whose donations ranged from $10 to $45 or more.

Korzeniowksi applied a rewards-based approach, the most popular form of crowd-funding. Rather than relying on supporters simply being in a charitable mood, he offered them one of the first badges rolling off the production line in return for their cash. “It's all about the perks,” he says.

Worth a try

But there are no guarantees. For every entrepreneur who raises the money needed, there are others who fall short. Costco member Layne Schmidt rounded up just $722 of her $21,500 Kickstarter goal to add a food truck to her home-based baked goods business, The Wicked Biscuit, located in Regina, Saskatchewan.

View:  Research and Insights from over 400K Crowdfunding Campaigns

Timing was a problem, she acknowledges. Her drive started in winter, for an idea that has summer appeal. Still, she's glad she tried crowdfunding and highly recommends it for other small businesses: “It got the name of my company in front of a lot of people.”

Ian Kent, of Vancouver-based Nomad Micro Homes, had a similar experience. He set out last fall to raise $90,000 on Indiegogo, the world's largest crowdfunding platform, to bring to market his less than 3 metres by 3 metres (10 feet by 10 feet) home design that incorporates a kitchen, living room, bedroom and bathroom.

He ended up with almost $32,000, which allowed him to start building a prototype while he continues to seek private investment. Almost as important, his campaign generated a lot of awareness. “It struck a bit of an emotional response in a lot of people,” he reports.

And that connection is really what separates crowdfunding from other financial avenues for entrepreneurs, says Ayah Norris, Indiegogo Canada's community manager, whose family are Costco members. “This is about finding an audience that is going to build something with you.”

That search doesn't require much Internet or social media savvy, but rolling up your sleeves is key. “It's not that there's money growing on trees,” says Craig Asano, executive director of the non-profit National Crowdfunding Association of Canada (NCFA; ncfacanada.org). “It's a helluva lot of work.”

It's a matter of marketing. Word has to be spread. Your circle of contacts has to be tapped (experts suggest 25 to 30 per cent of the goal has to come from people you know). And you must be prepared to answer questions and provide more information to potential donors.

“[Entrepreneurs] will need to treat it as its own business,” says Suzanne Paschall, CEO of Indie Ink Publishing, a Saskatoon firm that is working with NCFA to produce a book on crowdfunding. Having a plan is essential, she says.

The first step is deciding which platform to use. Indiegogo and Kickstarter are the most well known, but the NCFA website lists 67 other Canadian portals to choose from. Be sure to read the rules. Some allow you to keep all the money you raise, less their cut, while others say it's all or nothing: You have to meet your target to collect anything.

Crowdfunding or crowd-scamming?

JUST AS IN the real world, crowdfunding fraudsters on the Internet are only too happy to separate you from your money. Last year, for example, a fake Kobe beef jerky project raised more than $120,000 before it was exposed.

Always conduct due diligence before committing your cash—cash you can't afford to lose. Here are some tips to protect you and your wallet.

Don't take their word for it. The project profile page should only be your starting point. Look for links to other evidence that suggests the plan is real: pictures and first-person videos, biographies of the project originators, etc.

Use your network. Check Facebook and LinkedIn for mentions of the people behind the project. Social media and personal websites might also be available. If nothing turns up, beware.

Ask questions. Contact the project creators to request more information. And send a note to the crowdfunding service, asking for verification that the project is legitimate.

Check the number of first-time backers. Some scammers create fake accounts and make bogus pledges so that their project seems popular. Check the profiles of some of the campaign backers to see how many of them are first-time supporters; if the number is unusually high (compare it with other projects), that can be a red flag.

Report fraud. If you come across a scam, or suspect one, let the crowdfunding service know immediately. Their team will investigate and, if necessary, shut down the project.—GW

Planning for success

Next, says Paschall, write down as clearly as you can your passion for the product or service you want to develop. Remember: You're looking to engage with like-minded people. Also specify how much money you'll pursue and what you'll do with it. Many entrepreneurs want assistance to launch a business or product, but existing firms are also reaching out. A flower shop in Montreal, for example, got $15,000 in a drive started by its customers to help it recover from a fire.

Related:   Crowdfunding Best Practices for a Successful Campaign

From there you have to figure out how to communicate your points to the audience in a compelling way, says Indiegogo's Norris. A short video is essential, and your text has to be lively and encourage interaction. Your pitch also needs to stand out—the crowdfunding field is, well, crowded.

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The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada crowdfunding hub providing education, advocacy and networking opportunities in the rapidly evolving crowdfunding industry. NCFA Canada is a community-based, membership-driven entity that was formed at the grass roots level to fill a national need in the market place. Join our growing network of industry stakeholders, fundraisers and investors. Increase your organization’s profile and gain access to a dynamic group of industry front runners. Learn more About Us | About Crowdfunding or contact us at casano@ncfacanada.org.

 

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