September 26th, 2018
Why Crowdfunding Scares Most Entrepreneurs, But Doesn’t Have To
More people than ever are starting their own businesses. And as all these newly minted entrepreneurs enter the world of being their own bosses, they are all starving for much needed startup funding.
Investors take two forms – angel or venture capitalists. Angles look more towards the person and their team, while venture capitalists focus on the ability to pay back their investment. For a percentage of equity in your business, and often a say in how it is run, you could sell your soul – I mean part of the ownership of your business – to either investor type, in exchange for some cash to get your business running.
I don’t know about you, but selling part of your business to get cash to start the thing always seemed counter intuitive. You do get the experience and contacts of those investors, but still you’re giving up a lot for that privilege.
Enter the wondrous and often misunderstood world of crowdfunding.
Crowdfunding uses your social networks and other contacts to grow fans, friends and followers of whatever it is you are trying to raise funds for – be it a new product, service or a whole company. And unlike traditional forms of start-up funding, you don’t have to sell your soul, give away equity in your company, or even have a business plan. (Though, we all know you should have a business plan, right? That’s just good business sense.)
I spent many sleepless nights worrying about starting a crowdfunding campaign. But I got over my fears, and thought for the good of social media savvy entrepreneurs everywhere, I’d share my top 10 fears with you, so you too can jump on the crowdfunding bandwagon and grow your business.
1. IDEA THEFT
The most common fear all entrepreneurs face when seeking any sort of startup funding is their idea for the next big thing will be stolen.
It’s a catch-22 situation: no one will open their wallet unless they know what you are doing, but if you tell people your big idea, someone with the purse strings to make it happen may make it so, leaving you in the dark.
In the end, I decided my big idea would never happen without the startup funds, so I decided to tell the world in order to grow my business.
2. NO INTEREST
You know you have a great idea – but what if no one else thinks it’s so great?
If you’ve done your homework and done a business plan – remember that’s just good business sense – then you should already know there is a market for your product or service. And, based on your "homework," you should know exactly who your market is, and how to best promote your new idea to them.
Unlike bank loans and seeking out investors, when you crowdfund, you’re seeking out people that have a vested interest in whatever it is you are doing, so you’ll have more interest, not less.
3. NO MONEY
What if you don’t raise any money?
I was having a chat with a fellow entrepreneur, who told me he’s into watches. He’s really into watches. He reads and interacts online in social media forums about watches. He buys watches. He dreams about watches.
He told me, he’d pay a reasonable fee for access to more information about watches. And he told me he knows many more that’d do the same.
Since getting my first cell phone years ago, I’ve never worn a watch. But this got me thinking, if there are people willing to pay to learn more about watches – which I never knew was such a big hobby – then there must be people willing to pay to see my great idea flourish too.
4. LOSE MONEY
It’s easy to spend more crowdfunding than you will earn. This isn’t just a fear – it’s an actual risk.
Generating a buzz to build a fanbase is part of luring people to your crowdfunding project. Giving away cool gifts – often called “swag” – is the other part.
From branded T-Shirts, ball caps and mugs, to cute and cuddly stuffed toys, people put up all sorts of “swag” as an incentive to gain donations towards their project. These items do cost money, and then there is the logistical dollar being spent on postage and handling to ensure these gifts get into the hands of your supporters. And of course all the crowdfunding sites take their cut of your profits, for providing their services.
The key to running any successful business is to foresee any risks, and plan ways to eliminate or minimize them.
Again, it’s all about doing your homework: figure out what your costs are before you launch your crowdfunding project, and this way you’ll be able to adjust your goals to know how much you need to raise to finance all your expenses.
5. NOT ENOUGH RAISED
So, you’ve done your homework, figured out all your costs, and set a reasonable goal for crowdfunding the startup capital you need to start your business.
What if you raise some money, but not enough to cover your costs?
Most crowdfunding sites ensure you don’t have to worry about this.
Kickstarter for example, is an all or nothing model – if you don’t raise all the funds you set out too, you don’t have to pay for anything. You don’t get any of the funds you did raise, but at least you don’t get stuck with a big bill.
Indiegogo has a similar plan, but they also have another plan called their “flexible” plan, where you get to keep what you raise, even if you don’t make your funding goal. They charge a service fee of 9% on what you raised, and allow you to decide if you’ve raised enough to fulfill your gifting commitments.
Other crowdfunding sites have different plans, options, and fees. It’s important to read everything about the crowdfunding site you are using before you begin your project, so you know the costs and risks involved.
However, most crowdfunding sites are setup like Kickstarter or Indiegogo, so you’ll never have to worry about shelling out a lot of cash, when you don’t make your goal.