The benefits of crowdfunding

Crowdfunding’s appeal is obvious — it’s essentially free money just for having a clever idea. At least, that’s the impression the casual observer gets when they see a guy raise $55,000 to make some potato salad or $6,000 to “hire a man in a plane to write stupid things with clouds in the sky.”

Even with “reward-based” crowdfunding platforms like Kickstarter or Indiegogo, the crowdfunding process allows new companies to gather the capital necessary for their business without giving up equity in their business or taking on expensive debt burdens. It seems like a no-brainer: anyone with sufficient social capital can parlay it into some tangible capital.

But if you speak with the entrepreneurs behind successful crowdfunding projects, most will only mention the cheap money as an afterthought. To them, crowdfunding’s real value isn’t raising funds — it’s raising awareness.

According to a recent survey of Kickstarter projects by Wharton’s Ethan Mollick and the University of North Carolina’s Venkat Kuppuswamy, crowdfunding’s ostensibly ancillary benefits are actually the primary reasons why successful startups use it. “Crowdfunding is not just a means for immediate funds,” said Kuppuswamy. Rather, it’s a way to validate ideas, test markets, launch brands, find customers and impress investors.
When asked why they turned to crowdfunding, 70 percent of successful campaigns said “to see if there was demand for the project,” making it the most popular response, followed by marketing and connecting with a community of supporters. Only 54 percent said “the project could not have been funded without raising the goal,” and a mere 30 percent said they turned to crowdfunding because “other traditional financing options weren’t available.” Among savvy startups — 59 percent of respondents said they were using crowdfunding to launch a new business, and another 17 percent said they were launching a new product for an existing company — the “crowd” is more important than the “funding” in crowdfunding.


So, why crowdfund? “Proof of concept and market validation,” said Lorenzo Buffa of Analog Watch Co., which raised $73,000 on Kickstarter for its Carpenter Collection, an all-natural, soft-strap wood watch.

“Proof of concept” was also “the main reason” why Rooster Soup Co. turned to crowdfunding, according to Steve Cook of CookNSolo Restaurants, the guys behind Federal Donuts, Zahav and a few other esteemed eateries. Their latest is a charitable joint venture with Broad Street Ministry that will uses the profits from selling soup made from Federal Donut’s excess chicken to expand BSM’s hospitality collaborative. Despite having an enviable track record that would make even Allen Iverson levels of over-confidence understandable, Cook said they turned to Kickstarter “basically, to understand whether this was a good idea.” Forty-five days, 1,587 backers and $179,000 later, they knew they had an idea that Philadelphia would get behind.

By going on Kickstarter first, companies obviate the risks of investing a ton of time and money in a product no one wants (sadly, it is too late for AC to crowdfund Revel). “I could have spent a lot of my own money,” said Buffa of Analog Watch. “But that’s such a high risk on my end. On Kickstarter, it’s such a low risk venture.” And even though Buffa “already knew there was demand and interest” for his watches, Kickstarter gave him a better idea of how much demand. “I didn’t know it’d be that popular,” he said.

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