Every single day a plethora of startups kick off crowdfunding campaigns with big dreams of reaching their targets and scoring a big win for innovation. From entrepreneurs to artists, people have an idea they believe can make money, fill a gap in the market—and change the world, too.
So what could possibly go wrong? Simply put, few startups hit their campaign targets, and among those, some won’t even make a dime. These campaigns fail because their creators start off with the wrong question. Rather than ask: “How can crowdfunding work for me?” the question should really be: “How does crowdfunding actually work?”
Though the failure rate on startup campaigns is high, crowdfunding can still be incredibly effective if you keep two important elements in mind: it’s not just about raising money, and it will always take more work than you ever imagined. If you are looking to launch an equity-based campaign, take note: it’s expensive. Whether you’re talking social capital, labor, or cash—it’s not free.
Forget the Money, Test the Waters
It’s easy to understand why entrepreneurs gravitate towards the crowd rather than apply for a bank loan, or try to overcome the hurdles of angel funding or venture capital. But let’s take money out of the equation for a second. A campaign can provide you with validation from the crowd—or indicate a lack of it. By kicking off a small raise to test the waters, you can see what kind of demand exists, and exactly how donors or investors react. And while the messaging you use is important, the best pitch in the world by the most talented wordsmith ever, can’t make up for a lack of interest or demand if the value proposition just isn’t there.
Effective Crowdfunding Can be Expensive
Most crowdfunders are familiar with the three basic steps in creating a startup campaign.
- Do your prep work before launching: Optimize your site, email campaigns, social media posting, and secure support from a close ring of supporters.
- Provide Incentives: Put some thought into this; don’t be stingy; and follow through on what you tell supporters you will do (and make sure you thank them!).
- Spread the word: During the campaign, craft concise press releases, communicate with supporters consistently, provide updates, and ask supporters to share your campaign.
When it comes to launching an equity raise, however, it’s a different ball game. Many of the techniques above still apply, such as using the credibility of a small, dedicated group of investors—which can get you more investors. But you also need an attorney, not just for filing paperwork, but to approve solicitation materials and more. Even those using issuer exemptions often don’t realize how liable they are—not just for what they say, but to whom, and when. Even the channels you use to do your outreach can get you into hot water.
Mistakes have serious consequences in equity raises. This is where ignorance and good intentions are no defense; the appearance of impropriety is all it takes to launch an investigation.
The last thing I want to do is discourage startups from considering funding from the crowd. But I do want entrepreneurs to be aware of what they’re getting into, and to arm themselves with knowledge and partner with the right people before proceeding.
Take care of the nitty-gritty details first, so that when your campaign is “All systems go!” you can focus on your original mission: unleasing your product to the world and putting your dent in the universe.