Benefits of crowdfunding go beyond raising cash

When Cleveland-startup Innovative Developments launched a crowdfunding campaign on Kickstarter last February, it aimed to gauge interest and generate pre-production sales for Mycestro, a wireless mouse worn on your index finger. The campaign succeeded in generating buzz, leading to coverage in publications like Wired.com and Crain’s. It also didn’t hurt that in the process it generated $354,115 from a pool of 4,010 backers.

Crowdfunding is an attractive concept to companies within emerging industries whose cutting-edge technologies may not always garner early attention from traditional funding sources. As entrepreneurs in these industries are increasingly questioning the traditional mechanisms by which businesses access capital, crowdfunding has bubbled to the surface as not only a creative approach, but a viable one too. The Mycestro campaign illustrated that the benefits go beyond raising cash.

Crowdfunding is defined as the use of small amounts of capital from a large number of individuals to finance a new business venture or project. It typically makes use of social media to help entrepreneurs approach friends, family members and the Internet at large to “back” certain projects for a reward such as one of the first products or a simple thank you note. The resulting network expands the pool of funders beyond the traditional circle of owners, accredited investors and venture capitalists.

Kickstarter claims since its launch in 2009 more than 4.1 million people have pledged over $619 million to fund about 41,000 projects. In addition to serving as a method of raising capital, a successful crowdfunding campaign offers these benefits:

• Risk Minimization: Starting a company is risky, but securing funding doesn’t have to be. Crowdfunding allows entrepreneurs to leverage the collective assets of their network, which gives them the opportunity to raise capital without giving up company equity.

• Marketing: A well-planned and properly executed crowdfunding campaign can serve as a vehicle to reach stakeholders. It has the potential to go viral on social media, while attracting the interest of more traditional media outlets.

• Proof of Concept: One of the first things angel investors ask is to prove your business has what it takes to give them a return on investment. A successful crowdfunding campaign answers that question and shows there are others who believe in the project. So when it’s time to explain your business to traditional funders you have already had an opportunity to vet the process.

• It’s All Free: You can fund your business, minimize start-up risks and costs, market your venture, and gain proof of concept for free. Many of the leading “all or nothing” crowdfunding sites do not charge an initial fee to start a campaign. Instead, the platform will typically take a three to five percent flat fee off the total amount of funds raised.

For companies like Innovative Developments, these benefits played a key role in their decision to launch a crowdfunding campaign.

“We did not select the crowdfunding marketplace as a method to raise capital,” CEO Dave Greenspan says. “Innovative Developments utilized Kickstarter to provide two key market components: market acceptance of Mycestro and product introduction.”

For other companies, like Mentor-based Advanced Biosensors, a growing frustration with traditional capital attraction methods was the impetus for its new campaign on MedStartr. The company is looking for $60,000 to conduct a feasibility study for a completed proof of concept for its diabetes management technology called The Diabetic’s Dream, an improved micro-needle platform for a wireless Continuous Glucose Monitor.

Dr. Albert Kretz, founder of Advanced Biosensors, views crowdfunding platforms as a natural fit for projects like his.

“After years of trying local and other potential funding sources, I received no support,” he says. “Their position was understandable, considering the large corporate competition and new, single product companies have formidable market presence and strong product identities. Investors wanted to see ‘animal data,’ not just table-top results. Going where ‘angels fear to tread,’ the relatively new, emerging crowd became a natural alternate for exploration.”

Economic development organizations are also beginning to take note of the potential of crowdfunding. Braintree Business Development Center in Mansfield, a member of Jumpstart’s Entrepreneurial Network, has begun partnering with startups to develop and launch successful campaigns. It is currently hosting a series of Crowdfunding 101 presentations.

Braintree CEO Bob Cohen calls crowdfunding “one more tool for entrepreneurial success,” but stresses that it isn’t the perfect fit for all businesses. He points out only 25 percent of crowdfunding campaigns reach their goals.

Much of this difficulty can be attributed to the accessibility of crowdfunding, which allows anyone with an idea to create a campaign. The result can be campaigns led by entrepreneurs who have neither the expertise nor capacity to successfully execute the project, much less a full-scale business.

“Entrepreneurs need guidance to make the best decisions about the pitch, the ask amount, the reward level, and other elements that can increase the chance of having a successful campaign,” Cohen says.

A number of startups and small businesses fall through the funding cracks each year. Although, crowdfunding is not the answer for every organization, it does provide an alternative to traditional methods of capital attraction. When developed, executed and curated properly, these campaigns can provide small businesses with the capital needed to enter new markets, commercialize products and bring innovation to life right here in Northeast Ohio.

Grace Heffernan is Project Manager of Cluster Acceleration at NorTech, where she supports the economic development organization’s work to accelerate the growth of regional innovation clusters in emerging industries.

Source: Crain’s Cleveland Business – GRACE HEFFERNAN

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