Crowdfunding for Startups – Is crowdfunding right for me?

By Holly Sharp – Purple Spread Crowdfunding

You are here because you want to know – is crowdfunding right for me? Well….there is no such thing as a free lunch and cliche as it is, it applies to (rewards based) crowdfunding as well. There are trade-off’s to be had by taking this approach vs. the alternatives you have available to you. We can help you answer this by focusing on two smaller questions – which we will walk you through:

  1. Do the risks outweigh the rewards for your specific team?

  2. Based on your assets and limitations is crowdfunding the best way to accomplish your goals?


Is Crowdfunding Right for Me?

Question #1 – Do the risks outweigh the rewards for your specific team?

Consider carefully the rewards and the risks of using crowdfunding. This list is set in comparison to other alternative ways of raising money for your epic idea (borrowing, self-funding, equity investment).

Rewards:

  • There is no one you have to pay back or “owe”.
  • You maintain 100% ownership of your company
  • You can validate your idea early in the process before “going big”
  • You will get feedback on your idea in time to make adjustments before launch
  • You get the attention of potential investment, distribution, business partners that can help you along the way
  • You will have a fan club of loyal followers behind you when you do launch
  • If forces you to get your act together and really understand your internal strengths and weaknesses on a smaller scale

Risks

  • You WILL spend hundreds, if not thousands of hours developing and marketing your campaign. We are not kidding, with few exceptions, this is a major part-time if not full time job for a few months of your life.
  • If you jump right in without the know how or experience – there is a 64% chance (best case) of failure
  • You do not keep all of the funds that you raise. Common costs (discussed in detail below) include 10% to the platform of choice, product production through shipping and marketing/pr costs.
  • You have to pay takes on the funds that you raise (see the two tax guides in our resource section)
  • Someone may “rip off” your idea while you are still in the prototype phase. While this one tends to freak people out, we would push you to ask yourself what point of difference you plan to have at launch that you might not during a crowdfunding campaign. If you are relying on IP, it is hard to defend internationally (though we encourage you to explore in enforceable countries). Outside of IP is it quality, customer service or maybe a technology that is difficult to replicate or reverse engineer. If you have that advantage at launch, we hope that you would also have it during your campaign.

If after deliberation and consideration you have decided that the rewards outweigh the risks of moving forward, now we can move onto creating what we call your “goal statement”. This is a structured way of evaluating the goal that you set to gut check that it is realistic based on 1) what you hope to accomplish, 2) your assets and 3) your knowledge or resource gaps. So let’s look at…..


Is Crowdfunding Right for Me?

Question #2- Based on your assets and limitations is crowdfunding the best way to accomplish your goals?

At the end of this exersize, your goal is to fill in the following statement:

I am crowdfunding in order to xxxxxxx
This means, I need to get xxxxxxx
I order to do that I need to (raise or invest) xxxxxxx
My assets are xxxxxx
My limitations are xxxxx
The resources I need are xxxxxx 

This will help you truly analyize what you truly want to get out of the process and what you truly have to put into it to get out what you want. At the end you may find that the time and resources are not worth it OR you may find that it is a great fit for  you.  If you are thinking of seeking advice, help or enrolling in our online course – one of the first questions you should be able to answer is this. Without this, it is difficult for a true professional to really give you the advice that is right for your specific need and campaign.

To get an idea of what this would look like for your team, here are a few examples of this from other teams. Reading through them, you can see how much their approach changes based on their goals, resources and limitations.

I am crowdfunding in order to quit my job and focus full time on my business
This means that I need $50k in salary for 6 months to get started
In order to do that I need to raise $150k from a campaign
My assets are:
– An idea I am passionate about
My limitations are:
– I don’t have a ton of money to invest
The resources I need are:
– Working prototype
– A marketing plan that allows me to be scrappy
– 6 months of working on my time away from work
– Someone to help with the design elements

I am a crowdfunding in order to validate my prototype
This means that I need to make this accessible to as many people as possible
In order to do that I need to invest 35% of my campaign into marketing
My assets are:
– A working prototype
– A small team that can help me
My limitations are:
– Not much money to invest
– I am a designer and don’t really understand much about marketing/crowdfunding
The resources I need are:
– Money to invest in marketing
– 2 months to focus on building the campaign
– Help getting started

I am crowdfunding in order to find distribution or investment partners
This means I need to get lots of press exposure
In order to do that I need to invest $15k into a PR specialist
My assets are:
– Some money to invest in the project
– This is my full time job
My limitations are:
– I have never worked with the press before
The resources I need are:
– An understanding of what I am getting into so I know how to oversee it

I am crowdfunding in order to buy a mold to begin mass production. People love it, we just need to make more of it.
This means my campaign needs to raise $75k in profits
In order to do that I need to raise $300k from a campaign
My assets are:
– We have some money in the bank
– I am working on this full time
My limitations are:
– It is only me and I have a lot of other obligations as well
The resources I need are:
– An intern to help me mange the campaign onto of my normal founder responsibilities
– Training for that intern

 

1. Let’s start with “I am crowdfunding in order to”….. in other words, what is your motivation?

The simple answer seems like – duh- to get money, however, we believe it is more nuanced than this and the more clearly you can define what you truly want to get out of a crowdfunding campaign, the more likely you are to look at your idea and budget and truly make the right call for moving forward. Every campaign will want to accomplish all 3, but really ask yourself, what would you be okay to live without. What if you hit your $300,000 goal but never really got much media coverage – would you still be happy with the outcome? What if you had a $300,000 campaign and barely broke even, but were featured in every major news magazine for your industry? What if you had a $300,000 campaign that failed, but you were able to correct a major assumption you had about your design or marketing before you launched?

Reason #1 – We need money

This is at the heart of how crowdfunding started in the first place. I have an idea, but I need money to take the next step. For teams that are truly focused on that infusion of cash to get off the ground or to keep moving, you will want to consider:

– How can I trade time on my team for what I might otherwise outsource

– How much do I care about media coverage, if I can’t directly measure the impact to my campaign?

– How much money do you have to invest regardless of whether or not you fund? This type of team can be just as successful, but will need to have more time and talent resources in house to help drive the activities required to be successful.

Be as specific here as possible, as you will see in the examples above, the answer was not just “money” it was I need to have a salary to quit my job, money for a mold etc.

Reason #2 – We want to bring attention to our brand

These teams are often the ones you hear of and know about because they are willing to sacrifice profits for lots of marketing and PR. This team is more focused on the potential future funding or relationships that a large high-profile campaign can bring.

To consider:

– What type of marketing and PR agencies will you hire to help you get word out?

– What are your minimum profits you have to be sure to keep in order to still deliver the product. (insert tale of coolest cooler here…..sigh)

Reason #3 – We want to validate an idea we have

These teams can be a blend of the other two, but truly are focused on knowing if they have an idea worth spending time and money on after the campaign. For teams that are truly focused on validation, your focus should be on making sure you have a system in place to easily get feedback from both influencers and your backers. The focus for these types of teams should be on putting resources into their prototype, sampling and team resources that can personally interact with people on social media and in the comments section.

To consider:

– What is the amount that you would need to raise for the team to want to keep moving after the campaign. Yeah, you may deliver the product after a $300,000 campaign, but would you actually quit your job and give it a go?

 2. This means my campaign needs to….

Based on what your strategic business goal is (question 1), now ask yourself, what needs to be true about the universe for this to happen. Forget about crowdfunding for a minute. If you simply wanted the answer of question #1 to be true, what do you need? Let’s look back to the examples above:

I am crowdfunding in order to quit my job and focus full time on my business
This means that I need $50k in salary for 6 months to get started
I am a crowdfunding in order to validate my prototype
This means that I need to make this accessible to as many people as possible
I am crowdfunding in order to find distribution or investment partners
This means I need to get lots of press exposure
I am crowdfunding in order to buy a mold to begin mass production. People love it, we just need to make more of it.
This means my campaign needs to raise $75k in profits
You will see in each of these, that none of them are (yet) specific to crowdfunding, they are simply what this person needs to be true in order to accomplish their goal. It is likely to be the amount of money that that goal represents or who they need to get noticed by.

3. In order to do this I need to (raise or invest)…..based on my assets and limitations.

Here is where you bring the “what needs to be true about the world” need down into monetary crowdfunding terms. Generally this means earning a certain amount of money in profit or investing to exposing your campaign to a certain group of people. Obviously, most campaigns are doing both raising money and investing money, but this helps put the emphasis on what you need more. do you need to raise profits more or invest in an objective that is greater than the pursuit of profits?


This means that I need $50k in salary for 6 months to get started
In order to do that I need to raise $200k from a campaign

This means that I need to make this accessible to as many people as possible
In order to do that I need to invest 35% of my campaign into marketing

This means I need to get lots of press exposure
In order to do that I need to invest $15k in PR

This means my campaign needs to raise $75k in profits
In order to do that I need to raise $300k from a campaign

In order to complete this statement, you need to work backwards from the end of the goal statement back up to this.
Step 1: What are your assets? 
What do you already have that can help you either keep costs low or put towards investing? Below is a list to get you started.
  • Finished prototype ready to share with influencers/press
  • Money in the bank
  • People willing to lend you money
  • Time you can dedicate to working on a campaign
  • People who can help you
  • Skill “know how” -branding, video production, copy writing, design, digital media or PR

Step 2: What are your limitations?

What is currently standing in your way that will make accomplishing your goal challenging? This is basically the same list, as above rephrased.

  • Still working on your prototype
  • Limited money to invest up front
  • No true dedicated resources
  • Lacking skills in branding, video production, copy writing, design, digital media or PR

Step 3: What resources do you need?

Now, take a look at your limitations list. What do you need in order to compensate for your limitations?

  • Is the press really critical to your goal? But if you move forward right now, your prototype would not be ready to share? If so, this is the point where you ask yourself if it’s worth taking a pause to get it ready in order to have it as part of your outreach.
  • If you don’t have a lot of funds to invest, can you compensate by:
    • Offering equity from your campaign in return for their help – there are ad agencies who do this and you can likely find people in your circle who may be willing to do this as well.
    • Do you have friends or family you can call in favors from? Maybe you can’t get someone to loan you $5,000 for your video production, but you can get them to loan you their video camera and an afternoon of their time instead.
    • Leaning on the network you have already built. Do you currently have a decent following that you can leverage that will save you from having to invest a ton in marketing and PR?
    • Finding a partner who has a massive following. We had a client who partner with a designer who designed beautiful paintings to add to a speaker they wanted to crowdfund and were able to leverage that artist crowd to get behind them.
  • If you are trying to do this on top of responsibilities you already have (which is the case for most people) what can you streamline or outsource in order to keep moving?
    • Whether it is our course or not (we happen to think ours is the best to get you working on the right things quickly), is there a source that you can use to have an operating plan so that you are making the most out of the hours you have?
    • Again, can you pay someone or trade equity in your campain for someone coming on board to help you?
    • Can you outsource work to places like fiver or Upwork?
    • Can you bring on an intern who is hungry for the experience and might work for free for a summer?
  • The 6 core skills required to pull of a campaign (outside of general project management skills) are branding, video production, copy writing, design, digital media and PR. Some of this can be taught and some of this either you have as a skill or you need to hire it out. Figure out what you can learn, what you know and what you will need to hire for.

So, let’s revisit one of the examples we have been working with. This team has gone through all the steps up until this point and is trying to figure out what their monetary crowdfunding objective is.

They have a prototype and a small working team, however, they are fairly tight on cash. The founder is a designer and can manage creating their content, but knows very little about marketing and crowdfunding.


I am a crowdfunding in order to validate my prototype
This means that I need to make this accessible to as many people as possible
In order to do that I need to ??????????
My assets are:
– A working prototype
– A small team that can help me
My limitations are:
– Not a lot of money to invest
– I am a designer and don’t really understand much about marketing/crowdfunding
The resources I need are:
– Money to invest in marketing
– 2 months to focus on building the campaign
– Help learning how to execute marketing/crowdfunding

To figure out how to monetize her goal based on the assets she has and the resources she needs – she needs to…..
Step 4: Create a budget
In this example, there are 3 resources she needs to spend some time researching to figure out how she will attain them. Money for marketing, time to focus and help getting started. The founder of this project did our research (or quick plug – took our course) and figured out decided to invest in an agency that could help her with her marketing using a pay for performance model, she was able to hire an intern for $10k for the summer to help with execution and put money aside to help her learn how to run a campaign before jumping in.
So, her budget looked something like this.

 

(To get a working version of this tool with instructions emailed to you click here.)

Because this team was focused on validation, the founder was forced to articulate exactly how many people need to believe in your idea for you to truly feel confident in moving forward. For her, this was 1,000 people. At $400 for her main perk, she was able to get to her goal as being $400,000. For other teams it may not be based on how many people you want to get behind you. For many it is based on figuring out the profit number at the bottom and changing the goal number until you hit a profit number you are happy with.

From there, she was able to see how her biggest decision she had to make before deciding to move forward, hiring a pay for performance marketing agency at 35% would impact her bottom line in addition to paying for an intern, education and misc. costs. This left her with approximately $50k left to reinvest in her business.

For this founder, she decided it was worth it to move forward. She would feel that her idea was validated enough to keep moving forward, not have to invest a significant amount of her own money to hit her goal AND still have money left over to re-invest in her company.

For others, the outcome of earning $50 after all the energy of raising $400k may not seem worth it all, which is why it is so critical to understand WHY you want to use crowdfunding and the major decisions that you need to make based on what assets and limitations you have in order to reach that goal. For some, the answer might be that it is simply easier to go to the bank or to investors – and that is okay – this is hard work and it’s not for everyone. However, we hope this tool will help you make the right decision for you or your team before simply jumping on the bandwagon and diving in.

Best of luck,

the team at Purple Spread
Helping Founders Launch Epic Products into the World
Professional Trainers and Educators