Course: What is crowdfunding and how can you unlock its potential? 

Crowdfunding! 

What is the first thing that comes to your mind when you hear the term Crowdfunding? In this case, judging the book by its cover might just be appropriate.  But before digging deeper in explaining “What It Is,” let’s talk about who might be interested in understanding crowdfunding and its different types.

Individuals or startup companies that are looking to fund their idea/business.

At the early stage of a startup, the cost of maintaining and growing the business is greater than its capital and revenue.

In other words, you will be burning through a lot of funds to maintain your business when it is still not ready to generate revenue.

Therefore, you would need to raise money using one of the pre-seed funding methods available to be able to keep your company afloat until it can be self-sustaining.

Pre-seed funding is the earliest stage of funding for a new company.

There are several types of pre-seed funding that we have covered in a different video: “Types of Pre-seed Funding”.

Bootstrapping, Grants, “Friends, Family & Fools” or the 3 Fs, Pre-Seed Accelerator Programs, and Crowdfunding. 

In this video, we will be focusing on Crowdfunding…which is the least traditional form of pre-seed funding!

Crowdfunding is an innovative method for raising money from a large number of people.

And by large, we mean hundreds and possibly thousands of individuals pitching in with small pledges.

Mainly done via the internet, it is also a popular and accessible source of Proof of Concept funding, which allows entrepreneurs to gain the resources needed to establish the viability of their business idea. Ultimately, these two features will widen the spectrum from which you can secure financing.

Now let’s talk about the four different types of crowdfunding:

-   Reward Crowdfunding

-   Debt Crowdfunding

-   Equity Crowdfunding

-   Donation Crowdfunding

Reward Crowdfunding allows investors to contribute to your venture in return for non-financial benefits.

However, investors might expect a reward in form of goods or services at a later stage. The more the investors donate, the bigger the reward they will expect. This type of crowdfunding is usually used for creative projects. 

Debt crowdfunding provides investors with the chance to fund the project in exchange for financial interest.

This interest might range from high, low, to no interest at all.

This type of crowdfunding is usually used when people or companies are expecting a certain cash flow that will allow them to repay the financiers.

Equity crowdfunding, also known as Crowd Investing, Investment Crowdfunding, and Crowd Equity…

…allows investors to offer money in return for shares, or a small stake in the business, project, or venture.

This method is ideal for entrepreneurs who are looking for a large amount of capital to launch or grow their business, especially in areas where there is a potential for return.

Usually, these are companies that already have viable operations with a solid consumer base.

Finally, we have Donation crowdfunding, which is self-explanatory for the most part. 

Donation crowdfunding is a way to source money for a project by asking a large number of contributors to individually donate a small amount to it.

These contributors/funders do not obtain any ownership or rights to the project, nor do they become creditors to it. They are - simply - donating. It is usually designed by charities, or entities raising money for social or charitable projects.

Thank you for watching. Check our videos on the hub to learn more about pre-seed funding and the available types businesses can leverage, the different methods for building a winning crowdfunding strategy, and more.                                                                                                                          

Sources:

• European Commission. “Internal Market, Industry, Entrepreneurship, and SMEs: Reward-Based Crowdfunding”
• European Commission. “Internal Market, Industry, Entrepreneurship, and SMEs: Equity- Crowdfunding”  
• Reason Street. “Debt-Crowdfunding”  
• Investopedia.“Donation-basedCrowdfunding”
• Investopedia. “Series A, B, C Funding: How It Works: Pre-Seed Funding"

So are you ready to raise pre-seed funding? 

Test yourself by taking our quiz!

So why and when should you choose reward-based crowdfunding?

Before getting started on crowdfunding, you first need to make sure that your idea is a good fit for this funding approach, and that your team can take on a large amount of work involved with running the required campaign.

Crowdfunding projects need to be very specific and have a well-defined end goal. 

When crowdfunding, tangible products usually do better than intangible projects or services.

Games, big-budget films, design, and technology projects are examples of crowdfunding campaigns that perform well on platforms like Kickstarter.

Very often, this model is great for companies working on Hardware and Product Design projects.

Typically, crowdfunding involves pre-selling limited editions and exclusive access to products before they’re available on the market. 

Not only does this give you the funding you need but also gets your product onto the market immediately, following production.

So when should you get started on a crowdfunding campaign? 

The best time for a campaign is when your product prototype is ready and looks appealing: the prototype may not be completely final but should offer a lookalike that will, essentially, help you sell your final product to prospective customers.

A crowdfunding campaign will help you offset risk in different ways:

It provides market validation from a new community of backers while confirming the demand for your future product, without spending a lot of money. 

At this stage, the objective is to raise money to turn your prototype into an actual product, ready for production at scale, in the promised period.

What’s key here is the ability to sell the product in the campaign, without it being final and user-ready. 

You need to know and understand the manufacturing steps for your product, from building it all the way to final delivery, to avoid surprises. 

Let’s look at an example: the Roadie tuner 

Band Industries, the company behind the “Roadie” guitar tuners, launched their product via a crowdfunding campaign, back in 2013. 

In fact, they were so successful that they used this fundraising model 3 other times after that … Eventually leveraging it more as a marketing tool than an actual fundraiser! 

When they first started, they used a crowdfunding campaign on kick starter to understand whether their product would actually sell. 

Through the campaign, Roadie raised nearly $180,000, triple its $60,000 funding goal. 

This gave the team the market validation they needed and the push to continue developing their product. 

Having found a community, the team focused on building relationships with their backers, building trust, and delivering on their promise in a timely manner.

Bassam Jalgha, Co founder & CTO of Roadie Music by Band Industries, shares his insights on reward crowdfunding with the hub:

"We realised that it's very important for a hardware company to run a crowdfunding campaign.

The benefits of doing a crowdfunding campaign is that the money that we are getting is not investor money, not tied to any VC fund, or tied to any requirement besides us actually delivering the product; so people are actually placing pre-orders on the product which is the best kind of money a startup can get: sales.

The second benefit of doing a crowdfunding campaign is market validation without investing too much money early on.

You can do that pretty quickly early on during the lifecycle of the product, you can launch a crowdfunding campaign, validate whether the product is going to sell or not, and if it's not, go back to the drawing board, and if it is going to sell then go ahead of proceed into production."

So what made Roadie’s crowdfunding campaign so successful? 

Find out in our next video and learn more about how you should get started on your own campaign!

Take the quiz to test your general knowledge on crowdfunding!

 

Crowdfunding is a way of raising money in small amounts from a large number of individuals, usually via the internet. It can occur in different shapes and forms, including:

1

Reward-based, Equity-based, Debt-based, or Donations as the main categories.

2

Using cryptocurrencies, for private initial coin offerings.

3

Gathering funds from “Friends, family & fools” abroad through online money transfers, notably using international money transfer platforms.

4

All of the above

1 / 7

True or False: Reward Crowdfunding allows investors to contribute to your venture in return for non-financial benefits.

1

True, when participating in a reward-driven crowdfunding campaign, investors, or “campaign backers” usually expect a reward in the form of goods or services at a later stage.

2

False – investors will always expect interest or equity in exchange for financial backing.

2 / 7

Reward crowdfunding is particularly relevant for:

1

Companies looking to develop tangible products - for example, games, big-budget films, design and technology projects; or hardware and product design projects.

2

Charities and other non-profit organisations looking to raise for a cause/ social or charitable projects.

3

Companies struggling to raise from a VC fund and looking to give away some equity in exchange for some funds as they are bootstrapping.

4

None of the above.

3 / 7

True or False – typically, reward crowdfunding involves pre-selling limited editions and exclusive access to products before they’re available on the market.

1

True – not only does a reward crowdfunding campaign give you the funding you need but also gets your product on to the market immediately, following production.

2

False – You should already be selling your product through official distributors before kicking off your crowdfunding campaign. How will people have a clear idea of what your product is about, otherwise?

4 / 7

Equity crowdfunding and debt crowdfunding are types of crowdfunding mechanism that are are…:

1

One and the same – they both offer investors shares in return for financial support, meaning a small stake in the business, project, or venture.

2

Quite different, with equity crowdfunding offering shares in the venture, while debt crowdfunding offers financial interest (provided a certain expected cash flow that will allow repayment.)

3

A sort of fad, as it is very unlikely that you’ll be able to generate any type of return on your investment in both cases.

4

None of the above.

5 / 7

Equity crowdfunding is ideal for…

1

Risk-averse Venture Capital funds and helping minimise the risk offering a co-investment mechanism through such a campaign.

2

Entrepreneurs looking to raise from family, friends and fools, using a clear and state-licensed mechanism to make sure all is in order.

3

Entrepreneurs who are looking for a large amount of capital to launch or grow their business; and already have viable operations with a solid consumer base.

4

Companies about to go public / IPO and trying to understand the demand for their stock by offering some capital using this crowdfunding mechanism.

5

Entrepreneurs looking to raise from

6 / 7

True or False – overall, crowdfunding is a simple marketing tool for your product / current (or future) company that requires little effort.

1

True – it’s effortless and will get you great visibility. So you might as well go ahead and click on that “Create Campaign” button!

2

False – the biggest mistake entrepreneurs can make is to launch a campaign without a clear plan of action. If you are not ready, no one will see or believe in your crowdfunding campaign. So make sure you prepare months ahead of clicking that “Create Campaign” button.

7 / 7

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Here are some tips for entrepreneurs considering the ‘reward crowdfunding’ route:  

First, choose the platform that makes the most sense for your project: Choosing a platform for your project is the first major decision you need to make in relation to your actual campaign. There are many different options for crowdfunding platforms, so it is important to consider each platform as it relates to your project, specifically. An important element to consider is where you will find your largest number of backers.

Band Industries’ team behind the Roadie guitar tuners has had a good run with crowdfunding campaigns, with 4 successful crowdfunding campaigns to date. In their case, the company team knew that it was looking to reach an American market, so they chose Kickstarter. Now, Band Industries also runs extension campaigns on other platforms like Indiegogo, to tap into different communities.

Secondly, decide on your goal, or the funding amount you are looking to raise: Be reasonable: meeting that target will be crucial and an indicator of whether you have some market validation, and by extension, whether you should continue with your product. Having a clear reasoning for the target goal and amount is very important, so study that carefully.

Take into consideration initial product, team, and marketing costs. A starting point could be to identify the price per product – usually, your production cost x 10. Build on this to identify the amount you need. Marketing is central to the success of your crowdfunding campaign. Set up a project and communication plan for your campaign in advance.

Some important aspects to consider include:

Creating a compelling video showcasing all the future features of your project. The video should present a clear look-alike of how you intend your product to look like, when you are done with the fundraising and actually distribute the finalized product to your backers.  

Building your mailing list. To do so, plan for sign up teaser campaigns that promote your product and engage potential backers around a sign up call offering an ‘early bird’ notification to alert them that the crowdfunding campaign will be going live.These teasers should drive early sign ups and will give you a pool of potential backers to tap into once you launch your campaign.

The best way to go about this would involve: Leveraging your social media platforms, your network, and any other channels to create a buzz and ensure maximum participation in your crowdfunding campaign as soon as you announce the launch.

Overall, be ready to spend online to build awareness and generate early sign ups. Plan for a media and PR campaign a week before the campaign launch. Reach out to specialized media platforms covering your industry, where you’re likely to find your target audience. 

Overall, make some noise and get creative with your marketing strategy!  For example, the Roadie tuner team built a chromatic tuner application that they made available for download on the App Store. Offering this app for free allowed them to generate qualified leads for their hardware product and identify potential backers that would be ready to invest once the campaign launched. 

A final word of advice: 

Crowdfunding is a powerful marketing tool for your product and current (or future) company. If you are not ready, no one will see or believe in your crowdfunding campaign. So make sure you prepare months ahead of clicking that “Create Campaign” button.

Next - let’s look at key aspects to keep in mind as you prepare your crowdfunding campaign.

In a nutshell, there are 3 Main Pillars you should focus on: Marketing, Product, Legal

We largely covered the Marketing aspect in our previous video. 

But one aspect to really focus on is building your mailing list. Driving early sign up will give you a pool of potential backers to re-engage and tap into once you launch your campaign.

What is key here is to set a target goal for the numbers of emails you plan to collect, based on your fundraising goal, and to assume a conservative conversion rate from “interested” leads, to backers. For example, let’s assume you’re raising $100,000.

With your product and crowdfunding ticket worth a $100 per donor, you will need to engage a total of a thousand backers to reach your target.  But if we take a conservative conversion rate of 8% from the early bird backer emails you collected, you will need a minimum of 12,500 emails … an ambitious number to work towards.

We mentioned before that the best way to go about this is to put your social media platforms to work. Be prepared to spend on online social media campaigns to generate signups, and collect the emails of potential leads. When it comes to the product there a few elements to think about –

Identify partners you are confident working with - both locally and internationally.

Finalize your design for manufacturing and set clear contracts with your manufacturers.

Understand the timeline for production, and define what the production pillars are within this stage so that you can be ready to deliver once the crowdfunding campaign is closed.

In terms of product pricing, use a 4 x rule: if the manufacturer gets $25, then you should sell at $100. Also factor in production/manufacturing and shipping costs, if you are producing a tangible product. Price should stay fixed after the campaign, though you should think of offering a very early discount as an incentive for your backers to join in the crowdfunding campaign.

Another important topic – the Legal side of things

Registration, legal protection and certification are additional costs to consider. Register your company in the country you’re fundraising in: for example, if you are planning to use Kick starter, you will need to be incorporated in the US.

Make sure you protect your idea: think about patents and brand trademarks before going public. Because a patent can take time and is often relatively costly, you can consider a provisional patent until you have collected the funds to obtain full rights. 

Start with localized patents for the countries where you are manufacturing and selling. You can then obtain the rights for more countries as you expand to new markets over time.  Finally, being certificated will become important post crowdfunding, once you start distributing through retail.

Next, let’s look at what you should consider once you’ve officially launched your campaign and after you reach your goal – which is as important as the pre-campaign preparation phase.

There are a few steps that can help you do achieve: 

Organize a kickoff event that can help generate some buzz - whether offline or online. Leverage the mailing list that you’ve built ahead of the campaign: send personal emails, direct message reminders, and newsletters to update your supporters and other potential backers. Continue to work on your media and PR reach: publish interviews and articles to continue building a buzz. 
 

Some other ideas to engage your audience include: Answering emails & FAQs, planning a live Q&A session, starting a referral contest, socializing on your established channels 

Once the campaign is over, communicate your success and thank your community and supporters.  Now’s also the time to grow. Leverage your success: Update your campaign page as well as your channels. Redirect to your online shop and website to start selling.  You can turn your crowdfunding into an ecommerce Crowd-business by continuing to run a pre-order campaign from the website. 

Next comes the time to deliver on your promises. 

Start production and, as much as possible, stay within the timeline that you previously set when thinking about the production side of things. Keep thinking of your cash flow: avoid the “valley of death” – that tipping point when the startup's cash flow dip to dangerously low levels, threatening the company's immediate viability. The production period might lead you to face a cash flow crunch, given all the costs you will now be incurring to deliver on the final product. Think about operations, continue fundraising, and find creative ways to maintain your cash flow. 

When it comes to raising funding, avoid engaging investors when you are in the midst of a facing cash flow crunch.  Fundraising from investors should come either pre or during the campaign, when you are at a high point with strong demonstration of traction, to make sure you are not in a position of disadvantage when you approach investors. 

Overall, always maintain a clear channel of communication with your backers: keep them up to date at all times.  Share updates with your community on a rolling basis. Send out backer-surveys to collect insights. 

Be transparent about any delays or hiccups you might face along the way.  When all is done, you can finally reward supporters as promised!  Make sure to get them to share their excitement over social media and among their network.  

Nothing like word of mouth for good organic growth!

But is it right for your company, and why should you consider it? 

Equity crowdfunding allows you to raise funds from individual investors in exchange for shares in your company. It may be less suitable for creative or hardware, product-focused types of projects. But it can prove of great value to companies seeking funding to further build more complex service offerings – Whether an application, a food business or even technology moonshots like… flying cars!  

 

Equity crowdfunding could be right for you, if… 

… you’re evolving in an industry that is not necessarily ripe yet, and where local investors are hesitant to back you, without clear traction. Validation from individual backers sets you up for success in future rounds of funding. Not only does it allow you to extend your company’s runway, but it also offers valuable proof-of-concept. We’ve explored best practices for reward-based crowdfunding campaigns. There are however some notable differences to take into account, with equity crowdfunding. 

First, find a lead investor 

Small investors may be reluctant to come into a project that doesn’t yet have backing. A committed investor sends a positive signal that accelerates the fundraising process.  Secure a lead that can commit to investing at least 20-30% of the total required amount  
 

Secondly, focus on building a network of potential investors  

Target industry professionals with a clout, who can support the campaign and the company as ambassadors, now and in the future. Reach out widely and to build a strong network months ahead of the campaign. Whereas reward-based campaigns can rely a lot more on emotion, in this case, it’s essential to emphasize the business aspect. Share metrics, make the case for growth and the opportunity investing in your company represents. 

Third, set clear and achievable milestones  

There are two different targets to think about: Your main target is the overall amount you are looking to raise. It should provide your business with about 6 months of runway. Your minimum target is the lowest amount that you can tap into, as you continue running the campaign. Be realistic with both and make sure to provide detailed explanations on what you’ll do with the funding. 

Next, provide supporting financial documentation  

A company raising funds on an equity crowdfunding platform is required to provide more or less elaborate financial documentation. Depending how much you are raising, you may be asked for CPA-reviewed statements. Do study and prepare the required documents, ahead of setting up the campaign on the platform. 

Finally, structure the funding round & plan for your legal obligations  

On platforms like We funder, convertible notes are commonly used to structure the funding round. To avoid having too many stockholders on the cap table, a special-purpose vehicle or SPV is set up, where investors pool in their capital to invest as 1 entity, generally represented by the lead investor. Based on the amount you are raising, agree on a valuation and the equity you are willing to give up to your incoming investors. You will then have serious legal obligations, including annual general meetings with shareholders, annual reports, and decision procedures.  

If you’re watching this, you’re probably already thinking about getting started on crowdfunding.

Make sure to explore the rest of our series to understand best practices when it comes to preparing your campaign…and happy crowdfunding! 

 Sources: 

AD SME Hub Interview with Mohamed Zaid Founder and CEO of Fanera 

Wefunder: “INVEST IN FANERA The New Era for Football Fans” https://wefunder.com/fanera  

Wefunder: "TERRAFUGIA Flying cars. Seriously" https://wefunder.com/terrafugia/ask  

Wefunder: Getting Started https://help.wefunder.com/#/investor/getting-started-for-investors 

Wefunder: "How do SPVs work?" https://help.wefunder.com/spvs-custodians/how-do-spvs-work-investor