Crowdfunding is featured on the news every so often linked with some entrepreneur hitting it big. But is it really worth pursuing? We spoke to 3 CEOs on our podcast to find out what crowdfunding is and if it’s worth it.
Crowdfunding websites and the success stories coming out from them seem to be spreading everywhere these days. We’ve all heard about Kickstarter, GoFundMe and Indiegogo among others. Maybe you’ve even invested in a project or two yourself. Yet you often find yourself wondering what’s crowdfunding all about and whether you should use to fund an idea.
We spoke to three distinguished CEOs on the Cerius Business Today podcast with decades of experience in startups and funding for their thoughts on crowdfunding, and whether it’s a viable option for young entrepreneurs today.
What is crowdfunding?
Crowdfunding is essentially raising capital through monetary contributions from a large number of people. You can fund a business venture through two very different types of crowdfunding. The older kind is where you sell products before production to individuals who are interested in innovative and new products.
Jeff Greenberg is a serial entrepreneur with 25 years of experience in the high-tech community and with technology based startups. He explains it as: “You’re just pre-selling products, and this kind of crowdfunding is where people have years of successful history. What they’re really doing is just tapping into the early adopter market and that doesn’t necessarily ensure success into the mainstream. So you still have to have a marketing plan to get into the mainstream.”
The second kind is more recent and involves raising equity in large amounts from a small number of ordinary people who are not professional or qualified investors. Jeff tells us, “That’s still fairly new and it can be effective. However, it does take a lot of overhead to execute against it. And the best practices, to be honest, on that approach are still being developed.”
Visually appealing products fare better in crowdfunding
The most important factor for crowdfunding to be successful is for you have to have something which is visually appealing says Kevin Gibbs, who has been with four startups from angel funding to the final sale of the company, and has also worked on a number of turnarounds.
Aesthetics is especially vital in traditional crowdfunding markets because it helps get your story and message across to potential investors. Giving the example of a banking software, Kevin tells us how difficult it would be to raise capital for it because of its lack of visual appeal. It may be a good product, has a very good market and may be financially viable, but it would be even more difficult to attract investors in a traditional crowdfunding market.
“You need something with a look and a feel that people can visualize and understand both in perspective there,” he says. “It’s very good for one particular type but for other regions, if it’s not visually appealing, or it hasn’t got an easy story, or it’s not something you want to pre-sell, it’s going to be very hard to make money or raise money in a situation where it’s not something you can look and feel.”
It the most basic scenario, consider how many menus have pictures of the food on it. Words don’t tell the story. Pictures do.
Crowdfunding is not always reliable
Ken Hubbard is an advisor at ACH Ventures holding investments in 60 companies, as well as, sitting on the board of directors for multiple technology and consumer product companies. He told us a story of how unreliable crowdfunding was for a company he knew.
Recalling his initial conversation with them, he said, “A company came to me about a year ago, and they were looking for just under a million dollars. I said, ‘What are you going to try out? How are you going to raise?’ They said, ‘Well we want to try this crowdfunding. It’s the equity side not the gift side.’ So I said, “All right, well you try that and call me back.’”
Eight months later they called him back and told him what had happened since. They had put everything up on the equity site, a popular and widely-used one, and they had promises of $2.4 million. They felt really strong, but after everything was set and done and 8 months of time was burned doing videos and documents and more, they ended up with only $100,000.
It landed the CEO in trouble and put him in a desperate position where he needed money immediately to cover expenses, but by then nothing could be done about it. “It’s partially because of the CEO possibly not presenting when he talked to some of these investors, and partially because the scenario is still in its infancy and people don’t really know how to engage it well,” explained Ken.