Raising money is time-consuming and frustrating, particularly when you're not looking for millions upon millions to scale up your operations. Bankers often aren't inclined to lend. Investors may hold out for opportunities to put more money into a company, and might want too much equity in return for what they do provide.
This is where crowdfunding has opened a new frontier for business owners. This still relatively new form of raising capital leverages dedicated social networks of entrepreneurs with companies and investors looking for opportunities. It couldn't be easier to launch a crowdfunding campaign; launching a successful one is a different story.
Here are four reasons why campaigns fail:
1. You didn't nail the presentation.
Social networks may be generally informal, but don't make the mistake of thinking that investors are ever casual. Just ask Lloyd W. Armbrust, II, CEO of Austin-based OwnLocal, which runs websites and does SEO and social media management for small companies.
"We're a Y Combinator company from 2010, so we raised our first chunk of change out of YC," says Armbrust, a veteran entrepreneur. "We had connections, we had some great investors." In 2010, OwnLocal grossed $120,000, with half going to newspapers, radio stations, and TV stations that act as sales agents in their local markets. Partway through 2011, the company was on a million dollar run rate, but needed more cash. So, starting in April, OwnLocal listed itself on an investor site called AngelList.
You can believe that Armbrust had a solid presentation online to catch that interest. "I created a cut-down succinct version of our pitch deck, about four minutes," he says. Then the company posted a video. "The next day, we had 40 meetings set," he says. Eventually he had 10 investors who collectively put in $2 million. "We were talking about a traditional series A, but decided not to because of the number and quality of people we could bring in."
2. You didn't ask for enough.
Experts typically tell entrepreneurs there will be a minimum investment size that is realistic because the amount of work to qualify a $10,000 investment or $100,000 investment is about the same. Traditional investing looks to place larger amounts of money for the sake of efficiency.
In crowdfunding, smaller can often work well, depending on the network you use. Asking for less may seem like a safe approach, particularly on sites like Kickstarter.com, where you get nothing if you don't meet your funding goal. But it can be a mistake.
Many companies that look for smaller amounts of money find that they didn't look for enough to be successful in their ventures. "From the outside, it can seem like every project on Kickstarter is a success," says Joe Demin, founder of Yellow Leaf Hammocks, which had a Kickstarter goal to raise $10,000 and pulled in $11,400. "Until you start digging, you don't realize that a lot of the projects that meet their funding goal still don't necessarily make a profit."
3. You didn't put enough work into working the crowd.
Many also assume that the crowdfunding process is relatively easy compared to traditional ways. Not at all. "There is also a huge amount of time and hustle it takes to build momentum before your campaign opens to the public," Demin says. "There is [also] a lot of vagueness surrounding Kickstarter: their guidelines, the way they select campaigns to feature, etc. It feels a little like you're pledging a secret society when you take the leap."
Dennis Caraher, together with his wife Janet Street, started a side business called Easy Keepers, which sells non-toxic bendable toys. They raised only $4,863 of a $12,000 goal on Kickstarter. "We probably should have built up our fan base before we jumped in," he says. "We thought that… and this is probably a little bit of magical thinking… the video [we produced on the product] is so good that people will be looking for it. But there are thousands and thousands of Kickstarters, so the chance of you attracting attention is pretty remote."
4. You failed to put your eggs in different baskets.
Most important is to remember that crowdfunding may not become your path to capital. "Even if you make your Kickstarter goal, it doesn't mean you're going to make it in the business," Caraher says. "You still need a solid business plan and all the things you need to start a business."
But then, there's a lot more available from crowdfunding than just money. You can build support and the beginning of a loyal customer base. That ultimately can be worth far more than short-range funding.