Now that President Obama has signed the bipartisan JOBS Act, small businesses will soon be able to draw upon an army of small investors for venture funding.
With this in mind, I've been watching how this "crowdfunding" works–particularly for product launches, where people pledge money for a certain project in order to obtain the product itself. Because most start-ups are single-product companies, raising investment dollars is likely to be very similar, once SEC established the final rules.
Specifically, I've been following the CEO of a small game company, which asked for $20,000 in mid-April to revive an out-of-production offering. As of this writing, Steve Jackson Games has received more than $600,000 in donor pledges.
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First, a little background. SJG was founded in 1980 as a publisher of board and card games–a tiny market compared to the massive computer gaming market. At the time, SJG's most popular product was a futuristic combat game called Ogre.
Ogre went out of print many years ago and, despite its cult following, the company never seemed to have enough money to bring the game back to life.
Rather than funding the revival from its own cash flow, SJG decided to use Kickstarter.com to gather pledges from potential buyers. As the funding rolled out, SJG did almost everything right, as evidenced by the overwhelming success of the effort.
Here's why I think it was so successful:
- They built a list of potential investors. For years, SJG harvested the emails of people who might be interested in purchasing the game. When they started the crowdfunding, they emailed that list in order to get the ball rolling. Clearly, it's in your interest to build out your connections (through your website and through social networking) so that you can quickly tap people who might want to invest. Do this now; don't wait until you're ready for your Kickstarter campaign.
- They provided multiple investment levels. Ogre donors can contribute as little as $1 (which gives the right to vote on product features) all the way to $5,000 (which guarantees the CEO's participation at a gaming conference). They even have a $0 level for folk who just want to "help out." While the bulk of the investment has been in the mid range, having both the low end and high end helps build buzz.
- They offer investors special recognition. Almost every donor level for the Ogre project has some form of personalization, if only a signed certificate from the CEO. Higher-level donors even get naming rights for game pieces. A similar technique could easily be applied to crowdfunding for capital, by customizing products or packaging to recognize the contribution of your investors.
- They've kept investors involved. During the crowdfunding period, SJG has sent out at least one email a day to donors, usually with a poll that asks for advice on design issues, or what SJG should do with the extra money. The idea here is to give investors a growing sense of ownership, so that they feel like they're part of something bigger than themselves. Plus, the constant updates create the exhilaration of watching a horse race.
There is one thing, however, that I think SJG did wrong. It's pretty clear that SJG was flabbergasted by the success of the project and, as the dollar amount has increased, they seem to be scrambling to come up with reasons for people to keep funding the project.
This is in violation of a general rule for entrepreneurs, which is: Always dream big.
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