MONEY

Successful Crowdfunding Requires a Little Elbow Grease

A case study that reveals while crowdfunding can be lucrative, it's also a lot of hard work.
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I spend much of my time these days working with young entrepreneurs. I love it, not just because I enjoy helping people be successful, but also because I learn so much in the process. Recently, for example, I had a lesson in crowdfunding. My teacher was a young woman named Marisa Wu, the founder and owner of Salty Road, a Brooklyn-based business that makes artisanal saltwater taffy.

Salty Road had been in business a couple of years by the time Marisa first came to see me last year, and demand for her product was so strong that she’d been forced to outsource the taffy making to a confectioner in Maine. She wanted to bring production back to Brooklyn, however, and had her eye on the equipment she’d need.

The problem was, she couldn’t afford it.

I asked her to bring me a list of the ways she thought she might raise the necessary capital. She came back with a list that included all the traditional means--borrowing from family members, approaching independent investors, getting a bank loan--and one other: crowdfunding.

I had looked at some crowdfunding sites but hadn’t studied them closely enough to know much about the process. What I did know is that, given a choice, it’s always best to go with the option offering the most benefit for your business. I pointed out that, in Marisa’s case, crowdfunding would give her an opportunity to promote Salty Road among the people most likely to buy it (who are also the people most likely to fund it). She could also use her goal of bringing manufacturing back to Brooklyn to generate media coverage--and might be able to expand her market in the process. She liked that idea and went to work creating a Kickstarter project. I, meanwhile, did some research.

One thing became obvious to me right away: A successful crowdfunding project takes a huge amount of work. There are at least eight different elements you have to get right, ranging from setting good goals to choosing appropriate rewards for contributors. My guess is that, next to having generous friends and wealthy relatives, solid preparation is the most important factor in raising the capital you’re looking for. Marisa did a ton of research and applied what she learned. The result was a very successful campaign. She exceeded her goal of $10,000 by more than 150 percent, raising $25,120 in just three weeks.

As I watched her, it struck me that crowdfunding is basically a new and improved version of what I used to call “Rolodex financing.” By that, I mean getting capital from people you know--friends, family, and acquaintances. Marisa has many friends and contacts in New York, as well as customers from around the country who have bought from her in the past. She did an email blast and worked her networks to let them all know about her crowdfunding campaign. She also did interviews with local media outlets, which alerted strangers to her project. As a result, she was able to elicit contributions from a wide range of people--355 altogether-;and she did it without giving up equity or saddling herself with debt.

But a crowdfunding project serves another, less obvious purpose as well. For many products, especially consumer goods and services, it’s a way to test the market. From the response of strangers, especially, you can get a rough reading of the level of public interest in whatever you’re offering. Marisa, for her part, was surprised and encouraged to find that half of her support came from people she didn’t know. If she eventually decides to raise capital from equity investors, that information could help.

So thank you, Marisa. From now on, I’ll be recommending crowdfunding to more of the people who come to me for help.

IMAGE: Getty Images
Last updated: Feb 25, 2014

NORM BRODSKY | Columnist

Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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