3 Reasons Start-ups Should Consider Crowdfunding
If you have ever birthed a new idea, you undoubtedly are familiar with the immense headache involved with getting it to market. The patent process can cost tens of thousands of dollars, take years to finish, and more than likely will result in something altogether different than when you started (if it results in anything at all). Prototypes, packaging, and samples must be developed and often at the expense of a second mortgage. If you make it that far, you then need to negotiate valuable real estate (shelf space) with retailers, and with a new and unproven product, you start with zero leverage.
Yes, getting a product to market is not easy.
Our company, Wild Creations, is a product development company in the toy, game, and gift industry. In very few other industries is getting a new product to market more difficult. It is painstakingly time consuming and costly, and negotiating with large retailers like Walmart, Target, and Toys-R-Us that control the overwhelming majority of available consumer shelf space is no easy task. For these reasons, I have seen a great number of wonderful inventions in our industry never make it to market, depriving consumers of hours of immense fun and joy.
As a dad (and a kid at heart), I include myself in this group of deprived consumers.
So, what options do developers have? Until recently, there hasn't been one. One increasingly popular strategy, however, is starting to offer aspiring entrepreneurs an alternative to the start-up status quo--crowdfunding.
Crowdfunding is the practice of tapping a huge community of individuals, typically online, to fund financially new products or services. It is actually quite simple. An idea for a product or service is submitted on a crowdfunding site as a "campaign" with a detailed description and fundraising goal. Campaigns often include a video demonstrating the project and the market need and a clearly defined call to action, or "ask." The "ask" is typically financial, has several levels of contribution, and is "reward based," meaning that when someone contributes to the project, he or she receives something in return. For example, if a campaign is trying to raise money for a new product, a typical reward is one of the first products to be produced. The more money an individual contributes, the more valuable the reward.
Crowdfunding is not without its detractors, who often express the fear of a product or service being knocked off or hijacked by competition. These fears are warranted to some extent, and no campaign should be engaged without proper due diligence. With that said, however, entrepreneurs need to understand that crowdfunding is revolutionizing how start-ups and entrepreneurs get started because of three, simple benefits:
1. Build Awareness
Building a community of supporters is one of the most difficult things to do for a new brand or company. Social media has made this easier, but having a crowdfunding campaign taps an entirely unique community of individuals who are specifically looking for new ideas. Additionally, most crowdfunding sites are tightly integrated with social media sites with easy share links, allowing for rapid dissemination. A well planned, designed, and executed campaign can build a massive following in a matter of days.
2. Develop Proof of Concept
If a product meets its fundraising goal successfully, it receives the money that has been pledged. More importantly, the concept gains instant credibility and leverage. It is much easier to negotiate with manufacturers, licensees, and retailers when a product has established demand and a following. An unsuccessful campaign is also useful. Although no money is exchanged, the experience can be used to either improve the concept or scrap it altogether, potentially saving a great deal of money.
3. Raise Money
The primary reason for crowdfunding is to raise all-important capital needed to get started. If a campaign is managed properly and can meet its goals, it greatly alleviates the financial burden typically associated with a brand new product concept. This is not to be taken lightly, as there are ramifications for not meeting your obligations once funded, but a start-up that proves it can manage the process will find it easier in the future to fund new ideas.
In light of the fact that crowdfunding is still relatively new and not widely recognized, Crowdsourcing.org reports that over 450 crowdfunding sites successfully funded over $1.5 billion in campaigns in 2011. The leading crowdfunding sights are Kickstarter, Indiegogo, and RocketHub, though a great many other sites focus on specific locations (regional or community based) or types of projects (for-profit or charitable). Some sites are dedicated to specific industries, such as Jumpoff.co, which focuses on kid-related products and projects by young entrepreneurs.
Sorry, shameless plug. I wouldn't be an entrepreneur if I didn't.
I am a big fan of crowdfunding as the future of new product introductions. I believe it will lower many of the prohibitive barriers to entry that often shut out great ideas. It is not all cheesecake and strawberries (easy), and a significant amount of work and due diligence is required to make a campaign successful. With that said, I am hopeful that crowdfunding will continue to inspire start-ups and entrepreneurs to pursue their dreams and bring fantastic, new products to market.
As a dad (and a kid at heart), I am very hopeful!
Do you have a crowdfunding story that other aspiring entrepreneurs could benefit from? Please share below.