How to Crowdfund your Startup
By Kieran Masterton
22 April 2010 | Category: Uncategorized
In November 2009, my business partner and I successfully Crowdfunded a business designed to provide independent filmmakers with an alternative method of film distribution, OpenIndie. The result of our month-long campaign was over $12,400 to bootstrap our company, a good amount of press interest and a built-in audience and user base for our site.
What is Crowdfunding?
Before discussing the pros and cons of Crowdfunding I should explain a little about how the process actually works. The most important thing to considering when Crowdfunding your venture is that this isn't like taking investment. The process can take many forms, and just like taking investment, won't be right for everyone. That said, here's the most common model being used by everyone from startups and non-profits to artists, musicians and filmmakers:
An individual or organisation states that they need X amount of money to fund their venture. This venture can be anything, from a cupcake shop to an independent feature film; and the amount of money can be a small part or all of the total cost of the venture. The individual or organisation then uses their existing networks to leverage the crowd, that's you, to donate money to their venture in return for a reward.
Often this reward is directly related to the venture being funding, so it could be a batch of cupcakes or a credit at the end of someone's film; but equally it could simply be a very small thank you for your contribution. I recently came across someone who successfully crowdfunded enough money to pay for the hull of her ship that she needed to circumnavigate the globe.
In return for a small contribution she promised a postcard from a random location on her travels delivered to your door. As you can see, this isn't investment in the traditional sense, in fact rule number one of Crowdfunding is that you don't offer a percentage of your venture as a reward. Rather this process is something akin to patronage by a different name. However, there is an important difference between Crowdfunding and patronage that I will explain using the example of my own experience.
Pre-Selling your Product to Fund your Business
OpenIndie is the brainchild of filmmaker Arin Crumley and myself, a Developer with an academic background in film. The concept is to turn the existing model of film distribution on its head. Instead of Hollywood pushing out content, users of OpenIndie can pull screenings of films to them by requesting films to screen in their area.
This is a model that Arin developed for his film Four Eyed Monsters (2005) and it has since been used by indies like Age of Stupid (2009) and even big studios like Paramount with Paranormal Activity (2007).
During our discussions about the amount of work involved in building a site of this kind it soon became clear that this wasn’t going to be the sort of project I could achieve on my own during evenings and weekends. At the time, I was working as a Developer for a large British magazine publisher which left me very little time for personal projects.
The decision was quickly made that we needed some form of bootstrap funding, approximately $10,000 to fund three or four months of fulltime development and hosting costs for the time it takes to monetize the site. We weren’t after serious investment because we knew we had the skills in-house to build and promote the site.
Likewise, because of the nature of the site we felt that anyone interested in investing would probably have a vested interest in the world of film distribution and we didn’t want anyone to have influence over the direction of the site.
Around that time Kickstarter.com launched. Kickstarter is designed to allow anyone with an idea to get the money needed to make that idea a reality. However, they impose a few constraints. You have to ask for a fixed amount of money, and you only get that money if you raise all of it within a maximum of a three month period. $1 short of a $10,000 goal and nobody’s credit card gets charged and you don’t get a cent – a fact that focuses the mind somewhat.
In our case we worked extremely hard to leverage our existing networks, Twitter in particular. When it comes to Twitter indie film is a small world and it became clear that it was important for us to connect with the filmmakers that would want to use our service. Be as open as possible, allow them to ask us questions and emphasise that we’re building a site for them and with them.
We had to make the decision very early on about rewards and one of our first decisions was to ask for a fixed number of donations at a fixed rate. That way our progress is measurable. We asked for 100 filmmakers to give $100 a piece to be the first 100 individuals to add their film to the site, a target that at the time we considered ambitious.
Crowdfunding Options
There are a whole range of options for Crowdsourcing your funding, some sites focus on more creative endeavours while others are more suited to a broader range of projects. The site that I think is really setting the standard for crowdfunding is Kickstarter.com.
We used them to fund OpenIndie and we chose them for two reasons. First, Arin had already had success in funded a $3,500 campaign to pay for some expenses on his latest feature film. Second, Kickstarter was flexible enough to accommodate funding a business as opposed to just creative ventures. That said, here’s a couple of great options if you’re considering Crowdfunding.
IndieGoGo
Originally designed to help filmmakers fund their work the projects on IndieGogo now go far beyond just filmmaking. The site is more than flexible enough to be used to fund creative endeavours and businesses of all kinds. A great feature of this site is the ability to add team members to your campaign. This can be really useful because often a successful venture is about the team that you’ve built around an idea. It is important to show those backing your business that the idea is in good hands and it helps when leveraging multiple people’s networks.
IndieGoGo takes 9% of the final money raised as a fee for using the service but also offers a 5% cash reward for anyone who hits their goal, which is nice and effectively means your fee is only 4%. The site is also international friendly meaning that anyone from anywhere in the world can use the site to fund their venture.
Kickstarter
Not the first Crowdfunding site to hit the net, but certainly currently one of the best. Kickstarter has a number of different categories for projects. These include the likes of Technology, Music, Games and Food. With such diverse categories it’s simple to fit your business idea into Kickstarter’s model. One major disadvantage of Kickstarter is that it is currently only open to project creators who have a US bank account. This is a restriction of Amazon Payments which it uses to take your backer’s pledges.
Anyone from anywhere in the world can back your campaign, but only those with a US bank account can set up a campaign. Last time I spoke to the guys at Kickstarter about this issue they assured me that Amazon are looking to rectify this problem, but for now, it’s a fairly major barrier for use for those outside the United States. Kickstarter takes 5% of the final money raised as a fee for using the service plus around 3% for Amazon credit card processing fees.
GrowVC
GrowVC takes a similar model to Kickstarter and IndieGoGo, and applies it strictly to business startups, but with a couple of important distinctions. First, in my opinion this isn’t true Crowdfunding because it seems that with GrowVC funders get a share in the business, a fact that makes me think this is more like transparent angel investment.
I should note however that GrowVC do not actually claim to be a Crowdfunding site though they are applying some of the same principles to a similar problem. Secondly, instead of losing a percentage of your total monies raised, as a project creator, you pay monthly for the service based on the amount you’re attempting to raise.
Prices range from $20 a month to $140 for an unlimited funding account. They also charge funders a monthly fee for the privilege of investing and while this could be a barrier to investing it also ensures that investors are serious about what they’re doing. In short, a very different option, but a valid one nonetheless.
Ulule
And finally, one other site worthy of note but not yet launched is Ulule.com which appears to be focused upon a broader range of projects and creative endeavours. They have yet to announce their pricing structure but I think this one has the potential to be great for entrepreneurs. Plus, their promotional video explains very effectively how Crowdfunding works:
What Worked?
The beauty of this approach was that we were effectively pre-selling our product and we were putting a value upon that product. We were stating what OpenIndie would offer, how it would work and how soon they would be able to access the site. This set the expectations of our users at a realistic level and meant they understood that we weren’t going to be able to provide this as a free service.
It also meant that because those 100 filmmakers had faith in our idea, enough to back our campaign, they also acted as advocates for us and referred other filmmakers by retweeting and blogging about what we were doing.
Thanks to their faith and generosity I was able to leave my fulltime job, work for three solid months developing the site and launch it on March 1st in time for them to start promoting their films and building audience demand. We get to build our site and the filmmakers get the service they want.
What didn’t Work?
It would be wrong to say that Crowdfunding is the golden ticket to funding your business because it isn’t. Crowdsourcing takes a lot of work and it relies on you having a pre-existing audience or being able to build one very quickly. In our case Arin was already a known figure within the indie film world which attracted a small amount of press attention and a flurry of activity on Twitter when we first announced our campaign.
However, it took four weeks of tweeting, blogging, answering questions, doing interviews and, quite honestly, pimping the hell out of our campaign page to secure our $10,000. We funded approximately 14 hours before our deadline and went on to raise just shy of a further $2,500 making our total $12,413.
Now that you’ve popped your virtual champaign cork and celebrated the massive achievement of raising the money you need to build your baby, it’s time to deliver the rewards you promised. In our case some of those were easy. We offered anyone giving $15 or more a copy of the Four Eyed Monsters Soundtrack on CD or MP3, for example.
However, some rewards were harder to fulfil, for instance every filmmaker who signed up was promised a one hour consultation with Arin to discuss how best to build an audience for their film. We’re still working our way through the 100 filmmakers. Scheduling so many consultations across so many time zones with filmmakers schedules being so full and Arin’s time being limited has been a challenge. We continue to offer this service as part of our filmmaker sign up, but we now work with another expert in the field of audience building to fulfil these consultations.
Five Golden rules of Crowdfunding
I can not tell you if my experience of Crowdfunding is the norm, but here are a few things I have learnt from funding OpenIndie:
1. Ask for what you need
Make a budget and be sure that you can do what you need for the sum you’re setting as your goal. The most important thing when Crowdfunding is being sure that you can deliver on your promises.
2. Be realistic
This one takes its lead from number one. Can you actually do this? Do you have the skills? Are you sure? Don’t promise what you can’t deliver and never under deliver on your promises.
3. Set a unit price and set a total unit goal
People really respond to A) being part of an exclusive group and B) the need to reach a goal which isn’t financial. We asked for 100 filmmakers to donate $100. You could ask for 100 Magicians or 50 Accountants or 200 used car salesmen. Whatever your niche, focus upon it and ask yourself what appeals to that niche.
4. Pre-sell your product
Presumably your business has a product. Ours is film profiles, yours might be perfume, books or bookkeeping. Whatever it is, offer those people buying into your exclusive club that product if the campaign successfully funds. Everyone who donates $100 or more gets our exclusive funders special edition perfume, for example.
5. Be open
Transparency is straight out of the Web Business 101 classroom but it really can’t be said enough. Be open and honest with those giving you money and nothing will creep up and bite you on the ass.
Is Crowdfunding for you and your business?
It is very important to note that Crowdfunding is not a funding solution for everyone and it does not work with all business models. The process also has its critics who claim that it isn’t sustainable and that business startups aren’t charities so why are they asking for handouts? These are both valid criticisms. Certainly at OpenIndie we have found that Crowdfunding is not a sustainable source of revenue.
Since our successful campaign in November we have twice attempted to raise similar amounts by the same means, but neither attempt was successful. This was for two reasons. First, I think that we launched our second campaign too early. People wanted to see the site built and get to interact with it before deciding whether to donate yet more money to its development.
And, second, we are a small team of two and during development neither Arin or I had the time needed to push the second campaign in the way we did the first. In retrospect a second campaign probably wasn’t the right move. It’s called Kickstarter for a reason. That said, I think if you have a really niche product, and you have the audience needed to make a Crowdfunding campaign work it can be a brilliant means by which to see your ideas become reality. It has certainly been a fantastic experience for OpenIndie.
With respect to the concern that businesses are not charities and should not be asking for handouts, I see can this point of view and actually agree. This is why I advocate the pre-sale of goods in return for funding. By demonstrating your product and offering those investing an exclusive item in return for the help you need to get started you are not asking for a handout.
You are asking for them to have faith in you and yes, you could fail to produce the product you offered and your backers would walk away with nothing. However, if your backers know this up front and are still happy to put their hands in their pockets, and a successful business is born out of this act of faith, then I think Crowdfunding has the potential to bring a massive amount of ideas to life.
Finally, I’d like to ask you if you’ve had any experience of Crowdfunding either a business or creative endeavor? Or if you’ve come across a new Crowdfunding site why not let us know in comments?
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