crowdfunding

How Crowdfunding Works for Technology Startups

When it comes to startup fundraising, it’s hard to overlook crowdfunding as a potential source of raising funds.

Crowdfunding became a rage a few years ago.

Since then, several crowdfunding platforms like Kickstarter and Indiegogo have emerged, fueled with a passion to help entrepreneurs launch and grow their startups.

What is Crowdfunding?

Crowdfunding

Contributions and collective efforts from family members or friends or communities or potential customers or a collection of investors make for the primary sources.

However, funds can be raised by tens, hundreds or thousands of individuals via social media platforms and crowdfunding platforms.

Not just that, you can also leverage your investors’ network and skills.

 

Types of Crowdfunding

Individuals and groups of investors with excessive capital have always enthusiastically funded and financed bold ventures and back spirited entrepreneurs.

Today, given the high innovation factor, tech startups are able to acquire more capital and better investments.

There are three types of crowdfunding:

1. Donations

Platforms such as Kickstarter and Indiegogo promoted ‘donation’ based crowdfunding.

People with money and a penchant for investing in up and coming technology businesses happily contribute towards bold and unique ventures.

2. Debt

Debt funding is still a very common fundraising avenue for most early-stage startups.

Platforms such as LendingClub and Prosper enable those with capital to effectively act as private lenders.

These investors are later repaid with monthly payments.

3. Equity

Equity crowdfunding is very similar to traditional fundraising avenues that most tech startups opt for.

Platforms that enable such funding usually lookout for lucrative startup investment opportunities for their investors.

You’ll exchange equity or stock of your company for the incoming investment.

Startup Fundraising: How Your Tech Startup Should Do It

Startup fundraising is a matter of concern for all tech entrepreneurs. In fact, most tech moguls consider adequate funding to be an essential ingredient to the recipe of building a successful startup in addition to having a groundbreaking idea and the right mindset to transform the idea into a profitable reality.

Why Crowdfund Your Tech Startup?

Come to think about it, crowdfunding is a smart way to go about raising capital for your tech startup.

For your early stage tech business, opting for a crowdfunded avenue is an excellent way to gain social proof to prove your concept and competency.

Doing this can prompt angel investors and VC’s to invest in your startup since you’ve already proved your ability to deliver returns during your crowdfunding period.

Having said that, there are three things crowdfunding does rather well:

1. Serves as an amazing PR tool

Crowdfunding publicly announces who you are, what you are doing, and where you are going. It serves as an effective medium to communicate your idea and competency to the world.

This helps big time to gain visibility, build early-stage traction, and generate a positive buzz.

2. Build a fan base

One of the most understated and glossed over the benefits of crowdfunding is its ability to help young businesses secure early adopters and advocates.

Often, these ambassadors not only have a financial contribution to your business, but they also share a vigorous passion to empower your business.

3. Leverages Your Network

A positive PR coupled with empowering advocates means your tech business will be in the limelight.

A shareable profile will enable you to network with industry leaders, influencers, enthusiasts, evangelists, VC’s, and important individuals and communities.

How Does a Crowdfunding Campaign Work?

A common misconception surrounding crowdfunding is that you’ll put together a crowdfunding profile on Kickstarter and you’ll be flooded with millions of dollars!

There’s no hungry group of investors sitting around on Kickstarter all day looking for new projects to back.

The reality is very different. Because the only way to raise funds via crowdfunding is to make sure you are able to drive traffic to your profile on your own merit.

And this is no walk in the park.

Steps to Launch a Crowdfunding Campaign for your tech startup:

1. Create a Profile

Start by creating a compelling profile for your tech startup. A solid profile is imperative for your success.

Ideally, your profile should consist of an informative pitch video, an overview of the company, your products (or services), funding goals, and high-quality product images.

 

2. Set a Funding Goal

The next step is to determine just how much money you wish to raise. This is critical.

Set an achievable funding goal and work towards it. Most crowdfunding platforms require you to reach your goal before you can collect any funding amount.

In such a case, if you fail to reach your funding goal, you won’t be allowed to collect any contributions.

Therefore, it’s important to set a funding goal that is achievable.

3. Reach out to your backers

The third step is to find solid backers.

Leading up to the launch of your crowdfunding campaign, you should draft and send compelling and engaging emails and newsletters to your personal and professional networks.

Simultaneously, you should work towards securing early commitments from friends and family.

You can also reach out to your prospective customers, potential partners, and media contacts.

The first few days of your campaign are critical, ensuring promising commitments before your launch will help you enjoy a great first few days.

A Venture Capitalist’s Take on the Various Funding Sources For Startups

The unfortunate reality for most entrepreneurs with a lucrative idea is that they don’t have the funding to execute that idea to its fullest potential. Despite the wide array of available funding sources, most startups struggle to make the cut.

4. Market to Your Audience

The best, and probably most effective, way of making your crowdfunding campaign a success is to get smart with your marketing.

Great marketing will do wonders for your campaign.

It’s a lot of work though.

Most companies have dedicated teams to manage the marketing of their campaign.

From email marketing to social media hype to offline marketing, you need all the strings in order to make your campaign a thrilling success.

5. Collect Funds

The final step is to collect funds from your campaign.

If your funding goals were achieved, capital raised is transferred to your account in one of two ways:

  • If it is reward-based,  your contributors’ credit cards are charged, and the money is instantly transferred to your account.
  • In the case of equity sharing, you negotiate directly with investors and close the deal.

Crowdfunding Vs. Other Startup Fundraising Channels

Just like every other fundraising channel, crowdfunding has its pros and cons.

We’ve already talked about the work and effort required to create a successful crowdfunding campaign. It’s not an easy affair.

Cons

  • You need to dig into data and study which platform is best suited for you. Some platforms have a low success rate while others charge exorbitant fees for running a campaign.
  • You will also need to assign a marketing team and keep a sizeable marketing budget aside in order to make your crowdfunding campaign a success.

Pros

  • You have the chance to retain more control of your business as opposed to traditional startup fundraising channels from angel investors and VCs.

How Oculus Became A Crowdfunding Success Story

As a side project, Palmer Luckey started working on a virtual reality headset from his parents’ garage at the age of 15.

This VR headset is what we have come to know as the Oculus Rift.

He continued developing his product whilst starting a Kickstarter campaign.

The campaign saw tremendous success when it surpassed the $250,000 funding goal and raised a whopping total of $2.4 million!

Facebook acquired Oculus for $2 billion in cash and stock when the product was still in its prototype stage in 2014.

Final Thoughts

Crowdfunding can be a very profitable and beneficial fundraising channel for your tech startup.

Do your research and understand the expenses and expertise required to make your crowdfunding campaign successful before rushing in.

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