There is a growing phenomenon in the world of startup fundraising known as crowdsourcing. What is crowdsourcing, you ask? Crowdsourcing, also referred to as crowdfunding, is when a venture asks members of the general public for funding through many small donations. Notice how Wikipedia has been asking for donations to keep their website ad free? That is a prime example of crowdsourcing.
For smaller startups, there are online communities dedicated to crowdsourcing. Kickstarter.com is a crowdfunding platform where people with creative ideas can post their story and ask for funds. For example, lets take a current venture on Kickstarter.com called Newsgrape. This company has created an online-platform that can adapt to a users habits in order for bloggers and readers to effectively share material. Newsgrape needed $12,500 to get started, so they went on Kickstarter.com, made a video, posted a little something about them and their company, and asked the general public for funding. Note that there are some limits on what kind of startups can ask for funding.
What is surprising most experts, however, is how popular crowdsourcing is. The biggest trend that startups using crowdfunding are seeing is that people are generously donating, even in a tight economy. One of the biggest reasons: the option to donate in small portions. The majority of donators give in the $1 to $5 range, but when you have hundreds of people contributing it starts to add up!
What are the Keys to Crowdfunding?
The biggest idea to keep in mind if you want to go down the crowdfunding path is to make sure that your project is focused. This means you need to tell the crowd your specific goals so they can rally behind you. Also, help people connect with what you are doing by telling a compelling story, giving the potential donator a backdrop to why you do what do and why they should help you out. Dont forget to give your crowd a way to observe the impact your donation is having on your project, too, so they can feel good about contributing their money to you. You never know, they might donate again!
Having a large social network also makes the process easier, so reach out on Facebook, Twitter, LinkedIn and any other social media sites you, or your startup, have a presence in. If youre still building your social network out, email is a powerful tool and can go viral pretty quickly. Furthermore, consider making video updates instead of a post on your blog or Facebook wall. People will see how passionate you are, which will help the message spread.
According to Kevin Lawton of The Huffington Post, crowdfunding forces entrepreneurs to be open and honest. Investors wont spend time on a project that smells fishy, and its hard to pull the wool over the eyes of the entire internet
While Exciting, Crowdfunding is Still Not Perfect
One major caveat with the crowdfunding movement is the fact that there are only non-equity based options for startups. In other words, entrepreneurs can only ask for donations and not give contributors a piece of their company. This is the result of SEC regulations that ban entrepreneurs from approaching the general public for funding in an effort to protect investors from fraud. Unfortunately, this hurts entrepreneurs looking for funding between $25,000 and $2 million, a range that is challenging for startups because it is usually too high to fund out of pocket and below what VCs and angel investors usually give out.
At The Startup Garage we believe that crowdsourcing can be a valuable tool. Of course, it’s not an end all solution for getting your company funded, but its excellent for projects that arent too capital intensive, and can aid entrepreneurs that need to get from one step to the next.
Overall, if youre a startup that has a need for a limited amount of funding and you have a compelling story to tell, crowdsourcing can be very beneficial. You get money without taking on debt or equity partners, you can reach a new audience of enthusiastic followers, and it is easy to set up.