Introduction To Crowdfunding, Part 1

These tips were compiled by Ella van Leeuwen, Margit Laurs and Melvin Loggies, Master students Entrepreneurship & New Business Venturing at the Rotterdam School of Management (Erasmus University), Rotterdam, the Netherlands. Content shared in partnership with Symbid.

Raising capital through traditional financing methods has become harder and harder for start-ups and small enterprises due to the reserved attitude of banks towards loans. Crowdfunding offers you an alternative to raise money, and simultaneously promote and validate your project. If you believe that crowdfunding is the right solution for you, the ‘only’ thing to do is execute it successfully.

Introduction To Crowdfunding

CrowdfundingCrowdfunding might be the right solution for you, if so, then you can follow the lead of many entrepreneurs who successfully engaged in a crowdfunding campaign.The popularity of crowdfunding has increased spectacularly over the last three years. The global crowdfunding volume has grown significantly from $530 million in 2009 to $2,806 million in 2012, and these numbers are expected to keep increasing.

What these successful entrepreneurs realized is that crowdfunding is not only helpful to finance projects, it also provides the opportunity to gauge public interest and promote it before the project is really launched. A crowdfunding campaign enables you to test the popularity and validity of your initiative. As a consequence, crowdfunding allows you to forge early and strong relationships with the committed crowd of funders.

CFI Note: The 8 tips that will be shared in this series represent the building blocks of a successful crowdfunding campaign. Don’t forget the most important ingredient: hard work.

Are you going to be a part of this impressive growth? Are you ready to validate and promote your initiative? Are you going to be the next entrepreneur engaging in a crowdfunding campaign? By learning from the practices of three successful Dutch crowdfunding (KRNWTR, Brand Expedition and Biogolf) campaigns and the experience of three Dutch crowdfunding platforms (Symbid, Geldvoorelkaar and Oneplanetcrowd), you will be able to run a successful crowdfunding campaign yourself. We will give you three lessons over the next weeks in order to make your campaign a success, starting with the first lesson today.

Lesson 1: Use Your Friends And Family

crowdWhen running a crowdfunding campaign the first people who are probably eager to invest in your project or company will be your friends and family. These are the people you have been telling for months about your new start-up idea, these are the people who were highly involved in the start-up phase of your company, and these are the people who like your project just because of you. This looks like an easy way of getting funds, as your friends and family are probably highly willing to support you by making a donation. However, an important thing to know, is that this isn’t as easy as it seems, and even more important to know is that the financial support of your friends and family can almost be considered to be a requirement to make the crowdfunding campaign a success.

CFI Note: Very few campaigns are lucky enough to be supported by mass amounts of strangers. Those campaigns get a lot of press and it perpetuates a misconception that the Internet is full of backers looking to throw money at people they don’t know. Assume your immediate network will be key to your campaign. Think two levels: ask yourself how you can build a large enough network of friends and friends of friends to meet your goal. Tip: niche bloggers tend to have large secondary networks organized around a narrow interest. They’re good folks to reach out to!

The term ‘requirement’ might sound a bit strange, but Tetsuro Miyazaki from KRNWTR states “if not even your friends and family will invest, who is then going to invest in your company?”. So before you open up your crowdfunding campaign to the public, you should demonstrate the people in your direct network why your project or company is so amazing after which they should be persuaded to financially support you during the campaign. As indicated by Ordanini et al. (2011), the first phase of a crowdfunding process is characterized by a quick and significant flow of investments by family and friends, which reaches approximately half of the target capital. After this first share of target capital is obtained, people outside your direct network see that others believe in your project and will actually consider to financially support you as well. This is confirmed by Robin Slakhorst from Symbid, who argues that 20-50% of the final capital is collected through direct relations. Because this financial support from friends and family is so important, platform Geldvoorelkaar actually stimulates crowdfunding entrepreneurs to involve friends and family in the campaign. Symbid goes one step further and even requires the first percentage of the target capital to be invested by friends and family.

It is important to identify what type of investors are potentially willing to invest in your project in order coordinate your campaign, to pick attractive rewards, and to communicate at the right tone of voice. Next we will focus on the importance of identifying the right audience.

Lesson 2: Clarify your target audience

Dartboard (Wikipedia)As every single crowdfunding campaign is unique, you have to keep in mind that every investor is unique as well. It is important to know and to understand investors in order to identify what type of investors are potentially willing to invest in your company or project. In other words, you have to identify your target audience. Your target audience depends on the type of crowdfunding campaign you are running. Does the campaign revolve around a non-profit project, a product or maybe a service? And do you want to gain funds for the start-up of a new business, or for a project that is part of an already existing business? But probably even more important, what kind of product or service are you trying to get funded in order to bring it to the market? These questions can help you identify the target audience of the crowdfunding campaign on which you have to focus.

CFI Note: Note that these people support you financially and personally. Campaigns find success when backers tell their friends about the campaigns. Finding a way to connect deeply with that first round of backers is key.

The people in your target audience are the ones who eventually are going to support you, not only in a financial, but also in a promotional way. Depending on your target audience you have to choose the right crowdfunding platform to coordinate your campaign, to pick attractive rewards, and to communicate at the right tone of voice. Robert the Waal from Biogolf understood that not only individual golf aficionados were part of his target audience, but also companies who believed that the biodegradable golf balls would be the right present for business acquaintances. As a response, the entrepreneur targeted both businesses and private investors. ‘’I realized that not only potential customers but also businesses would be interested to invest in my campaign. So I targeted both.’’ stated Robert de Waal.

The parties in your target audience that actually invest in your project or company might even become important partners in the future. Although Martijn Arets from Brand Expedition received free accounting advise from one of his investors, he still regrets the target audience he identified, as he states: “I should have focused on an international target audience, because this would give me a strong basis to promote and distribute my book abroad, in the United Kingdom”. Regarding the identification of your target audience, it is crucial for you to understand why they are interested in your project or company and how much they are probably willing to invest, based upon which you can determine what you will offer in return for their support and involvement. This latter aspect is the subject of next weeks’ lesson.

Check out Part 2 of the series here

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