Nearshore Americas

Crowd Funding: A Better Tool to Pump Life Blood into Start-Ups

Although I normally write about managing outsourcing, increasingly I get involved with finding niche alternatives for smaller targeted initiatives. Often with an infrastructure and an imagination in place there are infinite possibilities.

Crowd funding is one of those initiatives. Crowd funding may not be an outsourced service per se but represents a market that will require customer solutions, development and reporting. It also requires a low-cost infrastructure and bi-lingual support.

Much of the expertise to launch a successful campaign should already be resident in your organizations.

What is Crowd Funding?

A few months ago, the New York Times ran an article about several entrepreneurs who had created a prototype for a slick new watch. To raise money they turned to Kick Starter, an internet site less than two years old, which was created to accept cash donations for projects they posted (Kick Starter takes a small percentage of $’s raised), When the campaign was done they had raised $6MM.

Crowd funding enables entrepreneurs to use the Internet to finance early stage ventures. Initially it was used primarily to connect artists with patrons as a way of validating and supporting their work. It then morphed largely into a mechanism to finance socially responsible endeavors such as Kiva, founded by Jessica Jackley, which has been hugely successful in collecting and distributing donations into Africa and distributes $100’sMM annually. Politics wasn’t far off and in 2008 Obama campaign created “Karma411” for collecting donations.

Evolution

Beginning in 2009 with the formation of Kick Starter a new era in crowd funding was launched.  Kick Starter and their competitors (there are now more than 30) are now funding more commercial projects. As the numbers of projects have grown, so has the total amount raised per initiative. It took three years to get to the $1MM level, but in 2012 over a dozen campaigns have raised that and more. It is interesting to note that of that $1MM, $470K is usually raised within three days. Short and sharp is the lexicon used to describe these campaigns.

A by-product of the rapid growth of these sites and the amount of money being raised has been the need to increase the creativity, professionalism and planning before submitting to a CF site.

The reality is mini businesses are being created and to be successful, they need both business and strategic plans (branding, web sites, videos, referrals etc). I have worked with entrepreneurs who recoil when these things are mentioned but are a necessity and in the right hands putting vision behind the idea is cathartic.

Donations versus Equity

So far, crowd-funding sites have only been able to raise money through donations because securities laws have prevented them from accepting capital for equity shares. However crowd funding will get a huge new tool in 2013 through the “Jumpstart Our Business Startups Act” or the JOBS Act.

In 2013, small companies will be allowed to sell equity stakes online to a huge number of investors facing less rules and red tape that come with larger equity offerings.

The legislation will significantly increase the numbers of platforms available for these activities. Remember choice breeds confusion and on top of multiple providers there are even more decisions to be made when you add equity to the mix.

At the end of the day the biggest reason for small businesses that fail isn’t the products created or the services being offered but the background expertise and the ability to find affordable trusting advice.

What It Means

Once a decision is made to go forward with a project there are a myriad of decisions that need to be made. Such as:

1. Equity versus cash donations

2. What does equity mean (valuing a company, how much equity?)?

3. Which platforms to use? Each has different rules and requirements, which is best for a particular product or project.

4. Who will be tomorrows “kick starter” and who won’t make it.

5. How to create and run a campaign:

6. Length of campaign – short and sharp (usually 30 days).

7.  Financial Target

Web site development, project design, video, Facebook, Twitter, back links (referrals and endorsements), rewards, customer care, rewards, brand development etc.

2013 and Beyond

Heading into next year we are going to see a plethora of potential platforms many with their individual expertise (53% of all projects are gaming in nature) in a very volatile market with winners and losers and huge decisions to be made around equity or cash.  Entrepreneurs that succeed (and there will be a lot) will need advice that enables them to make nuanced difficult business and creative decisions they don’t have the experience to make.

By far the biggest problem faced by small business is believing that they do not have access to affordable expertise. Ask for assistance because the stakes are too high.

The Campaign – More than a Video and Slogan

As I mentioned earlier, as the CF business has grown and the projects have multiplied, and the campaigns have become more sophisticated. Here is a list of project components:

These represent a full list of steps and may not always be necessary depending on the project/

1. Consultation – seek outside advice from people with experience. Look for a partner you can trust.

2. Project Planning (length of program, equity vs. cash, rewards etc.) – important here is the concept of targeted and quick campaign to grab attention immediately. Also, in a cash situation although there is no equity people offer tiers of rewards for contributors.

3. Web Site Development – Need this going in. Shop this service carefully, there are a lot of providers.

4. Video Shoot, editing and postproduction – not everyone can shoot a video. There is a reason there are professionals. The typical video is between 3-4 minutes and is the key to success. Do not minimize the criticality of this step.

5. Press Releases – With the right connections easy to do and can’t hurt.

6. Social Media/ Back Links – critical steps provides referrals, endorsements etc.

7. Pitch and Design

8. Support – Customer care needs to be addressed. Post campaign follow up and information. Starting a business and service begins immediately.

Believe it or not, all this can be done quickly and affordably.  Don’t make the mistake of going it alone. Find someone with the experience that you are comfortable working with.

Contact the author at: Michael@MichaelBlankman.com.

Michael Blankman

Add comment