Startup Surprise! Crowdfunding is Not Free

NotFree

As Milton Friedman once said, “There is no such thing as a free lunch”… and this certainly applies to Crowdfunding.

Crowdfunding has come on at such a rapid pace, many are still trying to understand how to correctly crowd-fund. The allure is for good reason: Crowdfunding grew from $16 billion in 2014 to $35 billion estimated at the end of this year. So officially, if this trend keeps up, Crowdfunding will pass VC investment which is estimated at $30 billion. Some say that Crowdfunding will double over the next few years which would mean that Crowdfunding would surpass all other forms of venture or angel funding and approach north of $75 billion in 2016.

Now before we all declare this as easy money, we need to understand what goes into a crowdfunding campaign. In this article I’m going to talk only about rewards-based Crowdfunding (versus equity, or debt), but this could apply to donations based Crowdfunding as well.

I get a few calls a week from small companies that want to use Crowdfunding as a vehicle to get their company off of the ground. Sounds fine at the outset. What most do not realize is Crowdfunding is not a “list it and they will come”, no more than “build it and they will come” (referring to websites) back in the late 90’s was true. Most crowdfunding sites require no upfront investment and take their fees out of the capital raised. So many are fooled thinking that Crowdfunding is therefore free. This could not be farther from the truth. While it is certainly true that there is very little investment in listing a crowdfunding campaign, there are dozens of activities in addition to tools and paid services that need to be deployed for an optimal campaign.

Fact is that if you’re going to run a successful rewards-based Crowdfunding campaign, you need to deploy a massive marketing campaign. This article is not designed to go in depth into all aspects of running a crowdfunding campaign, but here are some of the things you need to think about that will take money and our resources:

Staff – you will need staff to reach out to all of your constituents across all possible mechanisms. This includes social media, email lists, friends of friends, and more. Additionally, staff will need to quickly address any and all incoming comments or questions to make sure that your crowdfunding campaign is successful. On average, successful Crowdfunding campaigns run 30 days to 45 days. So if there is any delay in your communications, you’re wasting valuable time while the project end date is coming. We recommend that you think in terms of having a minimum of 3 to 4 full-time staff members working all angles of constituent communication during Crowdfunding. While they’re not communicating, they will be posting articles and other interesting blog posts to keep the crowd engaged and active. You will need this team available for about 90 days.

Ads – when Crowdfunding, you should really prepare and launch your initial outreach 45 to 60 days before your campaign starts. Additionally, you should use advertising mechanisms to increase your reach. Statistics show that 50% of your crowdfunding constituents and dollars will come from Facebook. So running Facebook ads to find new fans, friends and likes is a smart move. You’ll probably want to have $2000-$5000 for Facebook ads to bring more people into the fold so that when your campaign starts you hit the ground running with maximum participation.

Tools – you should deploy some tools to help manage your crowdfunding campaign. These include email systems like Mailchimp, social media tools like Hootsuite, PR tools like InkyBee or PR Web (don’t forget that you will need money for press releases as well), communication tools like Aweber, and more. There are dozens of crowdfunding tools and picking the right tool for the right job is important. But nonetheless, you should budget at least $1000 for these tools and between $300-$400 per press release.

Website and Social Site Design and Build– you will need to budget for website development and social site development. You’ll need a good developer or a team to build out all of your online properties. These costs can range from under $1000 up to $10,000 depending upon the type of sites you have and the teams you use. Professional web and site development firms are more expensive than individuals but generally their more reliable.

Video Production -every great crowdfunding campaign requires a rock-solid video. It needs to be informative, interesting, and well produced. Depending upon your skill set, your staff and your associates, videos can cost a few hundred dollars all the way up to $10,000 plus. It just depends on the quality.

Contests and Sweepstakes – I was speaking with a few crowdfunding experts who recommend running contests or sweepstakes prior to launching a crowdfunding campaign. These are designed to generate more traffic and engage users beyond all of your existing constituents. If you choose to do this, you will need money for prizes that could include things like an Apple Watch, and iPhone, and/or prizes like free products. So you will need money to buy these in order to give them away.

Crowdfunding can be an amazing way to generate capital. But realize that if you’re going to run a crowdfunding campaign, you should probably budget about $10,000 to start. If your staff are all volunteers, or working for equity only, you can probably look at a smaller budget of between $5000 and $7500. Without this investment, you campaign could be suboptimal and unfortunately it is difficult to circle back and run another campaign after you’ve gone through communications with all of your constituents. So this is, for the most part, a one-time chance, and you will need to get it right the first time. When done right, Crowdfunding can generate hundreds of thousands and even millions of dollars. Think of crowdfunding like an intense marketing investment.

And as Henry Ford once said, “A man who stops advertising to save money is like a man who stops a clock to save time.”