MONEY Startups

4 Secrets of Crowdfunding Success

150604_EM_Crowdfunding
Andrew Paterson—Getty Images

Turns out, it's not as easy at it looks.

Driving a tricked out BMW motorcycle with a refrigerated compartment attached like a sidecar, Simon Anguelov earns money to pay for community college in San Diego as a mobile ice cream vendor. The 20-year-old MiraCosta College student took out $30,000 in bank loans to create the customized bike with help from his sister, who cosigned for him.

Recently, it dawned on Anguelov that it would be easier to generate business if there was an Uber-like app people could use to order ice cream deliveries from vendors like him or ice cream stores. In May, he launched a campaign to get funding for IceCreamZilla, an app-enabled network, on the crowdfunding site Kickstarter. Kickstarter enables donation-based crowdfunding, where individuals make donations to business ideas they want to bring to life.

“Ice cream vendors like me would benefit from an app like this,” says Anguelov. “It would draw a lot of business to the industry.”

But Anguelov was in for a surprise. It has been harder than he expected to raise money on Kickstarter. By the time his campaign ended, he had raised only $1,980 toward his $25,000 goal. Under Kickstarter’s rules, that meant he didn’t get to keep any of the money. “It’s really hard to spread the word,” he says.

But he didn’t give up. He restarted his campaign on June 1, this time with a smaller goal of $5,000—and on his first day had already hit $3,015, with 59 days to go.

It’s easy for new entrepreneurs to get excited by the potential to raise money on sites like Kickstarter, where fundraisers have collectively snagged $1.7 billion since it launched in 2009. Some entrepreneurs have hit the jackpot. Pebble Watch, a smartwatch, raised $20.3 million in the site’s most funded campaign to date, and the Coolest Cooler—a picnic accessory that comes with a waterproof Bluetooth speaker—raised $13.2 million, which was good for second place.

And Kickstarter is just one option. In 2014, crowdfunders in North America raised $9.46 billion, a 145% increase from the year before, according to a recent global report from Massolution, a research firm in Los Angeles that collects data from 1,250 active crowdfunding sites around the world. Its data included both donation- and equity-based crowdfunding, where companies typically sell an ownership stake to investors.

Still, as Anguelov discovered, crowdfunding isn’t as easy as the success stories we constantly hear make it sound. Here are four key things to know before you start your campaign.

Successful campaigns start way before the launch. Many crowdfunders start building their following on social networks months before they actually launch a campaign. There’s a reason for this. Crowdfunding campaigns have a time limit. It’s not easy to reach your funding goal if you don’t start working on building up your social media following—a primary way to share these campaigns—until the day you launch.

“It’s hard to get viewers unless you have a presence on Facebook,” says Anguelov, with 20-20 hindsight. “I don’t have any followers.” This time around, he has started building his Facebook following and plans to join groups on the social media site where he can talk about his project. He has also changed his rewards. Previously, he offered discount coupons; this time, he is offering some extras to local donors who pledge $99 or more, such as a chance to meet him and have him personally deliver 25 ice cream treats.

It pays to set realistic goals. Each donation-based site has its own rules, but on some donation-based sites, including Kickstarter, you don’t get to keep any of the donations if you don’t hit your funding goal. However, it is possible on the site to set a stretch funding goal once you meet your initial goal and try to raise additional funds.

Other sites will cut you more slack, but you’ll pay for it. For instance, Indiegogo lets you keep all the money you raise, even if you miss your target. However, it charges a 4% fee if you hit your goal versus 9% if you get part of the way there. That means that if you raise $100,000, you have to pay the site $9,000.

Industry-specific sites may work best if you’re a niche player. If you’re looking to attract the attention of high-net worth investors, equity-based crowdfunding sites that target investors in your sector may be your best bet. Visio Financial Services, a 45-employee company in Austin that was founded in 2011, used this approach. It lends money to private investors who are purchasing single family homes to flip or rent. About a year ago, the firm raised $10 million in a debt facility through the real-estate crowdfunding site Realty Mogul, says CEO Jeff Ball. “There are a lot of accredited investors who have money they would like to invest in alternative asset classes,” he says.

However, gaining entry to such platforms isn’t easy. “It’s getting more crowded,” says Richard Swart, crowdfunding and alternative finance researcher and scholar-in-residence in the Institute for Business and Social Impact at the University of California, Berkeley’s Haas School of Business. “It’s becoming more difficult to attract interest.” Plus, they have little incentive to promote deals that aren’t right for their particular investors. “Many of these platforms are rejecting 90% to 95% of companies seeking funding,” says Swart.

Crowdfunding may not help you get more financing. Getting a bank loan or credit card and making timely payments can help you build a financial track record. But raising money on a crowdfunding site may not carry much weight with future lenders. Ask David Goldin, president and CEO of AmeriMerchant, a New York City firm that provides working capital to small businesses. “It’s irrelevant,” says Goldin. Why? Interest by people who aren’t professional investors or lenders doesn’t necessarily signal to someone like him that a business has staying power. It’s similar to the world outside crowdfunding platforms. “A lot of people invest in a restaurant—and most restaurants fail,” he says.

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