So you’ve got a brilliant new idea, you’ve done all the necessary legwork and now you’re ready to bring it to reality. There’s only one problem – you need funding.
Raising funds is a challenge nearly every inventor will face at some point, and crowdfunding may seem to be the perfect solution. The reality, however, is more complicated. If you’re considering crowdfunding your new project, here’s what you need to know to give yourself the best chance at success.
At its most basic, crowdfunding is simply the process of uniting entrepreneurs and inventors with large numbers of people who invest small amounts of money in a project, often in return for either an equity stake or various perks. These perks may be anything from early access to the product to written credit to a personalized meet-and-greet. A successful crowdfunding campaign is a collaborative effort, with backers receiving real value in return for their financial contributions.
While there are many ways to raise capital, crowdfunding offers a few key advantages. It serves as a market test of sorts, allowing you to interact directly with prospective customers, gauge interest in your idea and even receive feedback without the risk of bringing your idea to market prematurely. An effective crowdfunding effort can also create a real buzz around the product since backers tend to feel more directly connected and invested – both literally and figuratively – in your project. It’s also a viable funding option if you lack the credit score and established history to secure more traditional funding through a financial institution.
Before You Begin
Crowdfunding is certainly a powerful tool, but it’s hardly a panacea. Before you jump into the deep end, there are a number of things you should consider. Is your idea sufficiently unique to stand out from the crowd? Are you looking for equity investors or will you offer rewards? Are you confident that your product can be successful enough to generate the money needed to pay out rewards, cover all taxes and processing fees and pay off the fees taken by your chosen crowdfunding platform? And, perhaps most importantly, is your product’s target audience likely to engage in a crowdfunding campaign in the first place?
Creating a successful campaign is not easy, and it won’t happen all on its own. Even a brilliant idea is unlikely to get off the ground without a well-designed marketing effort to support it, so it’s essential that you take the time to consider how you’ll pitch your product to get people excited and engaged.
One powerful and underutilized tactic for doing so is storytelling. Use your invention – or yourself – to tell a compelling story that will attract people to your project and create an emotional attachment. Better yet, leverage the power of video to maximize your marketing impact.
An Imperfect Solution
Crowdfunding has a great deal to offer aspiring inventors, but it isn’t without its risks. One common concern is the specter of intellectual property (IP) theft. A patent may protect your property, but patents are difficult and expensive to attain. One option is to instead file a provisional patent application (PPA), which is easier and more affordable. It will give you a year to raise your funding before deciding whether to pursue a full patent, and your invention will have potential protection in the meantime. It’s also worth remembering that you need not share the technical details behind your product in the first place – the average backer is far more interested in what your product can offer them than how it’s made.
Read the Fine Print
You should also be aware that crowdfunding doesn’t eliminate financial risk. You may be less exposed to up-front risk, but you’ll still be responsible for repaying your backers, paying the various taxes and fees incurred during the process and covering the platform’s fees as well. If your product fails to bring in the revenue you expected, these fees can very quickly put you in the red.
If you believe that crowdfunding is right for you, the next step is deciding on the platform you’ll use. Each platform offers its own set of pros and cons, and choosing the right one can be tricky. To get started, let’s take a look at a few of the most popular sites.
Kickstarter: The granddaddy of crowdfunding, Kickstarter is among the most popular options for aspiring inventors. It uses an all-or-nothing funding model, with a standard fee of five percent of the total funds raised and a three percent fee for credit card processing. There’s no fee if you fail to meet your goal, and since Kickstarter is so popular, it’s often the best option for reaching a wide audience.
Indiegogo: In contrast to Kickstarter, Indiegogo does not use an all-or-nothing model. You can access your pledged funding even if you haven’t reached your goal, though the associated fees are higher. The fees for a successful campaign are the same as Kickstarter, though exposure may be an issue – Indiegogo averages nearly four times less traffic per day.
Fundable: Unlike many other crowdfunding sites, Fundable offers the ability to choose between offering rewards or an equity stake. The site offers excellent support in preparing and launching a campaign, and it boasts a large network of accredited investors. However, it’s best used for serious efforts since there’s a $179 monthly fee and a 3.5 percent processing fee for each transaction.
Crowdfunding isn’t right for everyone. It still comes with its own set of risks, and managing a successful campaign requires no small degree of marketing, hard work and good fortune. Still, if you’ve got an invention that you believe in and you understand the pros and cons, crowdfunding can be a powerful asset in getting your project off the ground and on the path toward success.
Beth Kotz is a contributing writer to Credit.com. She specializes in covering financial advice for female entrepreneurs, college students and recent graduates. She earned a BA in Communications and Media from DePaul University in Chicago, Illinois, where she continues to live and work.