Art of the Start-Up Jun 04 2012

Crowdfunding Brings Start-Ups More Than Money

By Alina Dizik

Crowdfunding isn't just about the money.

Start-ups that use this kind of broad financing also get some valuable insight about how to run their businesses. While crowdfunding was once thought to just attract one-off projects for artists, recently founded sites like Kickstarter, IndieGoGo and Rockethub let founders test drive a part of their business model or create a prototype for a new product.

"Entrepreneurs are our fastest growing category," says Brian Meece, chief executive of Rockethub, which launched two years ago.

Not sure how to reap the benefits of crowdfunding opportunities? Here six advantages of crowdfunding your project:

You'll get proof of concept

Users speak with their wallets on crowdfunding sites, which can be the best indicator on whether they like or hate your idea or product.

"While money is a critical component, the biggest benefit is the validation of your idea," says Sherwood Neiss, Miami-based co-founder of start-up Exemption, a crowdfunding advocacy group. Sometimes the good news can give you more self-confidence to keep going rather than to move on to your next idea, especially if there's a pricey prototype involved.

Pebble Technology Corp., which makes a watch that works with iPhone and Android to receive data and use apps, set a new record when raising more than $10 million on Kickstarter this month. With more than 68,000 backers participating in the campaign, it's a definite green light for the makers and functions as proof of concept for any future venture capital funding the company pursues, says Rahul Bhagat, head of operations at Pebble.

You'll learn what potential customers really think

Not only can backers fund the project, the small ownership perks associated with each campaign can help you get valuable feedback on what works and what doesn't. "It's kind of like a mega focus group," says Steve McGuigan, co-founder of BitBanger Labs. "Potential consumers have more input into the product at an earlier stage."

Bitbanger's Lucid Dreaming Mask raised more than $550,000 on Kickstarter through crowdfunding. The mask tracks when someone is in deep REM sleep. Among other things, the company's 6,300 backers suggested the mask be made thinner.

Pebble's Bhagat says that they learned what customers value in the watch through the comments section. "Battery life, outdoor readability, and cost seem to be major driving factors in the backing," he explains. "In addition to that we have great market research that shows what features and apps people want and what they're willing to pay for."

You'll get a lesson in sales and marketing

Whether building your online video to earnestly explain your idea or communicating with potential backers, entrepreneurs find that crowdfunding lets them develop their marketing and sales experience. Not only do entrepreneurs need to come up with a good idea, they need to sell their project while tapping in to the social capital of their community, points out Rockethub's Meece. Thinking about your sales and marketing messages early on can help you continue to develop your project with the customer in mind.

You'll know the size of your costumer base

Especially if you're making a pricey product, knowing exactly how many people are buying your product is key, says Pebble's Bhagat. "It is very painful to over-produce product because you've used up capital that is just sitting as inventory," he points out. When contributing money to the campaign, users made contributions that covered the cost of a Pebble watch and pre-ordered the product directly from Kickstarter, each paying $99 for the watch, which has a retail price of $150.

You'll get organized early on

Having investors to report to means you'll need to create a short version of your business plan from the beginning, says Neiss. As the process continues, you'll need to share more and more of your internal plans with those who have contributed in an efficient manner and learn which information to keep private. After your idea is funded, you'll need to file your plans with the Securites and Exchange Commission. Having to constantly report your progress and keep track of your spending helps entrepreneurs establish "organization skills that are good for any business," says Neiss.

You'll get ideas for future projects

Crowdfunded projects give start-ups insight into what customers would like to see next, says Christopher Williams, coordinator at Barrio Works, a neighborhood ministry in Phoenix that built a campaign on Indiegogo. "You get to learn about the types of folks who are interested in your project [and] what other types of projects they are interested in," he says. "Hopefully [you are] satisfying customers who will be happy to buy from you again in the future."



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