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4 things to consider before crowdfunding your startup

The market has been flooded with positive news about crowdfunding and how it is displacing the traditional venture capital market with great rapidity. This is a trend that is likely to continue, although it does represent only a small fragment of the market. The fact is that crowdfunding still has a long way to go in terms of displacing the venture funding market. A big mistake that one can make is going straight to crowdfunding and believing that is will give you the same coverage that a traditional fundraising campaign will have. This article is designed to provide you with the primary points to consider for your crowdfunding campaign.

1. Crowdfunding Doesn’t Work for all Business Models

There has been a massive amount of startups that are looking to create new websites and mobile applications with the belief that they can raise money without giving out anything through crowdfunding. While this may be the case for film production and philanthropic initiatives, non-equity based crowdfunding without proper incentives of personal interest often fails outright. If you’re not offering equity or raising debt from a ‘crowd’ of investors, you will need something of value to offer your backers. This means having an early stage prototype available, access to the production batch, or some other tangible value. Recognize that crowdfunding simply doesn’t work for all business models and focus on fundraising where your efforts will be more fruitful.

2. The Best VC Firms Aren’t On Crowdfunding Sites

Can you imagine how many pitch decks that Google Ventures gets sent in any given day? It’s already flooded with decks, along with all the other most active investors in the industry, so you won’t find them searching for deals on crowdfunding sites. Most likely, firms will be on there to improve their deal sourcing efforts, meaning they don’t have a large enough reputation to already be flooded with submissions and requests through their website. It is only the firms that don’t have a full inbox that are searching for deals, which are probably the ones that are not the most widely recognized.

3. The Best VC Firms Deliver Something Others Can’t

When your company is supported by a reputable investment group, they do everything they can to ensure that your company avoids failure. Moreover, they typically have the resources needed to back this up. Therefore, the best venture capital firms can contribute more than just financing and often open you to many avenues including strategic partnerships and a broad network of advisors. This does come with consequences since it may mean that private backers only interested in an arm’s length transaction may be easier to keep at bay if you want to focus on growth rather than providing constant updates.

4. Having Many Supporters Can Be Problematic

Having a large number of supporters can result in havoc at an early stage. There have been cases where products promised to backers resulted in the inability to fulfill demand and negatively impacted the product launch. In other cases, having over ten equity investors can mean you’re consistently delivered questions which you must fulfill and have investor conferences. If you can imagine the complications presented in the long-run, having less than three investors will seem like a simple solution.

When contemplating these four things, keep in mind that this is certainly not an argument against crowdfunding. It is rather a reminder that it is still not the way venture capital works and it should be used as a complement and in the right circumstances, an alternative to traditional venture funding. By failing to focus on the potential implications, you could be trading off short-term benefits and lower cost of capital for long-run disaster. As with everything, one should properly weigh the costs and benefits of a decision before implementing it and not be persuaded by the seemingly simple success of other companies. Lean more about how to manage your fundraising campaign by reading about one entrepreneur’s journey to financing.

  • “1. Crowdfunding Doesn’t Work for all Business Models” is spot on. In many success crowdfunding stories, there are also tons of failure to launch stories.

  • Augustine Madumere

    I agree that certain business models are not suitable for crowdfunding. Does most
    startups in Africa have what it takes to attract a good VC? With Crowdfunding set to surpass VC funding in 2016 according to report by Massolution, there can be no doubt that crowdfunding is a real alternative for entrepreneurs to achieve visibility and funding today.

    Apart from the potential to raise a small amount of early capital quickly, it’s a great
    opportunity to identify and connect with early adopter customers who provide feedback and brand awareness. Companies can build early versions of product via crowdfunding prior to raising VC Capital. Companies like Oculus, SmartThings, OUYA followed this approach.

    As you noted, these VC’s receive tons of pitch decks daily making it competitive to
    get the attention of a good VC that brings the benefits listed in the article.
    We have just launched IMEELA, Nigeria’s crowdfunding platform where aspiring entrepreneurs seeking funding for their start-ups can now promote their project idea on the website, http://www.imeela.com, to receive small donations from a large group of