In a field where everyone is trying to get money for their latest idea, it can be difficult — if not impossible — to secure outside funding for your project. In the past, your options for getting large sums of cash were primarily venture capital funds or angel investors. Today, though, crowdfunding has become a practical alternative for entrepreneurs who need funds but don’t want to sacrifice equity or go through the grueling process of being grilled by investors.
What Is Crowdfunding (in a Nutshell)
For those unfamiliar with crowdfunding campaigns, crowdfunding is a new way for entrepreneurs to raise capital by tapping the masses rather than a small pool of investors. You might have heard of a few, like Kickstarter or Pozible.
Crowdfunding works by allowing virtually anyone to make relatively small contributions to a project in exchange for tangible goods, rather than having a small pool of investors risk large chunks of funds. Donation amounts vary from campaign to campaign but they typically range from $1 up to $10,000.
Who is Crowdfunding Best Suited For?
Crowdfunding sites originally gained notoriety in the creative and artist communities because they allowed artists to successfully raise funds even though most traditional investors wouldn’t touch their work. Crowdfunding proved to be highly successful for these groups because the rewards are practical: by offering CDs, copies of paintings and other tangible goods, the system became a way to pre-order a variety of innovative products. As crowdfunding became more popular, digital downloads emerged as a popular reward option.
Is it Applicable to Software?
As a software development professional, you’re probably asking yourself if crowdfunding can help you raise funds for your software project. While the majority of crowdfunding projects revolve around creative endeavors and tangible goods, The Next Web mentioned two software campaigns which made their top crowdfunding campaigns list for 2013.
Ghost is designed as a platform devoted to publishing. By pitching itself as a simple alternative to WordPress and other content management systems, the creators of Ghost were able to raise £196,362 from a £25,000 goal.
Macaw raised $275,000 from a $75,000 goal. Macaw gained notoriety by providing designers with a tool which allows designers to write code straight from the design view.
So, yes, software projects can be successfully crowdfunded, provided there is a solid strategy behind the project.
Hold Up, Not So Fast
Before you go out and put your project idea up on a major crowdfunding site, it’s crucial to note a few key facts. According to Kickstarter’s published statistics, there were 60,025 successful campaigns in 2013, while 77,692 campaigns (more than half!) failed to meet their goal.
Breaking those numbers down further, the bulk of successful Kickstarter campaigns raised $1,000 to $9,999. If you were thinking crowdfunding instantly leads to riches, well, that isn’t quite the case. Just like any other business endeavor, running a successful crowdfunding campaign requires significant amounts of time and effort which can span months, if not years.
Tips for a Successful Campaign
Even if you have a proven track of marketing your own software, crowdfunding can be a whole different kettle of fish. The most notable challenge is that crowdfunding requires you to raise a significant sum of cash in a very limited amount of time — usually 30 days, though campaigns on some platforms can span a few months. Fortunately you can improve your odds of success by following a few simple tips:
Tell a story: since crowdfunding involves selling directly to your customers, you want to connect with them. This helps to improve trust, therefore improving contribution amounts. The best way to tell a story is through a video of the project founders along with a demo reel of the software in use.
Have something to demo: although software is intangible, you can help to build credibility with potential contributors by showcasing your prototype. Even if it isn’t perfect, you can still show that your dream is realistic, that you have a vision, and that you aren’t producing vaporware. If you don’t have a prototype built, showcasing prior works is another way to help build confidence in your abilities.
Communication is crucial: always remain active with your backers even after your campaign is over. Aside from providing you with valuable insights for future products, you’ll also be forming a loyal supporter base which can be tapped during future campaigns.
Equity Based Platforms: Avoid at All Costs
Unlike traditional venture capital funds which involve trading stock for cash, crowdfunding primarily revolves around rewards. This means that by law, a company can only give a product or service in exchange for money. Stock cannot change hands on most platforms due to anti-fraud legislation.
Recently, however, the Jumpstart Our Business Startups (JOBS) Act has become one of the hottest laws in the US because it is the first step to opening the floodgates for equity crowdfunding.
Despite the JOBS act passing two years ago, there are a few reasons why you should avoid equity crowdfunding at all costs for the moment:
Legal and accounting costs can cost tens if not hundreds of thousands of dollars depending on the amount of money you are trying to raise.
All funds for equity crowdfunding campaigns must be kept in escrow. If the goal isn’t reached the funds must be returned to the investors and the company still must pay all escrow fees.
When issuing stock to the public, you have to foot the bill for ongoing compliance costs which can cost tens of thousands per year. These costs are recurring until your company dissolves or all the shares are bought back by the company
After launching your equity crowdfunding campaign, there are significant restrictions on what you and your employees can say to promote your business, especially on social media. Failing to comply with these regulations can lead to significant civil and criminal penalties.
With all this in mind, it’s usually better to offer traditional rewards to your campaign contributors, rather than diving into equity.
The Sky is the Limit
The most important thing to remember before diving into crowdfunding is that you need to build a connection with your customer. Crowdfunding is a way for consumers to put their faith into projects which are typically far from being produced. Unless the consumer trusts you, they are not going to part ways with their money.
Have you run a crowdfunding campaign before? Would you use it to fund a software project? Are you currently running a crowdfunding campaign? Let me know in the comments!