This blog post is the second in a series of three articles by Millyard Tech Law, PLLC exploring the use of crowdfunding for funding a small business. The information provided is intended to provide an overview of the subject and is not a substitute for legal or business advice. We encourage you to consult with a SBDC business advisor to explore whether crowdfunding is right for your business. Check out this article to see how SBDC's client Popzup used Kickstarter, a rewards-based crowdfunding platform.
In our first blog post, we explored what crowdfunding is, its benefits and the keys for crowdfunding success. In this article, we are exploring when and why a business may want to consider rewards-based crowdfunding. As a reminder, rewards-based crowdfunding allows entrepreneurs to pre-sell a product or service or to launch a business concept without incurring debt or selling equity. Supporters receive rewards, such as discounts off the product or service once it is released, in exchange for supporting the project now.
Rewards-based crowdfunding can be attractive to companies for a number of reasons:
Crowdfunding is also seen as being trendy. There have been a number of well known rewards-based crowdfunding campaigns over the past few years that have raised the visibility of crowdfunding – some of which have been smashing successes and others that have achieved notoriety simply for being outlandish and ridiculous. In the realm of smashing successes, there is the story of Pebble Technology. The founders of Pebble used Kickstarter to pitch their idea of bringing a relatively inexpensive watch to the market that could be customized with apps to do things like display calendar notifications and emails. Pebble outlined its idea on Kickstarter, made a video about the product and set a goal of $100,000 to complete research and design of the watch. A donation of $100 earned supporters a promise that they would receive the watch when Pebble began selling them. The campaign landed more than $10 million from 69,000 supporters. In the realm of the ridiculous is Zack Brown, the gentlemen from Ohio who raised over $55,000 to make potato salad for the first time. Mr. Brown offered supporters such rewards as saying their name out loud when making the potato salad.
While the examples above illustrate that rewards-based crowdfunding can be used for just about anything, if you are seriously considering a crowdfunding campaign for your business, below are some situations that are particularly well-suited for using rewards-based crowdfunding:
Even if you determine that your business might be a good fit for rewards-based crowdfunding, remember that online crowdfunding platforms have an “all or nothing” requirement. In order for you to receive any funds, you must secure commitments for the entire amount that you are seeking to raise.
Good planning is critical to your success. It will start with having a good business plan and a solid grasp of your capital needs. Then you will need a marketing strategy to raise awareness about your campaign.
Crowdfunding is all about selling your concept and getting the crowd excited enough by your idea to provide financial support. You’ll want to be in the planning phase of a crowdfunding campaign several weeks before you even go online to set it up. Speaking with an SBDC business advisor or another company that has used rewards-based crowdfunding with their business are good first steps.
In our final segment, we will discuss when and how to use equity crowdfunding in more detail. Stay tuned!
Would you like more information on equity crowdfunding? Check out this e-book Getting Ready for Crowdfunding from Millyard Tech Law, PLLC.