Crowdfunding is very trendy. It is about financing startups with many people contributing a little bit of money each (it also works very well in other endeavors like political campaign financing and art financing).
We’ve already touched on crowdfunding in the posts “What’s hiding behind crowdfunding sites” which mentioned Kickstarter, the most famous crowdfunding site, and how these sites are effectively crowd-voting machines; and how crowdfunding applies to small local business as well “Crowdfunding… a local bakery“.
Recently there have been efforts made by the US government to give a legal framework to crowdfunding, although that is still work in progress as the issue is quite complicated (the JOBS act was signed by President Obama and gives 9 months for the SEC to come up with regulations). More information in this Forbes article.
While the regulatory landscape might change deeply, the crowdfunding model also becomes clearer. It is not ideal for everybody as a funding mechanism. And it is more and more obvious that being successful at crowdfunding requires a well thought strategy and plan.
There is one commonality to this plan: you need to give back value to the investor. No, crowdfunding is not free! It is not charity! Investors want something back from their initial investment; and generally they do want good value perks. This excellent paper on a jeans manufacturing startup that has used crowdfunding successfully gives very good advice on what it takes. Basically, investors are paying money in advance for getting your product later as a perk, or to get a special treatment of some sort. There is a fine line between pre-sales and crowdfunding, although crowdfunding perks can also be more flexible.
Crowdfunding is not just generous benefactors giving for free: for them, it is an investment that needs to get a good return in terms of value. If you seek crowdfunding, what future value can you promise to the investors that will more than enough compensate for their money?