- Another popular source of early stage financing is crowdfunding. This is especially true when you have a physical product that you're going to market with and you want to test the market and understand who is interested in your product. With crowdfunding on websites that have become popular, like Kickstarter or Indiegogo, you're essentially doing a pre-order or presale campaign for your product. What happens in the context of that crowdfunding activity with a product is that individual customers who are interested in your product are able to pre-buy your product in advance of it being ready.
If you clear some threshold in the crowdfunding campaign, say you set a threshold of at least $100,000 raised, you then get that money minus a discount for the crowdfunding site, which is usually five to 10%, and then you can use that capital to actually go physically build your product and get your product to market. So essentially it's collecting people who are pre-buying your product in advance. There's an added benefit, which is that you're building a community of early adopters for your product. And through the crowdfunding campaign, in a lot of ways you're able to experiment with what people are going to be interested in.
Now, there are many crowdfunding campaigns that never clear their threshold so they don't succeed, but even that is useful feedback for you in the context of your product, because if you can't get enough people interested in the product you're going to build to have a successful crowdfunding campaign, you should question whether or not you've landed on the right type of product and the right type of customer that you're going after. There's another type of crowdfunding that's called equity crowdfunding, which has come out of something called the JOBS Act, which was an act in Congress in the US that was passed in 2012 that changed the way early stage investors could invest.
And it opened wider the number of early-stage investors that could invest in the startup companies and take risks. Now there's some ironies around this because in a lot of ways, the fact that the government is regulating who's able to invest in a company at the earliest stages but isn't necessarily regulating how much money you can bet on red on the roulette wheel in Las Vegas is a little bit weird. But in a lot of ways sort of the investor protections that exist, exist so that people can't scam investors. With equity crowdfunding, it gives startups another mechanism in a way that's regulated to be able to raise money from certain types of investors who may not qualify for traditional friends and family or angel-type investing.
So as an entrepreneur, make sure you're current on the different rules of equity crowdfunding, but don't dismiss that as a potential option, because in a lot of ways it can allow you to get access to a much wider group of customers. And on the product crowdfunding side, especially if you're building a specific product, in addition to raising money, recognize that it's a good way to test the market in advance of you going out and actually building and shipping that first product.
- Exploring potential stakeholders: friends, family, and more
- Finding a venture capital firm
- Breaking down the term sheet
- Taking on debt
- Asking for NDAs
- Accepting a no