Chapter 6

Raising Money with Crowdfunding

In This Chapter

Understanding how crowdfunding works

Thinking about budget, benefits, and deadlines

Getting the crowd onside

Using equity crowdfunding to boost your business

Unlike other forms of crowdsourcing, crowdfunding is not about work. Crowdfunding is about raising money in small donations from a large crowd of people. You can quickly identify two fundamentally different kinds of crowdfunding: crowdfunding for charity and crowdfunding for commercial companies.

The easiest type of crowdfunding to understand is charitable crowdfunding, where you go to a crowd and ask each member for a donation to a cause. That cause can be an organised charity, a personal need (such as a medical expense or home repairs after a natural disaster), a community activity or an artistic endeavour.

Some crowdfunding sites identify another kind of charitable crowdfunding, usually called fund-your-dreams crowdfunding, where you try to raise money to do something that you’ve always wanted to do, such as travel to Rwanda to see the mountain gorillas, learn to drive a high-speed sports car or collect flags from every country on earth.

When commercial firms engage in crowdfunding, they usually do so to raise funds to help build their operation. To do this, they either sell shares of stock in the company or ask the crowd for a cash advance. The first kind of commercial crowdfunding, usually called equity crowdfunding, is a new form of crowdfunding, although it has roots in earlier forms of finance known as penny stocks. Because equity crowdfunding is new, many countries (including the USA) don’t have a complete set of rules to govern it.

The second form of commercial crowdfunding is sometimes called cash advance crowdfunding because the company is asking for a cash advance from the crowd. The firm often repays the cash advance by offering the crowd goods and services, when they become available, at discount rates.

Crowdfunding, while similar to the other types of crowdsourcing, has a few features that distinguish it from those other forms. In particular, crowdfunding requires you to take an active role in assembling your crowd, whereas for macrotasking and microtasking you usually rely on others to find your crowd. Building your crowd is where this chapter comes in handy.

Knowing the Basics of Crowdfunding

In crowdfunding, you take an active role in assembling your crowd. In many other forms of crowdsourcing, you can go to a crowdsourcing platform and find the crowd that you need. You can go to Guru (www.guru.com) to find general macrotaskers, or tagasauris (www.tagasauris.com) to get microtaskers able to create labels, or TopCoder (www.topcoder.com) for macrotasking programmers. At the major crowdfunding platforms, you find a crowd with some people who may be interested in your ideas. However, you have to expand that crowd. More importantly, you have to bind that crowd into a community.

General crowdfunding is a form of charitable fundraising and hence is governed by local laws and regulations. Your area may require you to keep a list of all donors, or notify the tax authorities of large donations, or do certain other things in order to follow the law. The major crowdfunding platforms can help you satisfy the law, but make sure that you understand the local requirements when you begin crowdfunding.

Seeing crowdfunding as a community activity

Like all forms of crowdsourcing, crowdfunding is nothing new. Until the industrial age created large, wealthy foundations, fundraising was almost always done on a small scale. A shilling in the collection plate. A penny for a Buddy Poppy. A dime to cure polio. Small contributions accumulated and allowed a community to address an issue it had identified.

The tools of modern crowdsourcing allow fundraising to move beyond a local neighbourhood or small town and engage people around the globe. However, the small neighbourhood remains the central image of crowdfunding. Don’t think that you’ll collect money from complete strangers, although you may not know all the people who donate to your campaign. You collect money from a community that’s identified your project as something of value. You may not know the members of this community personally. You may live nowhere near them. Yet you all have a common purpose and a common interest. You’re bound into a community through that purpose and interest.

More than almost any other form of crowdsourcing, crowdfunding is about building a sense of community. That community may exist only for a short time, but it decides to support your activities.

Using the crowdmarket

At the centre of crowdfunding is the crowdmarket. As with all other forms of crowdsourcing, a transaction is at the heart of crowdfunding. Instead of offering work, the crowd offers money as its part of the transaction. In return, the members may possibly receive many things. They may receive a gift from you in appreciation: a T-shirt, a coffee mug, a little thing to put on the desk. They certainly receive a note of gratitude and a receipt. Many, if not most, benefit from knowing they’ve been altruistic – the feeling that they’ve done something good for someone else. However, all receive membership of your community.

In making a donation, the crowd is stating that it believes in what you’re doing and wants to identify with you and your work. Members may not want to make that identification in a public way. They may not want to wear a T-shirt with your name on it, or put a sign on their door that promotes your cause. Still, they’ve offered you money. By doing so, they’ve said that they stand with you. Your task, then, is to pull this crowd into your community, to make the members feel that they want to belong to you.

Of course, the techniques of building a community around a market are the techniques of mass marketing. To rally a crowd for your crowdfunding campaign, you build a market for your idea and try to engage that market. This steps in this process are much like those of an advertising campaign:

1. Try to make people aware of your activities, and get enough knowledge to understand what you’re doing.

2. Get people to like what you’re doing and develop a desire to identify with you and your project.

3. Get people to act – in this case, to pledge a donation.

In crowdfunding, you can rely on all the techniques of modern marketing and advertising. However, you’re primarily relying on two things:

Personal connections within the crowd: People are more likely to join your community if they already know someone who’s in it.

Low cost of contributing: People are more likely to contribute if the cost is low.

Consider using a professional crowdfunding platform that can help you satisfy the local fundraising regulations. Although you can do crowdfunding with nothing more than a Facebook page (see Chapter 12) or website that directs people to make a contribution at a PayPal account, this approach works well only if you’re raising money for an established charitable organisation that knows how to handle donations. Head over to Chapter 13 for details of picking a platform and examples of crowdfunding ones.

Deciding between all-or-nothing funding or partial funding

As you prepare for your crowdfunding, you’ll find that most crowdfunding platforms use one of two kinds of market rules: the all-or-nothing funding rule or the partial funding rule. Both have advantages and disadvantages and work best in specific settings. The following sections explain each rule.

Most of the major crowdfunding platforms put a deadline on each fundraising call. You can keep your request on the platform until that date. After the deadline comes, you have to take the request off the site. You can avoid the problems of deadlines only if you’re crowdfunding from your own site.

Understanding the power of all-or-nothing funding

If you’re using the all-or-nothing market rule, you’ve set specific fundraising targets for your campaign and are collecting pledges from the crowd towards that goal. You also have a specific deadline by which you need to meet that goal. If your pledges exceed that goal before the deadline, you receive all the money that’s been pledged. If your pledges don’t exceed the target, you receive nothing.

The all-or-nothing rule is generally used to fund specific projects. In project funding, you’re doing a specific task in a fixed period of time with a budget. Perhaps you’re making a film, or building a playground or remodelling a building to house a charitable organisation.

If you don’t get the entire budget, you can’t do the project. Half a film or two-thirds of a playground isn’t a worthwhile result. In all-or-nothing funding, your donors don’t give money to create half a project. They make their pledges anticipating that you can do the entire project. So if you don’t raise all the funds, you have to return the pledges.

Many crowdfunding platforms state that they’re funding projects only and require you to use the all-or-nothing market rule.

Choosing to ask for partial funding

In partial funding, you have a fundraising goal and you have a deadline. However, you don’t need to raise the entire budget in order to be able to start work. In this case, you still get some money if you fail to get enough pledges to cover the budget. When the deadline arrives, you get the amount that’s been pledged to your work.

Partial funding is most useful when you’re doing work that you can easily expand or shrink. You may be trying to raise money to feed 100 people for a month or offer concert tickets to 200 people. If you raise money to feed 50 people or give tickets to 120, you can still do good.

If you’re trying to use crowdfunding to support the ongoing activities of an organisation, you may want to establish your own crowdfunding site. Use a website or a social networking site to keep the crowd aware of your activities, and use a financial service such as PayPal to collect money.

Understanding the fee

As you draw up your budget for crowdfunding, include the fees that you pay the crowdfunding platform. Usually, you pay two kinds of fees:

To the crowdfunding platform that promotes your fundraising efforts. Most crowdfunding platforms charge you a fee if you run a successful campaign on their platform. If you post a campaign and that campaign isn’t successful, they charge you nothing. All partial-payment campaigns are considered to be successful, even if you don’t collect the full amount that you request.

Generally, these fees are roughly 10 per cent of the money that you collect. Each platform should give you a clear statement of the fees that you can expect to pay. If you don’t see such a statement, use another crowdfunding platform.

To the financial firm that handles the transfer of funds for the platform. For example, Amazon or PayPal may take a fee. Typically, a financial organisation charges between 3 and 5 per cent of the amount that you collect.

Raising money over the Internet offers many possibilities for misunderstanding and fraud, so use only crowdfunding platforms that publish all their fees and policies. Also consider using only platforms that are accredited by one of the industry groups that promotes integrity and ethics in fundraising. One such programme is the Crowdfunding Accreditation for Platform Standards, one that’s run by crowdsourcing.org.

Running a Crowdfunding Project

You’re ready to start crowdfunding. You have a project. You understand the basic idea. The following sections provide guidance for getting your project off the ground.

Preparing to crowdfund has much in common with the work of describing your tasks for other forms of crowdfunding. So, you may want to take a look at Chapter 11, which explains how to write instructions for the crowd.

In crowdfunding, the instructions are very simple. You simply want the members of the crowd to give money or encourage their friends to give money. However, you need to explain to the crowd members why they should give money, and to do that, you need to start with the reasons why you need the funds. You need to start with the budget.

Writing the budget

After you’ve decided on a platform (Chapter 13 helps you here) and have decided between all-or-nothing funding or partial funding (see the earlier section Deciding between all-or-nothing funding or partial funding), you need a budget. The budget should lay down the amount of money that you need and the way in which you intend to spend the money. Be sure to include any fees that you need to pay (see ‘Understanding the fee’, earlier in this chapter).

Use the budget to make the case for your crowdfunding activity. The budget isn’t merely a statement of how you plan to spend money, but is actually a statement of your values. It may show that you’ll be spending the money on people rather than on things. It may demonstrate that an eager group of volunteers needs only one piece of equipment to be more effective. It may reveal that you’ll be donating substantial labour and equipment that you already own to the project.

Keep the budget as simple as possible. Many crowdfunding platforms publish only the total amount that a crowdfunder is seeking. Furthermore, the crowd has a decidedly low tolerance for figures. If it sees a detailed budget with lots of figures, it’ll skip your request and go to the next project.

Describing your project

Benefits, benefits, benefits.

When you write the description of your project, remember the first rule of crowdfunding: emphasise the benefits to the crowd. The crowd will fund your project if it identifies with your work and believes that the work will do good. The crowd members often won’t care about how brilliant the idea may be or how beautiful it may look. They want to see a benefit to the crowd.

Of course, many members of the crowd may not directly benefit from your project. However, if they can see a connection between those who do benefit and themselves, they may see enough good to offer their contributions.

Here are some helpful hints for writing descriptions:

Start the description with a strong sentence that emphasises the value of the project.

Tell people what they’re contributing to the project, not how the project will be done. See the nearby sidebar Explaining benefits for an example.

Use the words we and ours rather than I or mine to emphasise the community nature of the fundraising.

If the platform allows, include photos and videos that emphasise the benefits of your project. A good video can be a powerful fundraising tool. With it you can explain your project, demonstrate the benefits of your work, and explain the things that may not be easy to understand in your pitch.

The Vancouver restaurant Besties produced a three-minute video that showed the two partners talking about their planned restaurant. They explained some of the food they'd serve, including a German street food called currywurst, and showed how they were developing the restaurant by themselves. The video helped the firm raise $10,000 (or £6,300). Check it out online at www.indiegogo.com/bestie.

Don’t exaggerate the value of your project. In the long run, exaggeration damages your reputation as a crowdfunder. For a time, you may be able to convince some people that your project’s better and more important than it really is, but you won’t be able to do it over an extended period. Communities on the Internet are usually able to uncover exaggerations and hyperbole.

---

---

Setting a deadline for a decision

Most crowdfunding platforms allow you to set the deadline for your crowdfunding campaign, usually a date between one and ten weeks after your posting. You’re responsible for driving most of the crowd to your platform, so choose a date that reflects how much time you need to contact your crowd. Most members of the crowd will make a decision shortly after they hear about your campaign. If you set a date that’s too close, you may not get enough of the crowd to know about your campaign. If the date is too far in the future, people may forget about the campaign.

Campaigns often see a surge of activity at the start and at the end. When the campaign is new, you get people visiting your presentation to see what you’re doing. At the end, you can rally people to the cause and encourage them to donate once more. If too much time elapses between the start and the end, the crowd may forget about your campaign and react with surprise when you start telling them that the deadline is near. You get the best reaction if you set a long enough deadline so you can build a big response at the start, keep regular contributions coming in to the campaign, and have a big push at the end while the idea is still fresh in the minds of the crowd members.

Crowds are often smaller than you may expect. On small crowdfunding projects, you can quickly find that your crowd has a small number of members who are communicating among themselves only. If this happens, you may find that the crowd tires of your project and doesn’t respond when you try to raise funds at the final deadline.

Contacting the crowd

Before you start the campaign, you should take a moment to think about the crowd that you hope to find. Ask yourself:

Who may be the members of the crowd?

How do I contact them?

Who do they know?

What ideas can I use to get a response from this crowd?

To contact the crowd, you use the standard tools of digital communication, like email and phone, and social networking (for more on social media, see Chapter 12). You send messages to your friends and colleagues to tell them of the campaign. You ask these people to fund the campaign and to notify their friends. You look for institutions and organisations that may help you by sending messages to their employees, customers, friends or members. You keep your crowdfunding fresh and active by adding news of your progress and ideas that you’ve gained during the campaign.

As you run the campaign, try to use images and ideas that identify your crowd and encourage people to join it. If you’re funding a neighbourhood project, use pictures of the neighbourhood. If you’re doing something that doesn’t have geographical boundaries, such as an art project or an effort to support certain kinds of animals, use images that identify your project and encourage people with such interests to join. If you know a prominent individual who’s willing to lend her name to the project, you may find that her doing so expands your crowd.

Here are a few other ways to reach out to the crowd, many borrowed from traditional fundraising:

Find an inner core of supporters to start the campaign. It takes money to raise money. People are more likely to pledge money to campaigns that have already attracted some money. Early contributions are evidence that people like your project and have confidence in your leadership. Therefore, before you start advertising your crowdfunding campaign to the world, raise some money from friends and family so that you can open your campaign with some real pledges towards your goal. In crowdfunding circles, these early donors are known as your inner core of contributors.

The inner core can be very helpful to your campaign. As well as giving early donations, they can contact their friends and family and ask them to donate to your campaign and provide a second round of contributions midway through the campaign to encourage other people.

Use matching challenges to bring donations. If you know someone who’s willing to make a large donation, ask her to give it as a challenge. Instead of her donating $100 (£63), have her say that she’ll double the contributions of ten individuals up to $10 (£6.30), and then challenge your crowd to find $10 donations. In crowdfunding, you can also use a challenge to match the gifts of individuals who bring new people into the crowd.

Give gifts. You can offer gifts to people who make donations of a certain size or to individuals who bring a certain number of contributors to the crowd.

Use multiple social platforms. Not everyone uses Facebook. Not everyone uses Twitter. Not everyone uses Net2. Not everyone uses the neighbourhood listserv. Not even everyone uses email. Promote your project on as many platforms as you can. If doing so seems appropriate, you might even use traditional forms of media – notes on the supermarket bulletin board, talks to organisations, calls to friends.

Look for volunteering opportunities. Some people find it easier to give labour than to give money. Find a way to engage people in working for your project. Have them gather to support the neighbourhood activity, create the artwork, support the cause. Post information about that contribution on your project page to show that you’re making progress towards your goal.

Have a gathering. Invite the people who support your project to gather in a physical location such as a park or a coffee shop. At the event, encourage the participants to contact their friends over social media to donate to your project.

Offer a webinar. Organise a webinar – an online conference – on one of the social media sites such as Google+. In the webinar, you can explain your project and the need that you have for funds. You should be able to capture the webinar and replay it for other people.

Considering an Example: Creating a Playground

A group of neighbours want to build an urban playground for their children. They’ve identified a piece of land that’s owned by the city and have obtained the permission of the city council. They’ve been able to find several old playground structures that they can use, but they want to purchase and install a climbing structure. The city has no funds for the project, so group is raising money through crowdfunding.

Building a budget

The group identifies a make and model of climbing net that costs $14,999. (£9,400). The group has to install it themselves, so it needs concrete, construction equipment and a city permit. The members estimate that they need $18,642 (£11,600). When they remember that the crowdfunding platform is likely take about 10 per cent, they decide to ask for $19,000 (£12,000). Figure 6-1 shows their budget.

Figure 6-1: Budget for a crowdfunding project.

Writing a letter

After they create the budget, the members of the crowdfunding group draft a letter describing the project. The basic idea is short and straightforward. The letter describes the project as providing a safe and clean playground for young children. After they complete the description, the group open an account on a crowdfunding platform and create a project. Figure 6-2 shows that project and the description on the crowdfunding site WhenYouWish.com.

Setting a timeline

The group decides that it should be able to raise the money in a month. Because the neighbourhood has a diverse group of families, the group members decide on a deadline of 35 days to make sure that the timeline cover the paydays of all the families. The members believe that some people are most likely to give when they’ve just received a pay cheque.

Reproduced with permission from When You Wish.

Figure 6-2: Project on a crowdfunding platform.

Getting the crowd

After they place the project on the crowdfunding platform, the group members start calling the crowd to the platform. Ten families donate $100 (£63) each, so the group can start the project with $1,000 (£630) already pledged. The members then start inviting the crowd. They contact their own families and friends, the people who subscribed to the neighbourhood newsletter, and the local shops and schools. The fund begins to build and soon meets the goal. The group doesn’t even have to use matching funds, prizes or a big push at the end to get the final money.

Accumulating Equity for a Company

In equity crowdfunding, you’re raising money for your company. Instead of just asking for donations, as you would in ordinary crowdfunding, you sell a little bit of the ownership in your company to members of the crowd. As with charitable crowdfunding, you expect the crowd to buy the ownership of your company in small units. Instead of selling large shares of stock worth $40 (£25) or $100 (£63), or even $1,000 (£630), you sell shares for $1 (£0.63), or $5 (£3.15) or $10 (£6.30).

Crowdfunding is tightly regulated in most countries. You have to meet the regulations of the country where you're attempting to raise money. Before you do any equity crowdfunding, make sure you know the crowdfunding regulations for the country where your company is incorporated and for the country where you're trying to raise funds. Check the crowdsourcing industry website (www.crowdsourcing.org) to see whether it has any information about regulations in your country, and also look at the website of the government agency that regulates banking and investment – usually the best place to start looking for such regulations. If you have any questions, get professional help.

At the moment, equity crowdfunding is in a state of flux. It became legal in the USA only recently, and at the time of writing, the American Government is still in the process of creating regulations to govern this form of crowdfunding. When it’s created these regulations, the number of firms that offer equity crowdfunding services will expand quickly. Many of the firms that provide charitable crowdfunding, such as Indiegogo, WhenYouWish and Kickstarter, will likely offer equity crowdfunding services.

In the following sections, I use the UK firm Crowdcube as an example of an equity crowdsourcing firm. Crowdcube follows the model that most experts believe will become the standard for the equity crowdfunding industry.

Before you start equity crowdfunding, find out more about the state of the field at information sites such as crowdsourcing.org (www.crowdsourcing.org) or Daily Crowdsource (www.dailycrowdsource.com), and check the services offered by other firms involved in crowdfunding.

Making a pitch

Equity crowdfunding works much like charitable crowdfunding. You decide how much money you need for your company – the target goal for this funding campaign. You also decide the percentage of your company that you’re willing to exchange for that amount of money. You post this request on a crowdfunding platform.

You can set your request low or high. Most platforms have a minimum value that you must request. Some have a maximum amount. All crowdfunding platforms encourage small investments, but most establish a minimum investment. At Crowdcube (www.crowdcube.com), a crowdfunding platform in the UK, you have to ask for at least £10,000 ($16,000). Crowdcube has no maximum request, but it does require all investments to be at least £10 ($16).

When you’re deciding how much you should request and how much equity you’ll sell, you’re determining the value of your company. The amount you request is equal to the value of the fraction of the company you sell. If you believe that your company is worth $5 million (£3.15 million) and you want to raise $500,000 (£315,000), then you sell 10 per cent of the equity in your company.

If you don’t know how to put a value on your company, seek the advice of a commercial banker or investment advisor who knows how to do it. If you don’t, you run the risk of selling too much of your company for too low a price. Essentially, the value of your company is the price that someone would pay for it on the open market. However, most investment organisations employ an economic model that includes the assets of the company, the amount of income that the company can generate, and the business risk that the company faces.

In addition to setting a target goal, you also set a deadline, usually two to three months in the future. If the crowd meets your goal by the deadline – if it provides all the funds that you’re seeking – then you sell the piece of equity in your company, issue stock certificates and get the money you need. If the crowd doesn’t meet your goal, the platform returns the money that’s been pledged and you get nothing.

Using a platform

You carry out equity crowdfunding on special platforms regulated by the local government. You can’t do equity crowdfunding on platforms for charitable crowdfunding.

When you do equity crowdfunding, you have to provide substantial information about your company: the business plan, recent financial statements, financial projections for the coming years. You also need to show how the company would provide a return on the investments it’d like to receive.

Figure 6-3 gives the first part of the application for a posting on Crowdcube. The application is much like the form for a charitable crowdsourcing campaign. It asks for a few pieces of technical information such as your company number, an acknowledgement that your company is indeed a UK limited liability company, and the investment that you’ve already secured.

You’ll be most successful with your first attempt at crowdfunding if you pitch your offering as a good investment rather than trying to describe your organisation as a good company. Most investors want to know that your company will make their money grow, that it will return their investment, and that it has a promising future. Many first-time crowdfunders spend too much time trying to describe their product or service. They want to explain why the product is good rather than why the investment is good.

Figure 6-4 shows the second part of the Crowdcube application for equity crowdfunding. In this part, you have to provide the information that describes your business. You provide a business plan, financial forecasts, and details of the number of employees, funding, revenue and profit. The form also asks you to state the funds you require and the percentage of the ownership in your company that you’re willing to sell in exchange for the money.

Paying the fees and getting the funds

When you do equity crowdfunding, you tend to pay four kinds of fees, as follows:

Posting fee: The fee that you pay to the crowdfunding platform to register and post a pitch for funds. This fee is usually a small amount. At Crowdcube, the fee is £250 ($400).

Success fee: A percentage of the amount of money raised through the crowd. Typically, this fee ranges from 3 to 8 per cent. At Crowdcube, the fee is 5 per cent of the total money you raise.

Transfer fee: The money paid to a financial institution to transfer the money to your account. Crowdcube transfers the money to the bank of your choice and doesn’t charge a fee.

Processing fee: Covers all the costs of paperwork and legal filings. Crowdcube charges a flat fee of £1,750 ($2,800).

Reproduced with permission from Crowdcube.

Figure 6-3: Initial information for an equity crowdfunding campaign.

Reproduced with permission from Crowdcube.

Figure 6-4: Business information for crowdfunding.

Attracting the crowd

When a crowdfunding platform has accepted your application for equity crowdfunding, you can start directing the crowd’s attention to your campaign.

You have to help build the crowd. Most crowdfunding platforms have at least a small group of investors, but they rarely have enough to fund your request completely. You have to recruit more members of the crowd through your network and the networks of other members of your company.

In equity crowdfunding, you may have to limit what you say when you promote your company’s crowdfunding request. You can certainly draw the crowd’s attention to the platform and tell it that the campaign represents an investment opportunity and that the platform has information that explains the quality of the investment. But you may be restricted by government regulations from making additional claims about the quality of the investment.

As with charitable crowdfunding, assemble an inner core of investors so that you can show that a substantial fraction of your request has been filled on the first day. You can then use the network of this inner core to call new members to the crowdfunding platform.

You can recruit new members to the crowd by using the same techniques that you may employ in charitable crowdfunding. After you start with an inner core of investors, you can turn to neighbours and local institutions. You can have events that gather investors together. You can have volunteer activities for investors. You can even offer investors a modest gift for their investment, such as a shirt, an item for their desk, or an early version of your product. (You may also want to use an early version of the product to raise funds without selling equity; see the later section Using non-equity funding.)

Waiting for results

Generally, you can’t change your pitch after you’ve posted it. Some platforms let you increase the amount of equity that you’re offering, but you can’t change the amount of money that you hope to get out of the campaign. However, you can add information to show the progress that your company’s making.

As with charitable crowdfunding, you may have to make a push at the end to achieve your goal. In this final stage, you may find that the most likely investors are those who’ve already pledged. Because they’ve already made an investment, they’re often interested in seeing you succeed.

Be careful during any final push to avoid frightening investors. Most crowdfunding platforms allow investors to withdraw their investment at any time before the deadline. If you send messages that suggest that you’re in desperate shape, you may find that some of your investors decide that your company isn’t a good place for their money.

Examining the results

No matter what happens at the end of your campaign, look at the results and try to understand what happened.

When all goes well, you get the money, pay your fees, and get back to work. However, consider how much effort you put into the campaign. If you got the money quickly and with little effort, you may have undervalued your company. If you had to work hard and barely made your goal, you may have overvalued the company. In either case, you want to think carefully about how you approach the crowd for a second round of funding.

---

---

When crowdfunding doesn’t work, you’ve overvalued your company or failed to convince the crowd that the company was indeed a good investment. You can return to the crowd for a second attempt of crowdfunding, but before you do, take time and prepare yourself. Ask yourself what you can do to make your company better value and how you can better communicate that value to the crowd.

Spark Devices attempted to use crowdfunding to raise $250,000 (£155,000) to start manufacturing a device that would enable people to connect electric lights to the Internet and control those lights with a computer. The campaign began with great enthusiasm and ended six weeks later with pledges for $125,000 (£77,500). However, by the rules of Kickstarter, the firm got nothing, because it failed to meet its goal.

The record of Spark Devices' campaign (available on the Kickstarter website at www.kickstarter.com) suggests that the firm made two mistakes. Firstly, it set its fundraising target too high. The campaign could have raised a substantial amount if the firm had set their target lower. Secondly, a close look at the contributions suggests that the firm overestimated people's willingness to give large sums of money to the campaign. Few people were willing to give more than $100 (£63), even though the company offered gifts, products and other opportunities for large contributions. According to the campaign budget, the firm anticipated getting at least $40,000 (£25,200) more in contributions from large donors.

In general, the crowd responds to actions rather than to figures. Can you get the product out the door? Can you get a new contract? Can you improve the quality of your service? These sorts of things impress the crowd and may make your next attempt at crowdfunding more successful.

Using non-equity funding

You may want to avoid equity crowdfunding for as long as you can. When you’re selling equity, you’re selling some control in your company and some of the claims on future income. When you sell equity as a small company, you’re selling it dear. Generally, the longer you can wait before you sell equity in your company, the more money that equity brings.

Crowdsourcing offers small start-up companies an alternative to equity crowdfunding. Instead of selling part of your company, you can raise capital through donations. Although people rarely give gifts to profit-making companies, you can reward the gifts with early versions of products or specialised versions of products.

The Pebble Watch provides a dramatic example of how funds can be raised for a company without selling equity in the company. The firm posted a request for funds on the crowdfunding platform Kickstarter. The request offered rewards for the donations. If you gave $99 (£62), you got one watch. If you gave $220 (£138), you got two. If you gave $235 (£147), you got early access to the developers’ kit that allowed you to create software for the watch. A gift of $1,000 (£625) got you ten watches. Given that the firm planned to sell the watch for $150 (£94), these rewards were really preliminary orders for the watch. However, the firm was able to raise more than $10 million (£6.25 million) through Kickstarter and use that money to expand its organisation without having to sell equity.