How To Do Crowdfunding--Even During COVID-19

Necessity, the mother of invention, has been looking for a great crowdfunding platform for forever.

Hundreds of years ago, writers would fund their projects by subscription: They took a piece of paper with a title door-to-door and people would literally write their name, saying they'd buy the book. If enough people signed, the book would be printed.

Fast-forward to the 21st century. Instead of going door-to-door, entrepreneurs go on the internet. Raising small amounts of money from sympathetic donors, lenders, and investors has become a lifeline for many small businesses, especially in the era of COVID-19. In recognition of this fact, the SEC recently loosened some restrictions on crowdfunding to expedite the process.

Your brilliant idea for a product or service just needs some seed capital to get off the ground--or your company just needs an infusion to stay alive--and you're thinking about crowdfunding as a way to raise the money. Here are the things to know to make sure you're crowdfunding the right way.

Crowdfunding Rule 1: Know Yourself

The first rule of mounting a successful crowdfunding campaign is to know who you are. Ask yourself, what are we offering? Besides being good, general advice, knowing what you're crowdfunding for will determine which crowdfunding platform you choose. And the right crowdfunding platform will make all the difference.

Are you selling a product that you can give to donors as a reward, or do you have plans for an eventual IPO that will turn all your small investors into stockholders someday? Different platforms cater to different crowdfunding exit plans, and there is no one-size-fits-all solution.

Two major types of crowdfunding projects exist: rewards-based crowdfunding and equity-based crowdfunding. Depending on what you're selling, you have to pick between one of these two options.

Types of Crowdfunding Projects

Here are two hypothetical examples. Alpha Centauri, a company made up of two best friends, has a fun idea for a role-playing game called Towers of Castlebridge. They need to raise money for game development, including paying professionals to play the game, and they need to pay the publisher to print the game pieces and package units of the game.

GenBioGuard, a.k.a. GBG Inc. is a startup that makes a test for viral infections. They have a staff of 25 people and have created a successful prototype, but they need to raise at least $2 million to produce their next product. Though they have had previous rounds of venture capital financing, the company president wants to go the crowdfunding route because they're not ready for an IPO and they haven't gotten interest from other angel investors.

In both cases, these companies need to know who they are and who they're selling to in order to choose the right platform to crowdfund. That involves formal or informal market research. Ask your friends if they would buy your product, raise money informally from close associates and family. The feedback will tell you if there is sufficient appetite for your product. If you have the money, consider hiring a consulting firm to do the research for you. The easiest way is to go through your prospective crowdfunding platform and see what other, similar ventures are doing to raise money and how successful they are.

Crowdfunding Rule 2: The Right Platform Is Essential

A wealth of crowdfunding platforms exist. They are private companies, and they are not banks, which means they are not regulated as strictly as those traditional financial institutions. Each one has a different model for how it collects money to support its operations, either from flat fees or a percentage fee from the money you raise or from credit card processing fees. According to Crunchbase, there are 1,145 crowdfunding companies in the U.S., and internationally, there are many more.

Crowdfunding companies fall into four broad categories: donor, debt, reward, and equity. Donor crowdfunding is typified by GoFundMe where you ask for money with no strings attached and that's what you get: Your contributors give you money with no expectation of return. Debt crowdfunding is similar to Grameen banking in that you borrow small amounts of money from many different lenders that you promise to repay. With reward crowdfunding, donors get rewards: swag, the finished product, and much in between, based on the contribution. Equity crowdfunding is similar to venture capital investment; the main difference is it's open to small investors.

Deciding on a Crowdfunding Platform

The founders at Alpha Centauri know from their experience as members of the gaming community that Kickstarter is a place where their friends and competitors have raised money. They're in all the Facebook and WhatsApp groups; they attend all the conferences; and they know by word-of-mouth which platforms deliver and which ones to avoid.

They also know that Kickstarter has rules unique to the platform that will influence their strategy. One very important rule is that if they don't meet their fundraising goal, they won't get a cent of pledged money. If they think they need to raise $10,000, but by the end of their fundraising period they only raise $9,999, they will have spent a lot of time and money for no return.

The president of GBG is also active in the community of startup tech founders who give him information about the pros and cons of crowdfunding. Though their product technically would be allowable on Kickstarter, the President knows the recreational-tech-oriented types who fund projects through this platform would not be as turned by a medical test kit as they would by, say, a gear-laden watch. What's more, he wants to raise substantially more money than the average Kickstarter project, and he doesn't want to incentivize those contributions with rewards.

A more straightforward, equity-type fundraiser suits both the goals of his company and how they plan to use the money once they have it, so he decides to go with Crowdfunder.com, a very popular site for companies seeking equity crowdfunding.

Equity crowdfunding comes with a different set of rules and more government oversight. The SEC has rules for small businesses that seek to crowdfund with which anyone who goes the equity crowdfunding route should be familiar.

Crowdfunding Rule 3: Platforms Do Not Do Marketing For You

The strength of a crowdfunding platform is in amplifying the buzz around projects to a community that is interested in investing in the future. The platform also lends legitimacy to projects because most platforms have honesty and transparency rules that pre-vet projects for viability. But platforms do not promote your project to strangers.

Alpha Centauri's founders have heard painful stories from friends about a great idea that got buried on the Kickstarter site and languished, while simply okay ideas that opened their fundraising event with the wind of preexisting buzz in their sails make it to the "Recommended" and "Taking Off" pages of the site. And then, of course, they really take off.

To make sure their game is a success, the Alpha Centauri team spend more than a year building up their Facebook presence, teasing a new release, and growing a community of "likers." That isn't free, in either time or money. To make sure their word is getting out, they hire a freelance social media manager to respond to comments, and they put aside a budget to pay to boost their posts to fans and fans' friends. They also spend money on a professional freelance web developer to make sure their website looks flawless.

GBG also spends money on social media and content marketing, but they focus on highlighting the social connections of their team and especially the notable donors who have already invested in the project. The name of a single industry celebrity and a well-known venture capitalist on their website draws inquiries before the project is launched on Crowdfunder.

Crowdfunding Rule 4: Pregame Planning Is Key

Sun Tzu, author of the classic The Art of War, said, "The victorious strategist only seeks battle after the victory has been won, whereas he who is destined to defeat first fights and afterwards looks for victory." In other words, if you want to have a wildly successful crowdfunding, you have to win before the clock starts ticking.

The Alpha Centauri team knows this well, and to make sure they have the right momentum, they arrange for friends and family to pledge donations on Kickstarter before the crowdfunding opens. They also price their goal so their initial gifts represent a fair amount of the total they are seeking. Raising a good percent of your goal quickly--within days or hours of the opening of the campaign--gives you a better chance of getting onto the platform's "notable" and "taking off" pages.

Because GBG is selling equity in their business, they also put money and time into making sure they are legally prepared to start their crowdfunding event. All the documents they need to file with the SEC and other government agencies have been reviewed by their legal team, and they know all the scenarios pertaining to how much of their funds will be paid to the platform, the restrictions on who can invest, and the resale restrictions on equity purchased by investors.

Crowdfunding For All

Raising money outside of traditional banking or equity markets has become mainstream. Given the wide variety of crowdfunding platforms in the world, you will likely find what you're looking for.

The most important thing to remember is crowdfunding isn't easy. It requires a great idea, naturally, but it also requires a lot of elbow grease. Or, to quote Thomas Edison: one percent inspiration and ninety-nine percent perspiration.