Crowdfunding campaigns are everywhere now. Every year, thousands of new products are launched on platforms such as Kickstarter and Indiegogo, and more and more companies are turning to equity crowdfunding to finance their company and scale up. But what is it about crowdfunding that makes it so successful?
A: In a nutshell, what is crowdfunding?
M: Crowdfunding works by getting multiple parties to invest or donate money to a product, service, or cause. More specifically, crowdfunding is a form of crowdsourcing – where a large task or goal is divided amongst multiple participants to achieve a cumulative result. This means that a team who needs a certain amount of money to launch their product does not need to find a single VC or angel investor, but instead their first batch of customers. That’s only for product crowdfunding, though. There are a number of different types of crowdfunding.
A: What are the different types of crowdfunding?
M: There are three main types of crowdfunding – product (or reward-based) crowdfunding, donation crowdfunding, and equity crowdfunding. Product crowdfunding is what you tend to see on Kickstarter and Indiegogo – people launching their products in exchange for a freebie or discount on the product. Donation crowdfunding is usually done by the likes of JustGiving, raising money for a charitable cause. Equity crowdfunding works to raise capital in exchange for shares in a privately-held company, and the market leaders are Seedrs and CrowdCube.
A: Why is crowdfunding so successful?
M: Put simply, crowdfunding democratises access to capital. Product crowdfunding allows prospective customers to vote with their money, and allows teams to validate their market. Kickstarter is unique as an ‘all-or-nothing’ platform – if you don’t reach your goal, you don’t get the money. This benefits hardware project creators to set a cost that will cover their tooling and manufacturing set-ups, and shows traction for future financing. Best of all, crowdfunding platforms are a great marketing tool.
A: And what about equity crowdfunding?
M: Equity crowdfunding is interesting as it provides people with an opportunity to invest in companies in much smaller quantities than an angel investor or VC would. We’ve seen BrewDog and Monzo have great success with equity crowdfunding recently. One thing I would note, however, is that equity crowdfunding investors putting £500 or £1000 into a company generally have done less due diligence than an angel investor or VC. I think it’s important for people to be aware that equity crowdfunding campaigns, like their product-based siblings, are effectively marketing campaigns. Investments should be made on the backs of forecast and business analysis, not merely the flashy campaigns put out by some companies.
A: How developed should a product be before looking to crowdfunding?
M: Both Kickstarter and Indiegogo have policies in place to ensure that the products have been developed to the extent they should be. I’ve heard of Kickstarter chasing up companies with particularly successful live campaigns to ensure they have the capability to deliver, and killing the campaign if not. On Indiegogo, you select your product development stage so backers know how far along you are.
A: What is the role of crowdfunding in a product’s life-cycle? Do companies make money off crowdfunding?
M: People often profit from crowdfunding campaigns, but that’s not usually the case with a hardware product. Kickstarter campaigns validate product-market fit and provide teams with the capital required to cover one-time setup costs such as tooling. Having said that, there are plenty of hardware crowdfunding campaigns that are profitable, but these are not as common as campaigns that validate the market and cover setup costs.