Is crowdfunding a valid method for a startup opposed to angel investing?

Anonymous

August 26th, 2015

Angel investing has been a viable source of funding for startups for decades. With the evolution of technology I'm considering using Kickstarter. When using Kickstarter you can expect to see lower investment dollars at higher volumes, as opposed to angel investors who invest higher amounts of capital.

Lawrence Lerner Digitalization and Transformation Coach

August 26th, 2015

It's probably not an either or situation. Each has different strengths. There is a company I am currently with that is already well funded. The Kickstarter campaign is being used to generate user buzz.

The reach and audience of a kickstarter campaign is different. It can serve as an entry point or pre-angel funding.

Michael Moon Co-Founder at StartupReady.Net

August 26th, 2015

For the right product or even service, crowdfunding is a brilliant and effective way of accomplishing the following:

De-risk the business model through validation with classic early adopters
Create a pre-sales pipeline with prepaid customers!
Demonstrate concrete traction to potential investors as well as traditional source of borrowed funds
Use rewards or premiums to validate a larger, upsell solution set
Interact with early adopters to tweak the fit and finish of a product

We have seen the emergence of "enlightened angels" who will only invest in crowd funded products as a precondition: "we will help scale revenues based on the evidence and traction of a crowdfunding campaign."

Perhaps the greatest value of crowdfunding a product entails the creation of a "socially proofed" product that upon its entry into commercial channels comes with a fan base, press coverage, all manner of social proofs, and scalable buzz!

Products or services with a social mission tend to do better. However we have begun seeing more traditional business-to-business products getting crowd funded by innovative product managers!

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Hopefully this came through: a high-level overview of crowdfunding campaigns

John Anderson

August 26th, 2015

ask Pebble

Hunter Ashmore

August 27th, 2015

Crowdfunding has certainly lowered the investment required from early investors, but it hasn't eliminated it.

Scott Miller (of Dragon Innovations) recently said "We used to have to figure out how build it, then we sold it. Now we can sell it first, then figure out how to build it." I like this quote because it sums up how crowdfunding has flipped the relationship with entrepreneurs and customers.

The problem is that even if you pre-sale a product, there will typically be significant overhead expenses not covered by that revenue alone. For example, sourcing a manufacturing partner for an initial production scale-up may take weeks - even months - and is likely not fully built into the cost of your first units. This is why it typically takes a mix of both crowdfunding and external capital to deliver on a successful campaign.

The ongoing debate is which to do first: seed invest then crowdfund or vice versa? My answer is whatever works.

I think it is better to go with an initial investment (if you can get it) so that you can have a polished team, prototype, and marketing campaign going into crowdfunding. However, many ideas simply don't gain traction with angels or VCs until they have some proof of market. For this, you have to bootstrap a bit more on the concept, then use crowdfunding as your market validation. With customers are in hand, you can then raise the capital you will need to deliver a great product.

Shaun Masavage CEO, Founder of Edge Tech Labs, LLC

August 27th, 2015

Lot's of good responses here, but unfortunately nobody seems to have actually gone through this debate/exercise first hand. Here's a real-life example! I built my company's first product, DrinkMate, in 2014 and was forced to use crowdfunding (Kickstarter) to prove the market demand. This was great and we received $99k in backing, definitely enough to manufacture all the DrinkMates and I thought it was enough to seed the company to grow as well.

Wrong! One of my biggest mistakes so far was not pursuing angel investment immediately after the first Kickstarter campaign. We scraped by until April, but after development delays making our iOS DrinkMate (the first Kickstarter was only Android), we were really in a pickle. We buckled down and launched a second Kickstarter campaign in July in addition to pursuing angel investment.

Our second Kickstarter campaign ended just over $93k and we're now about 1 month into our seed round. Things are looking great now, but earlier this year in April, drastic action was needed in order to get working capital (credit cards, loans, etc.).

Conclusion: start pursuing angle investment as soon as you have a MVP! If you don't get investment immediately, you'll at least already have the connections and contacts in line for later (such as at the close of the Kickstarter campaign).

John Seiffer Business Advisor to growing companies

August 26th, 2015

I think you're thinking of Indiegogo as crowdfunding equity.http://www.crowdfundinsider.com/2015/03/65063-indiegogo-is-poised-to-move-into-equity-crowdfunding/

The typical crowdfunding campaign (kickstarter, Indiegogo, or many others) raises money by getting grants or selling product. It has a side benefit of showing the market response to the product (assuming the campaign is well run) so those are not really investment dollars, they are transactions.

Rules are still being finalized about how you can market equities through such a platform, especially to non-accredited investors. There will be limits on how much you can raise, this way and you'll need to consider if larger investors (angels and VC) will be hesitant to invest in future rounds if you do go that route in the early stage. Assuming you need future rounds.

Steve Everhard All Things Startup

August 26th, 2015

Kickstarter is a clean transaction as far as future funding is concerned. These are early adopters acquiring access to a product or service - or a reward - at the earliest opportunity. A pre-order in many ways. As the funding is predicated only on the reward there is no equity issue or long term exposure.

Other crowdfunding solutions, like CrowdCube, offer equity investment through a proxy holding by the platform. In essence investors are part of a fund invested in that equity and do not have direct voting rights (assuming the share class grants them) or other preferential access. The advantage for the company is that they have one shareholder on the register.

How successful these routes are will depend on your offer. Although crowdfunding can be an important marketing strategy to gain awareness it can fall flat if your raising is undersubscribed or so unpopular that it is suspended by the platform. This happens. You have to approach it like an auction, do your PR in advance of the offer and get your social media campaign underway to drive early demand. You also need to keep feeding the offer with new information during the campaign to prevent it stalling. You also need to be able to offer attractive rewards.

Steve Everhard All Things Startup

August 26th, 2015

@Kwame Leslie Dougan please turn off your email relay. You are flooding FD with your out of office messages!

Christina Otto Green lighting

August 26th, 2015

I used Indegogo an was very unsuccessful last year but my social media was not very strong

Dave Brown Venture and Private Equity Investor

August 26th, 2015

Please turn off your auto response message as you have now sent numerous emails with the same unhelpful message David G. Brown dbrown@ohvp.com 415-713-0503

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