In today’s current startup climate there’s a certain pressure to seek investment early and often. This trend has shown signs of slowing down, but there’s still far more focus on the mechanics of raising a round than whether a company is at the right stage to do it at all. Bottom line: in almost every case, angel or venture capital shouldn’t be the first step in building an idea into a business.
On the other hand, rewards crowdfunding (think Kickstarter and IndieGoGo) is practically designed to be a first step. You can present as little as a half-formed idea or as much as a fully-designed product to millions of potential backers and customers for virtually no cost.
Now, it’s important to point out here that rewards crowdfuding is not the only kind of crowdfuding. There are are multiple kinds, like equity and debt crowdfunding. These follow more of a traditional early-stage investment model, and while they can also serve as a good option for early-stage projects, they come with a different set of expectations and requirements than rewards crowdfunding.
If you’re truly looking for a first or second step, rewards crowdfunding is likely your best option. Still not sure if it’s right for you? Here’s a quick cheat sheet. You should seek rewards crowdfunding instead of traditional early-stage investment if:
1) You’re Still in the Concept or Prototype Stage
You’ve bootstrapped all you can bootstrap, your friends and family are tapped out, and banks see you as too much of a risk. You know your idea is a game-changer, but you just don’t have the capital to make it happen. Angels and venture funds are going to label you too early. They’re not going to bet on your success if they can’t see your (almost) fully-realized product.
But, if your idea really is a game-changer, you’ll attract the financial support you need on a rewards crowdfunding platform to push your product into the next phase.
2) You’re Tackling a Niche or Hard-to-Prove Market
As an entrepreneur, you will hear investors ask “how big is your market,” “is your market big enough,” and “is there even a market for this” over and over again. If you’re working in a space where the metrics don’t seem satisfying enough to calm these market size concerns, or you simply don’t have the metrics to address them at all, rewards crowdfunding is the logical choice.
Through rewards crowdfunding, you can find your market and prove it out. Maybe the market for self-powering ultra-sonic jewelry cleaners seemspainfully niche, but thousands of backers are using the tool for other applications you never considered. What if your market proves it is too niche or too small to build your idea into a venture? You can crowdsource feedback and ideas from backers and platform users that help you pivot.
3) You Don’t Have Any Customers
This one is easy, and goes hand-in-hand with the market problem. Investors care about customers. Without them, there is no business. Chances are if you’re early on in building your venture, you don’t have the money or the manpower to get your business seen. Landing on a platform like Kickstarter puts your idea in front of millions of people all over the world. Sure, running the campaign requires plenty of elbow grease, but a lot less than blazing a grassroots trail in your neighborhood for a much higher return. Run your campaign effectively and you’ll walk out with a robust, tangible customer base you can point to as proof of concept in investor meetings.
4) You’re Worried About Losing Control
It’s easy to forget when you first start out that every time you sign a deal with an investor, you’re agreeing to either an equity or debt partnership. The more often you sign, the more control you’re ceding to partners. If you need money, but you don’t want the kind of strings that impact the direction and operation of your startup, rewards crowdfunding is an alternative that you can control. After all, you set and distribute the rewards yourself, and you can choose whether you implement backer feedback.
5) You’re Not Building a Venture
This goes without saying, but if you’re not building a venture, early-stage investment should not even be on your radar. Rewards crowdfunding platforms beckon filmmakers, graphic novelists, and the daring visionaries behind Star Trek museums with open arms. Angels and VC’s? Not so much.
If you are interested in learning more about whether to raise a fund, register for “Are You Ready to Raise?” on March 5.