It’s hard to imagine that just two years ago, the Oculus Rift—a virtual reality device that’s been called “the future of gaming“—was just an idea in its founders’ minds. But after raising $2.4 million on crowdfunding platform Kickstarter in September 2012, tech startup Oculus VR was able to launch its vision in earnest. That funding was a critical step in the development of the Oculus Rift and a major step toward the company’s $2 billion acquisition by Facebook. This story and others like it are precisely why the crowdfunding landscape has become—well, crowded.
Given the hundreds of different funding platforms that now dot the internet, it’s no surprise that the crowdfunding economy has more than tripled since 2011, totaling an estimated $5.1 billion in 2013. With so many entrepreneurs vying for funding, creating a successful crowdfunding campaign is more challenging than ever.
“There are many entrepreneurs who consider crowdfunding a route for free money that doesn’t require preparation,” says Sang Lee, CEO and founder of Return on Change, a platform for accredited investors to engage in equity-based transactions. “However, like any other capital raise, there needs to be a lot of ground work done before launching a campaign.”
Before you venture into the crowdfunding marketplace, make sure you’re prepared to compete. Here’s how:
1. Determine the business fit
“Crowdfunding is a great option when you have a great idea for a product and are without a lot of working capital,” says Diana House, co-founder at Cole + Parker, a company that makes bright, colorful socks and uses the proceeds to support entrepreneurs in the developing world.
House and her co-founder—a husband and wife team—relied on crowdfunding to get their business off the ground.
“When we started Cole + Parker, we needed to generate funds for our first production run, as well as show pre-sales for our Dragon’s Den [a television series in which entrepreneurs compete for funding] appearance,” House said.
By using the crowdfunding platform IndieGogo, House and her husband were able to pre-sell more than 42,000 pairs of socks within a few weeks of finalizing their concept— but still months before they had a physical product.
Crowdfunding helped House and her partner establish proof of concept and validate their business idea. It also offered a way to build awareness about Cole + Parker—a critical step in establishing a pre-launch customer base.
“It’s a great way to test an idea before losing your shirt by going to production and then realizing that no one wants your product,” House said.
