Startup companies that are trying to market their product to multiple channels or customers often have a difficult time reaching first customers, break even, or becoming profitable. The problem is one of focus. Many startup companies do actually have several avenues for selling their products and services in the marketplace. Determining how to approach the market can make or break a small startup.
Many companies get bogged down in trying to please or approach too many types of customers or clients and spread themselves too thin resulting in little revenue being generated. The key is to take a “laser-beam” approach to early customers, rather than a “shotgun” approach and hoping a customer comes in the door.
Imagine the company is making large sheet cakes in a small home with only one oven. The company can only bake one cake at a time. More than one will not fit the capacity of the oven, and if more than one is attempted in a short period of time, all of them will be undercooked and ruined.
How does a company choose which “cake” to focus on? The company must determine which of the potential customers they are going to focus on. If a detailed market analysis has not been completed, it should be done. The result of the market study should be: who is actually going to buy this product/service and actually pay me.
Once the market is narrowed to a few choices, the company should find “The Best First Thing.” The Best First Thing is the market segment that will actually pay for the product or service; first.
The key is to get revenue coming in the door. There may be many market opportunities for your company’s products and services, but you must start with one that will start paying the bills.
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As we mentioned in the article, “Crowdfunding Primer,” crowdfunding has the potential to greatly increase access to capital for small businesses. However, crowdfunding to date has mostly been used for creative or non-profit ventures through reward and donation sites such as KickStarter and IndieGoGo due to the complexity of the regulator environment, restrictions by securities agencies and legal costs.
Crowdfunding can be used for gauging market interest and in gaining pre-orders of a new product to be developed. This strategy is called “pre-tail” referring to retailing products before they are built or developed for the retail marketplace. For example, an interesting new product called Vessyl, by MarkOne raised pre-sales of the product of $50,000 via crowdfunding according to Mark One’s Vessyl Launches Pre-tail for Intelligent Cup in Crowdfund Insider. The device, which tells the user the makeup of beverages inside and consumed in the cup, is expected to retail for $199. However, pre-orders were given a discount of $99.
This pre-order, pre-tail approach can gauge market interest in a product before investing large sums of money in building and producing product inventory, to save an entrepreneur time and money. Bad ideas will not receive pre-orders, while ones with market appeal will receive interest in the final product. With a large pre-order of a potential product, the company may have an easier time using the pre-sales revenue to produce the items, and show potential early-stage investors that there is a market for the product to assist in funding the company operations.
One challenge of taking this approach is that there must be a disclosure of what the product is and does. Any new or innovative product must have the intellectual property protected prior to releasing it to the public for sale. An intellectual property attorney will advise as to the need for filing patents, trademarks, or other issues to make sure that after the product is disclosed on the crowdfunding site, that others are discouraged from stealing or taking the technology. The products still must be promoted and marketed outside of the crowdfunding platform.
This growing use of crowdfunding as a pre-order pre-tail system is a great way to see if the market is interested in your product. In the short term, pre-tail could be the best way to use crowdfunding for your business, as long as the items are appropriately protected and promoted.
Crowdfunding has the potential to greatly increase access to capital for small businesses. However, crowdfunding to date has mostly been used for creative or non-profit ventures through reward and donation sites such as KickStarter and IndieGoGo.
A Tampa Bay artist Amber Lynn Nicol successfully funded her last two albums, Broader Horizons, and When the Sun Goes Down; via Kickstarter for under $10,000.
I decided to create a KickStarter campaign to raise funding for studio recording time for a musical performance of just one song. A YouTube video was created explaining the project and it included a song sample. The Kickstarter campaign was registered, approved and listed by Kickstarter and available to be searched on the site and in search engines. Then I waited. And waited. And waited. Finally, just before the 20 days was up, two individuals donated $5 dollars to the $500 campaign.
In comparing Nicol’s successful strategy to my failed experiment, there is one clear differentiation. Nicol actively managed her Facebook, Reverb, LinkedIn, Website, and live performances in marketing her KickStarter campaign to her fans and social network. She also had good rewards for donations, and personally contacted each and every person who donated, and thanked them via social media. I did none of those, and failed miserably.
What can you learn from this experiment?
If you build or start a crowdfunding site, and expect people to just find it and send you money, you are setting yourself up for failure. Targeted marketing, promotion, social media posts, emails, and direct contact must be diligently planned as part of a crowdfunding campaign using traditional marketing principles. Crowdfunding in itself will not do the hard work, but is a platform for accepting funding in an easier manner. And remember – promote, promote, promote.
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“Duncan Niederauer, CEO, NYSE”]Crowdfunding, if done properly, is the future for how most small businesses in this country are going to be financed.”
As we mentioned in “Crowdfunding Primer,” crowdfunding has the potential to greatly increase access to capital for small businesses. However, crowdfunding to date has mostly been used for creative or non-profit ventures through reward and donation sites such as KickStarter and IndieGoGo. One of the reasons for this is the strict securities laws the SEC imposes in the U.S.
Historically the SEC and state securities laws have mandated that investors in high-risk ventures or start-up companies be what is called an “accredited investor.” Typically, an accredited investor is a person who makes at least $200,000-$300,000 a year and have a net worth excluding residence of $1 million dollars. These investors typically are sought out as Angel investors, providing seed or equity capital in partnerships or owning shares of companies.
The theory behind the accredited investor rules is that they can afford to lose their investment or that they are “sophisticated” enough to understand the risks of the venture, and that a loss will not cause them to go broke since they have adequate assets or income. This is a form of consumer protection provided in Rule 501 of Regulation D (Reg D). The amendment sets the amounts for the investor to not exceed 1) the greater of $2,000 or 5% of the annual income or net worth of the investor (under $100,000 year income/net worth) and 2) or 10% of the annual income or net worth of the investor (over $100,000 year income/net worth). Section 302 of the Act requires that all offerings be offered through a broker dealer registered with the SEC and a member of the Financial Industry Regulatory Authority (FINRA).
The Jobs Act of 2012, Jumpstart Our Business Startups Act, was intended to encourage funding of small businesses by easing the securities regulation through crowdfunding and a lowering of the restrictions. Though the bill passed, and technically equity crowdfunding should be able to be pursued as of this writing, the government has not given approval for going ahead.
The Jobs Act of 2012 has opened up the door for crowdfunding, but there remain certain detailed requirements for issuers of the crowdfunding and regulatory requirements that are still best handled by a securities attorney particularly as State securities laws have governing bodies that oversee and enforce such laws and each state is different.
In addition the shares issued in a crowdfunding offering are restricted for resale on the market for one year. There are investment thresholds. If you are seeking under $100,000, the offer can proceed without reviewed financials. Raising from $100,000 to $500,000 the financials must be reviewed and raising $500,000 to the $1 million cap will require audited financials.
As of this writing you cannot use equity crowdfunding for non-accredited investors under the Jobs Act. You can however raise funds from accredited investors under the old “Reg D” securities laws with platforms like CircleUp, which has the crowdfunding model under existing laws.
So, is equity crowdfunding right for your business? Currently if you are willing to still comply with the Accredited Investor requirements of Reg D and can find a comparable platform that works for your business, yes. However, equity crowdfunding for the broader participants who are not accredited-investors is expected to be allowed by the end of 2014, and that is where the larger opportunity lies for companies and the future of small business financing. Equity crowdfunding can be an impactful opportunity to the start-up business community, but the required financials, legal documentation, appropriate platform, and registration requirements are substantial. If equity crowdfunding is of interest to you, make sure you conduct the due diligence and get the proper legal advisors before seeking investors.
Duncan Niederauer, CEO, NYSE Crowdfunding, if done properly, is the future for how most small businesses in this country are going to be financed.
Crowdfunding is a pooling of funds from a large number of participants (a crowd) to raise funds for a project or new initiative usually through an Internet platform. This is not a new idea as many projects in history have been funded this way, without an Internet platform. Mutual funds are a similar concept where a large number of investors pool their resources for a common goal or investment strategy. Crowdfunding to date has mostly been used for creative or non-profit ventures through reward and donation sites such as KickStarter and IndieGoGo.
The idea of equity crowdfunding, or hyperfunding, is to access many individual investors for smaller investments into a venture for up to $1 million. By opening up the equity funding option for those people who are not accredited investors, a company can raise funds from many, many individuals at a much lower dollar amount. The lower participation amount protects the investor somewhat. For example, if you want to raise $1 million for your software startup, you can go and find five accredited investors (hard to find) and have them all invest $200,000 in your business in exchange for equity ownership. Or you could potentially raise the $1 million on a crowdfunding platform with 500 investors at $2,000 each.
Estimates of the potential crowdfunding market are impressive. “How Big Will the Debt and Equity Crowdfunding Investment Market Be?” (Best, Neiss, Stralser & Fleming 2013) from the University of California, Berkeley estimates that if 2.5% of existing small business funding comes from crowdfunding, the totals could be $460 million in angel investor equity funding, $1 billion in small business funding, and $4 billion in small business loans under $100,000 would be replaced with crowdfunding. That is more than $5.5 Billion just in replaced existing funding, and that does not include the additional increase in potential crowdfunding based on increased access by investors and entrepreneurs.
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