Crowdfunding 101

Gain the insight to determine whether crowdfunding may be right for your business venture or expansion.
Crowdfunding

The Digital Age is transforming the way beauty businesses are launching and expanding their retail ventures, products and services. It used to be that when small businesses needed funding, they would toil through their fundraising efforts via the means and “hoops” required by banks, venture capitalists, angel investors, small business loan providers, family and friends; even draining their savings and retirement funds. But in 2016, many small businesses and hopefuls are gaining capital to fund both business needs and new ideas through what some are considering a much easier and, arguably, more profitable route: crowdfunding.

Taryn Hemmings, COO of Sweat Cosmetics for Active Beauty, says the popular crowdfunding site Indiegogo helped the company raise needed capital with greater ease than a traditional source of funding would have provided—while also giving the brand traction early on. “It was a perfect way to get some excitement built up and information about the brand out, without having to fully launch anything. It was nice receiving encouraging feedback from it. Our expectations were definitely more relaxed with our crowdfunding campaign than they would have been with traditional fundraising,” notes Hemmings. Sweat Cosmetics for Active Beauty creates cosmetics that are suitable for physical fitness and contain SPF.

Experts contend that the general concept of crowdfunding has been around for centuries in some form or another. The concept, generally speaking, is simply the effort of amassing the support and financial means necessary to complete, produce or bring to market an end product via its end users and other supporters.

For Janice Fredericks, CEO of Fabulous Freddy’s Beauty Supply & Boutique, crowdfunding was an answered prayer. She says that after praying about how to finance the opening of her second store in Brooklyn, New York, she decided to create a crowdfunding campaign. “So I did,” she says. “Doing a crowdfunding campaign gave me so much more enthusiasm, because I was out there telling my story, basically talking about my business to anyone who would listen. I received so much support from my community, locally and nationally. It meant so much to me to get the support from people who resonated with my story as a young, female African-American entrepreneur,” adds Fredericks, whose campaign was fully funded on Indiegogo.

CROWDFUNDING VARIETIES
Determining the right type of crowdfunding platform for your venture is critical to success, so you’ll want to consider each type. Crowdfunding platforms exist for every cause imaginable, from families seeking financial support during unfortunate circumstances to real estate investors’ endeavors. “I think it’s important to pick a site that caters to your industry; a demographic that you may represent,” explains Fredericks. “For example, there were a few female crowdfunding sites that I considered, but unfortunately, they did not have a large following. I looked for how popular the site was and the fees.”

Indeed, crowdfunding has become so popular that the sky’s the limit when it comes to available options. Crowdfunding platforms generally fall into the following categories: rewards-based, donations-based, equity-based and debt-based. While some platforms specialize in a specific type of funding, others allow users to fund absolutely anything at all. A summary of crowdfunding categories follows:

  • Rewards-based crowdfunding allows the campaign to offer goods, services or some other reward in exchange for a donation.
  • Donations-based crowdfunding is characterized by campaign fundraising for disaster relief, nonprofit, personal needs and the like. The goal is to meet personal needs.
  • Debt-based crowdfunding connects businesses with a host of investors who are themselves seeking investments, bypasses bank requirements and provides faster processing time.
  • Equity-based crowdfunding facilitates a partnership in which the donors become part owners in the business, including shares and royalties.

From there, users may choose from hundreds of crowdfunding varieties.

TOP CROWDFUNDING SITES AND SUCCESS RATES

Today’s top crowdfunding sources, including frontrunners KickStarter and Indiegogo, are all online.

Different crowdfunding companies offer a variety of support options, from design, promotion, marketing and analytics to post-campaign resources, such as fulfillment and manufacturing options. “We mainly chose Indiegogo over others because we [connected] with a company that exclusively helped design, create and run campaigns through it, and so had a lot of expertise for us. It was also a bit more flexible than others we looked at,” shares Sweat Cosmetics’ Hemmings. Indiegogo offers its users varied support, from the design and implementation of a campaign to audience analytics and post-campaign retailer partnerships.

Thomas Clipper, which offers small-batch and limited edition men’s grooming products rooted in modern British design, had specific reasons for choosing Kickstarter. “It's the biggest, most renowned and competitive crowdfunding site. Most importantly, Kickstarter backers (those who pledge toward campaigns) really value quality craftsmanship, which is at the heart of Thomas Clipper,” says co-founder Antonio Weiss.

Although crowdfunding to date has been responsible for raising billions of dollars for individuals, nonprofits, business ventures and so forth (donations-based GoFundMe, alone, has had users raise $2 billion in just the past year), business entrepreneurs need to temper expectations for success. According to Entrepreneur

magazine’s January 2016 article, “Less Than a Third of Crowdfunding Campaigns Reach Their Goals,” between 69 and 89 percent of projects fail to reach their goal. Furthermore, less than one-third of projects, across some of the top crowdfunding platforms, actually reach their goal. Kickstarter, for instance, was highlighted as having the highest number of successes at 31 percent.

Indiegogo prefers to observe a neutral, more optimistic perspective of campaign success versus failure. “Our flexible option allows campaigns to be successful even if they don’t reach their goal because they can keep what they earned,” says an Indiegogo spokesperson. The company offers users both Flexible Funding and Fixed Funding options. Its flexible option allows users to keep all of the contributions they receive, even if they don’t meet their campaign goal. The fixed option allows all contributions to be returned in the event that the campaign does not reach its goal. As a result, success versus failure truly becomes relative, as companies may see whatever contributions they do receive as a win, in addition to any exposure, feedback and loyalty they may gain in the process.

PREPARING FOR SUCCESS
Crowdfunding companies have observed certain characteristics generally associated with successful fully funded campaigns. Ryan Rutan, chief innovation officer and founding partner of Fundable’s Startups.co, shares: “Having had the privilege of observing thousands, and working directly with hundreds of campaigns per year on Fundable.com, I can state with certainty that the main drivers behind the success or failure of a campaign boil down to two specific factors: First, the development of an audience to market the campaign to prior to launch. Second, the product/market fit of the offering within the campaign.” Rutan says it’s critical that businesses make sure their products and offerings meet the needs of their core audience. He further notes that campaigns that fail to develop an audience prior to launch have exponentially higher failure rates. So, “those that spend the time to build and communicate with their core audience enjoy significantly higher levels of success,” he explains. “No amount of marketing will overcome a poor product/market fit. If the crowd doesn't want what you're selling—failure happened before you started.”

Indiegogo’s spokesperson concurs that building a relationship with one’s audience is key to experiencing a successful campaign. The company notes that campaigns that fail tend to be the less compelling ones. So, it recommends that businesses take time to really share their story and share why they’re using crowdfunding—authentically, transparently and with clarity. In addition, the successful companies tend to use a compelling, well-produced video to share their stories. While it may require time and expense, a visual presentation via video explaining your venture makes a greater impact than words. Successful companies also frequently give their backers updates. “Campaigns with more updates tend to raise more money,” the spokesperson adds.

Fail or no fail, the global crowdfunding industry, as a whole, raised $34.4 billion in 2015, according to Massolutions, Inc., which offers leading research and analysis on crowdfunding platforms. And, just to put its rapid growth in perspective, the industry reached $16.2 billion in 2014, up from $6.1 billion in 2013, underscoring its multiplied growth year by year, as reported by Massolutions. Millions of people are flocking to these sites to invest in great ideas and contribute to great causes out of their pockets! This fact begs the question: Why?

WHY INVESTORS CHOOSE TO PARTICIPATE IN CROWDFUNDING
Crowdfunding sites give individuals an opportunity to donate money to causes or invest in ideas in which they see potential, with minimal risk or hassle. They see a need or an idea they like, and they pledge an amount that is affordable for them, even anonymously should they so choose. Furthermore, it provides the opportunity for people to feel a part of something bigger. And it gives them an opportunity to help bring to life new ideas and businesses that may increase their quality of life in some way.

Often their pledge is protected by parameters set up by the crowdfunding platform. These safeguards give pledgers the added comfort and confidence they need to make their pledge with peace of mind. For instance, Kickstarter protects pledgers by requiring an “all or nothing process.” In other words, if the project they invest in doesn’t meet its goal, the pledgers receive their money back. However, if their preference is to give without expectation, they can do that as well. Indiegogo, for instance, offers flexible funding, where the company chooses its funding end result. Companies can choose to keep all contributions, regardless of whether they meet their goal. They can also choose to have all funds returned to contributors in the event their goal isn’t met. (Some companies prefer not to deal with looming customer expectations when they have not received full funding.)

UNIQUE BENEFITS OF CROWDFUNDING
One of the most noteworthy benefits of crowdfunding for small businesses is that it allows consumers to prequalify themselves as customers and loyal fans. Other advantages include:

  • Crowdfunding provides flexibility and control over one’s fundraising efforts.
  • It makes fundraising public, giving opportunity for friends, family and absolute strangers to participate in the effort.
  • It provides the opportunity for one’s fundraising campaign to reach millions of people via social media.
  • It allows the product or business to be tested in the market, and provides room for feedback.
  • It saves time and energy, since the business owner or creator doesn’t have to pound the pavement, looking for potential investors and loans.

THE CONS
As does any opportunity, crowdfunding presents pros (as previously mentioned) and cons. Crowdfunding cons are largely relative to the expectations and needs of the user. For instance:

  • Some businesses may be reluctant to use a public platform for raising capital due to the potential for public embarrassment in the event that the goal isn’t reached or the market is unresponsive.
  • Companies must be prepared to stay engaged with the campaign’s backers, whether via social media, the platform itself or even as a result of media attention.
  • Once the funds have been raised, the company or creator has the added pressure of meeting the expectations of its backers and making good on all promises.
  • Crowdfunding is generally not free for businesses. There are fees and taxes that vary by crowdfunding company, as well as the potential for additional expenses.

To the end, it’s just a matter of deciding which pros and cons a business is willing to accept. For those who choose crowdfunding, Fredericks notes that she would include the additional step of reaching out to bloggers if she were to attempt another crowdfunding campaign. “These campaigns are all about word of mouth. The more people that click your campaign, the better the chances of reaching your goal. Make your story compelling! People need to feel emotionally connected to your business mission and vision statement.”

THE TOP 5 CROWDFUNDING SITES
Of the hundreds of crowdfunding sites to choose from, we bring you the Top 5 most popular crowdfunding platforms that are suitable for beauty business:

Indiegogo: Beauty businesses can fund absolutely anything on this platform. The company prides itself on being a springboard for entrepreneurs and small businesses, providing a variety of features that users can take advantage of, from marketing to analytics support to logistics, manufacturing and more.
Kickstarter: This platform is mostly project-based. So if, for example, you’re looking to bring a beauty product to market, it just may fit your needs. Kickstarter also provides a variety of support for success.
Fundable: Entrepreneurs gain access to funding from investors, customers and friends on this platform, which also offers worthy resources.
Circle Up: Marketed as the “world’s largest network of consumer and retail investors,” this investment marketplace facilitates privacy during the deal and offers a host of services.
MicroVentures: This venture capital investing platform hosts many types of businesses. Specific criteria are required for acceptance.

[Photo by BrianAJackson/gettyimages.com]