Is crowdfunding on Kickstarter and Indiegogo an effective financial strategy for startups?

Crowdfunding has a place, and I am excited about its growth possibilities in certain areas. The funding raised has been about doubling each year for some time now.

It is generally for consumer-oriented companies where the vote of the consumer matters. This is a test of the product demand as well as a way to raise funding for a production run of an early version.

Recently the amount that could be raised was increased to $20 million via crowdfunding and the amount of fraud has been low. Of course, the average consumer does not have the skills to evaluate a company, team, market opportunity, and strategy well. And this takes real work. So essentially, they are just betting on the product concept. And since the amount of money raised is generally small (~$100K-$250K) it is enough to replace the traditional “Friends and family” money when the founders have no wealthy family or past success to roll their gains into the next business.

Of course, even professional venture capitalists get it wrong about 80% of the time with only 10% of their companies generating the bulk of returns. Eighty percent often go bankrupt with ten percent more surviving but never generating the kinds of return and growth needed for an exit with any profits.

Each crowdfunding platform is carving out a niche, with Kickstarter and Indiegogo most often being early products. Others do retail, services, etc.

Crowdfunding should be part of a long-term financing strategy because it can also be a way to find your first customers at a low cost. Traditionally the path for startups with large opportunity is founder sweat equity and capital, friends and family, angels then institutional which can be venture capital. However, the bar is very high for VCs and 90% of companies will not have the team, barriers to entry and large market opportunity required by VC. Generally, they need a $100 billion market in five years and a $100 million annual revenue opportunity, which is the top 0.4% of companies.

I paste below a good diagram on this funding lifecycle and crowdfunding would be where friends and family (FFF = Friends, families and Fools) is too.

You can download my free eBook on the Top 8 Reasons Companies Fail to Raise funding here

Also check out my blog where I have loads of articles on entrepreneurship, scaling and raising capital.

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Bob Norton is a long-time Serial Entrepreneur and CEO with four exits that returned over $1 billion to investors. He has trained, coached and advised over 1,000 CEOs since 2002. And is Founder of The CEO Boot Camp™ and Entrepreneurship University™. Mr. Norton works with companies to triple their chances of success in launching new companies and products. And helps established companies scale faster using the six AirTight Management™ systems. And helps companies successfully raise capital.

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