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What is Crowdfunding?

Lesson 2 from: Launch a Successful Crowdfunding Campaign

Christopher Hawker

What is Crowdfunding?

Lesson 2 from: Launch a Successful Crowdfunding Campaign

Christopher Hawker

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Lesson Info

2. What is Crowdfunding?

Lesson Info

What is Crowdfunding?

To start off with what is crowdfunding crowd funding is the practice of funding a project or venture by raising small, many small amounts of money from a large number of people, typically via the internet. So it's this idea that instead of looking for one big sum of money from an investor or from a bank, or from your mom, you can get lots of people to give you a small amounts of money and accumulating all those together gives you enough money to launch your product and then traditional crowdfunding. We'll call it traditional, though it's excellently it has been around since two thousand eight, so his traditional is anything that's just a few years old can be. But traditional crowdfunding is non equity crowdfunding, meaning as you're getting this money for your product and you're not actually getting a piece of equity, we're giving up equity in your company, and this is hugely important because if you're trying to raise money and you're giving up equity than you're giving up ownership i...

n your company, and the idea originated in two thousand eight with indy gogo. So indiegogo was originally formed to help people create films, film projects, and so it was a way for people to pitch in, to cause something to come into being that might not otherwise get teo. You know created because in addition to the fact that you're giving up equity it's very challenging to get someone to invest there expecting a return on their money so they want you know if they put in one hundred thousand dollars they want to get two hundred thousand or more back well if someone's just basically essentially preordering the rights to see the movie then you're not giving up anything and all they expect at the end of the campaign is to see the movie so the theoretically anyway the debt is lower you just got this emotional debt tio show the people the film and indiegogo had a brilliant idea and implemented it beautifully and it was, you know, instantly quite successful and then in the inspiration for it was actually like public television or public radio rather so public radio would say hey give us one hundred dollars and you get a t shirt you're buying a piece of the radio station and it wasn't a pre sale you were backing them and then you weren't buying you know you just got this as a result of supporting the campaigns to the same thing with the film but then kickstarter started up on kickstarter had the brilliant idea that well, it doesn't need to be just film it could be other types of things as well and they introduced like design projects as a category that people could crowd fund meaning things not just a no artistic expression or like a musical thing so they expanded the scope of what crowd funding could be used for and this had you know a huge impact on the industry because now people saw this possibility and a lot bigger light and so kickstarted raced ahead of indigo going became more or less the eight hundred pound gorilla in the space though indiegogo is also stayed very relevant and kept evolving and they both become you know quite substantial and important companies go fund me came along a couple years later as well and go fund me was focus specifically and helping individuals support themselves in their life so if you get like in an accident you have medical bills to cover or you want to go to a class and you can't afford it you can set up a go fund me site and get it gives really like a place for your friends and family to donate money to your cause so it's a platform for you to access your own network so originally thes sites were really focused on accessing your own network and then as a result of the amount of traffic they got what became possible is we're getting incidental backers people who were showing up to support a friend's campaign but then seeing another campaign deciding to back that and so that's really what drives some like the bigger campaigns you see is the organic hit you get from people who weren't necessarily looking for it but it starts with activating your own person network the next really major event that happened was the lunatic watch case which allowed you to turn an ipod nano into a watch it was like a watchband and this was the first campaign to do big bucks did like nine hundred thousand dollars and at that point the industry just took off his people realized while this isn't just about raising ten or fifty thousand dollars, you can raise a million dollars and that got very exciting to a much broader selection of people because that's a lot of money that's like venture capital or angel capital money then the pebble watch came along and raised ten million dollars and then people really started take notice not just startups but corporations like there's real money in this to be sure and then veronica mars raised over five million dollars for a tv show or movie and has the most number of backers ever for a campaign. So really going mainstream moving beyond like just people who are into start ups and into new things but really everyone in the world getting involved in supporting and bringing things to life the coolest cooler happened re thirteen million dollars the first nine like tech product that did really big money and then most recently the pebble time watch was raised over twenty million dollars so this is the new way to raise money or a new waiter is money that's, super important and it's just getting more and more important. So in two thousand fourteen, sixteen billion dollars across all the crowdfunding platform sixteen billion dollars raised, which is a shocking amount of money and then last year is thirty four billion and projected to reach ninety billion in twenty twenty though based on the recent growth, I think they were projecting like twenty billion for two thousand six, two thousand fifteen so that ninety billion might even be short and equity crowdfunding is coming into play now. We're so like originally this traditional crowd funding was for non equity crowd non equity funding, but now at equity is coming in where people can actually use the crowdfunding platforms to sell pieces of their companies. This has a hugely important implications as well, because that's how people have been raising money for a long time and bringing way way way more people into the fold instead of the select few it is for a lot you know, everyone now everyone can get involved in funding projects. So what if people cried when you can? Of course I'm an inventor, and so this is going to primarily focus on crowdfunding products, but all the things I'm going to say will also be relevant to crowdfunding, any type of thing and that includes films, musical creations causes events, artistic invent endeavors or really anything you can think of so almost anything that needs money you can find a platform and you can crowdfunded if that's what you want to do in order to cause the thing toe launch and it is super important because what crowd funding is is the democratization of capital so historically capital has been controlled by people who had large amounts of it already so angel investors, venture capitalists and banks where where you needed to go to get money. And so this meant that those people had to decide where they were going to put their money and their decisions might not jive with like what consumers really wanted and it's not their fault it's like where the people with the money people are coming to us for money and we gotta choose because we can't go everywhere and suddenly you have put the access to capital into the hands of everyone because they can anyone can put up a campaign, it doesn't take a huge amount of expertise or knowledge it takes quite a bit as you'll see, but it doesn't take a corporation to put it together a few clever, motivated, committed people can cause it to happen, and so now everyone has the opportunity to put their projects out there and see if people are interested and give it a chance t live give it a chance to live and which brings us to the next parent which is the democratization of what gets to exist. So because there's a few people in the traditional model deciding what products are getting funded a few people are deciding what gets to exist in the world and that means that they're guessing based on whatever information they have is going to be desired by consumers the consumers aren't deciding what gets to exist except once it gets to the store and once at the store then they get to vote with their dollars whether or not the thing you know deserves to continue existing well this allows consumers to win a lot sooner and so things get to get voted on that might not otherwise get to get voted on lastly crowd funding is a new way to launch products and really this is the true power of it it's gone beyond just capital and it's just a new way to get products or events or whatever it is you're trying to out into the world and there's a huge number of positive reasons why it's a great way to launch products and it's not just about the money in fact the money is just one of many equal considerations when deciding whether or not the crowd from something to touch briefly on the impact of this democratization of capital I just want to hit a couple points first of all thirty four billion dollars in two thousand fifteen raised to crowdfunding thirty billion in venture capital so venture capital everyone has this idea that this is, you know, how businesses get started and it's the most important driver of creation. Not anymore crowd funding is causing far more businesses and its thirty four billion divvied up into many more companies. So instead of fewer huge bets, it's like many, many more smaller beds on little things that never would have seen the light of day before. So it's caused a huge proliferation, massive proliferation and creation, like the amount of stuff that gets to occur now that never would have occurred before is exponentially bigger, and we can see that in particular and hardware startups, which is, again, you know, my focus is on products. In two thousand six, there were one hundred forty thousand hardware startups, approximately best, you know, there's, no exact dated but about forty thousand hardware startups in the world globally and in two thousand fifteen, about one hundred forty thousand, so it's like a four fold increase in the number of new companies being started, let alone all the new musical productions music, albums, theater, productions, events and you know of the countless other awesome things that now get to exist because of this platform. And speaking of things that get to exist that may never have existed before here's three examples that he loved these air all three huge winners in the crowd funding space the coolest cooler is a cooler, with a built in blender and blue to speaker that was on kickstarter is thirteen million dollars. This is a product that is inconceivably complex and it's has like like twenty different features. It also has bungee cords on it and a bottle opener and retractable handle it comes with a plate and knife building it just all these things it's like a party in a box and probably it never would have existed without crowdfunding, because if you look at a company like coleman who's making coolers or glue, this is a huge risk. First of all, cooler companies don't make cordless blenders and cooler companies don't make blue two speakers and the cost of developing something like this is astronomical, like millions of dollars conceivably to develop, engineer, create the molds for something like this so the risk would be phenomenal and to come out with that product without knowing that people are willing to pay for it is a gargantuan risk for a company for something that on paper, when I first heard about this, I was like, I'm not sure that that's going to work because it's so complicated going to be so expensive, so but consumers voted big time they wanted the coolest core something with cat your headphones like it never would have occurred to me in a million years that someone needed cat your headphones, but it didn't like a few million dollars and indeed go going is now and every brookstone in the country they've got like giant models of these things. I mean it's a huge success story, and it was two young ladies from berkeley who just had an idea. They thought it was cool, and then consumers again got to vote in the last one. To me, one of my favorite stories and all the crowd funding is a beehive. This is not something that most people ever thought they would be interested in, but I a couple of guys decided that there was a way to improve a beehive by putting a spigot on it. So to get the honey out, you just turn a knob and outcomes the honey instead of having to disassemble the high pull out the comb and like deal with all the bees wants to deal with these anyway, so they dramatically simplified this interest thirteen million dollars. So it turned out there was a huge latent demand for a beehive out there in the world, and we got to find out thanks to crowd funding and talk about this new way of launching products the thing about crowdfunding is when people think here crowdfunding what they really is funding and so the obvious place people go is they you know is that crowd funding is about getting money? Well, it is about getting money obviously that's part of it but really it's about much more than just getting money? Oh, the money is potentially a great thing, but oftentimes when you run a campaign once we get into it and you see some of the costs associated with running a campaign, a lot of the campaign saying if they do millions of dollars aren't necessarily making much or even any money they might lose money based on the cost of the goods they're selling in in order to attract people to a crowd funding campaign, you have to offer them a great deal like people aren't wanting to pay retail for something that they might never get and possibly get a couple years down the road, so they're expecting that what they're getting in exchange for buying it early is a really deep discount. Well then you subtract the cost of goods that cost running the campaign the amount of time it takes to run a campaign properly, which in our firm is three to four hundred man hours there's a lot of effort to run a proper campaign so it's not in the end necessarily that profitable even if you do big numbers however, what it does do is priceless, which is it gives you proof not a guess, but proof that people are willing to pay for your item before our best thing to do was to do a focus group and focus groups are notoriously unreliable because people want they'll tell you what you want to hear they think they're trying to give you the right answer they don't really know they're guessing I think I would buy that, but the only way to know if they do really buy that if if you put it in a store and then they actually buy it when it's like a massive like, you know there's a hundred there walking by, but I'll take that, you know and like then they're actually voting with their dollars. Well, crowdfunding allows people to vote with their dollars. So now you've got your cat ir headphones, which to get on the marketplace may have cost a couple million dollars development and tooling and then getting inventory going to a trade show, getting interest from people to sell it into the market, getting buyers at retailers convinced that people want to buy the product then they getting into the retailer and then that gets on the shelves and then maybe like two years later and millions of dollars and then finally found out whether or not you and everyone else along that line was guessing right and I worked on products myself personally where I went through that whole process and then I was like yes there was a product of the thirsty light which was a little plant moisture sensor told you want a water plants and I believed in it everyone around me believed my mom believed in it and the buyers believed in it most importantly at the stores were sold in the radio shack and kmart in q b c and everywhere it went consumers iand didn't buy it I mean we sold a few and we made our money back barely but everyone along the change that is going to be huge hit wasn't we we're all guessing well with crowd funding we wouldn't have had to guess we would have found out that people don't really care as much as we thought it was a great idea consumers john let's save our resource is and launch another product not the news you want to hear but better than hearing it after all that time believe me, I would have rather saved all those countless midnight calls trips to china all the hasse or quality control challenges I would have rather have waited all that I wasn't doing it just for fun or for my health in fact quite the opposite so we call that focus group to point no you're really finding out that people want the product and then once you've got those people engaged you can ask him questions and I are asking questions of real customers potential customers people have put down money before the product is issued here is the product were planning on launching what other features which would like to see how would you like to see it evolve? What color do you like? Etcetera, etcetera? And now you've got an audience of engaged potential customers who have voted with their dollars that they want to see this product exist before the product exists. We can improve the product based on the input of the most valuable people to give you that input, so super breakthrough in de risking an amplifying product launch so amplifying because now you've got this proof so you can, like put a lot more force behind your launch like there's, only so much digging in you want to do before you know if you're not procter and gamble before you launch a product, because the more you dig in, the more you invest more, more risk you're taking well, now that you have a certain level of confidence you can like, push harder, you don't put more of yourself into it, you can gather more resource is and it doesn't feel as risky, so you're de risking it because of you have this like confidence that it makes sense to move forward in a story, a few graphs to illustrate this I won't get into too much detail, but you can see here is the old way manufacturing products where you are actually going to be, you know, doing what I did with the thirsty light, so you're here's your timeline, and here is the amount of money that you've got in vain acid, and you're just investing through design, prototype marketing, and then you gotta get your molds made, which is a very expensive thing. One thing a lot of people don't know about manufacturing physical goods is how much money is invested in the mold. So like a mold for, like something simple, like this little clicker I'm holding my easily be ten thousand dollars. So to make a plastic molder taking a piece of steel that's a very high quality piece, steal your machining out the cavities, they're going to make the parts and there might be quite a few little parts in here and it's, a big chunk of steel sound like you just pick it up and move it around. You got like a winch and move it around in this big machinery, and it just takes a lot of time and and the mold itself is quite complicated there's moving parts and water channels to cool it off, keep the temperature right. So people underestimate how much that cost is it's very substantial, so now you've got that julian costs then you got your you know, expenses for going to a trade show and then you gotta get your in inventory and now finally, if it's successful and again this is a guest, so you're like, you know, a year and a half, two years out finally start to make some money back and then eventually might cross that line and start making a profit. Another way of bringing products to market is licensing, which has been mostly what I've done with my career and what I've coached most inventors on is instead of starting a company license your product, someone else, and we'll go into this later because it's one of your options after you crowd from the product is actually license that you don't have to make it yourself and but, you know, traditional licensing was kind of similar to manufacturing a product because you're investing in the design, the prototype of the marketing and then you've got this weight while you're trying to license it to someone and licensing actually takes longer than manufacturing it because the manufacturing piece we're making the molds, et cetera, oh, it will only happen after you've security license and licensing things is very challenging and it doesn't necessarily happen quickly it could take a long time of interact with potential manufacturers first got identify them getting touched the right people and go through the rigmarole stars have to align they finally say yes then they start the tooling process then they're making an investment you got to convince them that they're going to make that big investment that on the guests and the other guessing on your products so why would they guess on your product so there's a barrier there because they want to work on their own things generally and finally they do it and then you find out a successful later and then meanwhile you're getting a smaller returns there is getting a percentage of your investment takes longer to get back those low risk lower risk because they're more likely to succeed ultimately in the marketplace than you are because they're already an established company and also it's lower risk because you didn't have to invest in the toiling in the inventory of the trade shows and all that so licensing is a super attractive deal if you can do it but let's take a look at crowd funding here you get to the point where you got a prototype and then you were in your crowdfunding campaign no one possibility is it fails so just a few months in you can cut your losses or another possibility is it succeeds and you start making money back right away from your campaign that may or may not get you back to even based on what I said earlier it's not always going to be profitable in the end, but it's certainly going to get you a part of the way there if it's successful, so reducing your overall input at the same time while you're reducing that and put your building a lot of the assets that ultimately you're going to need to sell the product anyway so whether or not you're running a crowdfunding campaign, you're gonna have to create a logo you're going to have to figure out how to tell the story about the product you're gonna have to get photography likely anymore you're gonna want a video so these are things we're going to be spending money on anyway, you might as well run a crowdfunding campaign and then you get that money and then you have to go through the tooling process and the end of the engineering process etcetera. But then you launch into the mark place, and here you can see it over laid with the grafts from traditional licensing and manufacturing. So the time frame that you're at risk is much shorter and the total amount of money that you're at risk is less certainly than manufacturing aboutthe same it is for licensing, but overall you have a much lower risk profile and then once it hits the marketplace, if you've had a success like with a quickie the quickie, then I licensed after the after the campaign because I didn't want to necessarily go out and try to sell little keys, you know well making very little money per unit and get into a store's when a company approached me and said, hey, we'd like to take this product over well, the company that approached me was a very difficult company to get in with a super successful company night eyes and we've been trying to license them products for years unsuccessfully well, they were able to look at this and see the success they were more inclined to move forward and then once they have it, they could go to their retailers. They look at this big success online, and so it speeds up the adoption by retailers because they're able to look at it so it not only the risks, it amplifies it and then we're making more money sooner because of that success. So this is just illustrates riel, you know, numerically why crowd funding is such a huge advantage over launching products the old way so I'm just gonna go briefly through the pros and cons of crowdfunding. So the pros are, of course, the non dilutive capital, so whether or not it ends up being profitable it's still money back in your pocket after generating assets that you're gonna want to create any way and it's without giving up equity later on you could still go on get equity except now you're raising equity with a proven product instead of a product that you're speculating people are going to want so theoretically it's going to be easier to raise capital and you have more equity to give up because you haven't given it up already. So non dilutive capital super valuable here's the thing about that capital though it's not free money, its bet it's financial debt you old those people something and well, theoretically it's crowdfunding and there's always buyer beware you know there's there taking a risk is well, the truth is most of the backers don't see it that way they see it as like you own that thing and if you don't give it to him on time, the honor raise a huge stink and we'll talk about backer hand, you know, communication and handling the trolls a little later, but the reality is it's debt you owe them and it's not just financed that it's emotional debt we'll talk about that on the con side, but this nine dilutive capital super valuable market validation we hit on product exposure it's a public platform the people are seeing the product people are coming to the place to see if you're getting a lot more exposure than you ever would have if you just put it up on your own website now, like thousands, tens of thousands, hundreds of thousands of people are becoming exposed your product, which, again, is going to give you more momenta when you finally come to the marketplace public? Oh, I saw that before. I remember when that was on kickstarter. Now here it is, it's, really, and they're more likely to buy because they've seen it before the de risking of the product launch, which we hit on quite a bit, building the valuable assets, the engaged backers that you can use for market feedback and marketing insights, those customer insights building a list so all the people who, you know, you build a list in order to market to people won't talk about this building later, but you're building a list and some of those people are going back your campaigns, even if they don't back the campaign, you still have their email, so once the product goes live, you actually have product's shipping. You can go back to your list to say, hey, we finally made it now by and so those people are going to be more likely to buy than someone whose email you don't have. And in addition, once you run your campaign, the people who back your campaign, you have their emails as well, and those people you can also market to future product center so building a list supervalu boats like one of the most valuable marketing assets you can have because email is a super powerful marketing tool pinpoint people and mark to them directly rather than generalized facebook or social media ads and promotions. Lastly, the momenta met you gain for your product, investing in a product takes a tremendous amount of great takes commitment and takes endurance. It takes belief in what you're up to and at any given moment when you're bringing a product to market, whether crowdfunding or not, what you want to do is be building momentum, building that confidence that I'm on the right path, and it continues to make sense for me to do what I'm doing because it's always going to be cheaper to cut bait them to move forward. At some point, you realize this isn't the right path, I should stop now and cut my losses rather than keep moving forward. So with a successful campaign, you're building momentum. You're building confidence so that you know you're not wasting your time, because launching a product is not something you can do casually it'll like eat your life, it's not something you do on the side generally if it takes off, so you want to make sure that you're not going to devote a year, two years, three years of your life to something that ultimately isn't considered going to succeed, and I can speak from my own experience with the thirsty light in particular, where I certainly would wish I hadn't spent all that time on that product, I could have spend it somewhere else opportunity cost there are some cons, so it sounds amazing, so like what's, the other side of the ship other should trump unless you're anyway, the cons are it's a lot of effort, it takes a lot of time to like us at three to four hundred man hours to set up and run a campaign doing it the way we do it trident, which is a high level of execution, but anymore the space is changed, like once upon a time there are people doing pretty casual campaigns and having success at a small level. Now the campaigns that do well are done very professionally, and it takes a lot of expertise in a lot of time, so you can't just half ass it. You got a full us, you've got to like, bring in experts who know what they're doing in the various areas and can do it well, and if you don't have it, you have to develop it or hired possibility of a public failure so you could go out there guns blazing thinking you're going to take over the world and the thing could flop. And depending on your strategy, that might be a disaster for you so if you're going to go raise money, it could be that you have investors ready to go and you decide you're going to raise this money with a crowdfunding campaign first and then it fails and then the investors you know, get cold feet and sand never mind you just failed on crowdfunding the truth is crowd funny is not for every product it works for certain types of products and so it may be that it failed not because it wasn't a great idea that could succeed but just because it wasn't a right fit for the crowdfunding market, which is specific segment of the population and so if you're going after something that's targeting, you know, older women there's not a huge you know demographic there in the crowd funding space currently it's getting more and more mainstream, but it may be that that's not a great place to test the product or if you have a business to business product it's not been proven for b two b and so you may fail because of the type of product you're showing, but then you've got this public failure and people are going to make judgments based on that and even though well we get that it wasn't necessarily a perfect fit but still, you know it's it's a potential downfall, public scrutiny so let's say, you're the coolest, cooler guy, and you're is thirteen million dollars, and then you're shipping your products and you're a little late and things were going great, but you know you're getting, you know, some backlash, and then what happens is your factory in china goes on strike true story, guys, you know, factory went on strike and, you know, people don't understand, you know, but people are watching very closely so everyone's paying attention and suddenly there's a hiccup in the road and it's, not your fault, and but people don't care, and so you're suddenly you're having a very public situation where backers air yelling at us, screaming at you in making accusations, which are I'm founded and untrue, and despite your best efforts, your, you know, facing a backlash, so the public scrutiny is fine if everything goes smoothly, which happens like never. So you have to be prepared for the backlash because delivering hardware goods in particular, and this can also true for films, of course, like there's, a lot involved in making film or opening a restaurant or any of the countless things you might bring into being and as a creator, you're putting yourself at stake, you're taking a risk, you're putting yourself out there. But it's very easy for people who haven't put themselves out there and who aren't teo, you know, armchair quarterback you about what you should be doing and then yelling at you for making the wrong play call. And so the public scrutiny is something that you have to be prepared to handle and have a strategy for handling and also have a thick enough skin to not take it personally because if you're ever putting yourself at stake and people are taking notice, people don't have something to say and sometimes they're not going to agree with you so something that definitely need to consider also we just hit that with a demanding backers the backers can be very demanding and that you owe it to him to give him give it your best, but all you can do is give it your best and that's all you can do is do your best do your best and then, you know, be open and your communication, but nevertheless you could have people at your door like demanding things and like if you were working with an investor, you got one person mad at you if it's not going smoothly there typically and investors going to savvy about what you're up to so they'll understand things that aren't working, but if you've got lots and lots of people, that could be a problem and then we covered the emotional. A debt as well in financial that these are things you need to consider.

Class Materials

Bonus Materials with Purchase

Patent 101 Videos
Campaign Page Examples
Campaign Page Wireframe
Launch Day Checklist
Campaign Video Checklist
Financial Calculator Spreadsheets

Ratings and Reviews

Dyan deNapoli
 

Really helpful class for anyone planning to launch a crowdfunding campaign! Christopher was a great presenter (very comfortable and relaxed), and he clearly knew the topic extremely well. His presentation was very thorough and well thought out. One thing I would've like to have seen is more questions taken from the virtual audience. There were quite a few on the thread, but the moderator only passed along a few of them to Christopher to answer. Another thing that would have been very helpful is advice about creating successful crowdfunding campaigns that are for projects or experiences or ideas, rather than for physical products (which this class was focused on). Maybe Christopher can do a short crowdfunding part II class?? But I still give this class an A+!

Elizabeth Best
 

This was very helpful. I feel like it answered so many of my questions. It made me realize what a huge commitment crowdfunding is! As an entrepreneur I can see how this video saves trident a lot of time on calls and emails explaining what needs to be done. Great idea! I am amazed at how much technology is involved and online or social media marketing. I better develop a stronger team with millennials who know how to make it happen. Thank you.

David McNichols
 

Chris goes into the depth required to own this material in a way that is both essential and inspiring. Although my best friend launched 10 out of 11 successful Kickstarter projects, I could not learn from him through osmosis all the amazing material Chris has covered here in detail! The patent research information alone makes it worth the price! I highly recommend this course.

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