Crowdfunding for Startups Guide for 2020

Quick Summary - Crowdfunding can be a better source of funding for early-stage startups than Angel Investors and Venture Capitalists if you know what you’re doing. Beyond crowdfunding’s potential to generate funds, you can begin building your mailing list, vet the idea for your MVP, and generate valuable publicity.

Crowdfunding for Startups Guide for 2020 | PerceptionBox

Many things go into a successful crowdfunding campaign. Not to reinvent the wheel, our guide will point you to the best crowdfunding resources available. They’ll get you moving in the right direction so you can take advantage of some of our insider tips for crowdfunding in the 2020’s.

14 mins read

What is Crowdfunding?

Crowdfunding is the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the Internet.
Today, crowdfunding is an established, mainstream approach for raising funds – for just about anything. It’s used by businesses, entrepreneurs, artists, inventors, you name it.

For startups, the most important thing to know is that there are two primary types of crowdfunding campaigns. Prized-based crowdfunding campaigns offer people who back your idea a variety of perks, like early copies of a product, in lieu of any equity. Equity-based crowdfunding campaigns offer different forms of equity often with non-publicly traded shares and buyback programs.

When to crowdfund or seek investors?

If your plan includes going through an incubator or startup accelerator continue following the path of least resistance with investors. If you finish their program, you’ll take part in a “Demo Day” where you’ll show your business idea to their participating investors. Your accelerator team, alumni, and fellow classmates help you get in front of others. The downside is the 4-8% share for the program, but it is more than offset by the accelerator team’s experience, resources, and contacts.

Crowdfunding is a good option if your startup will be based on any kind of product – software, mobile apps, vehicles, books, etc.

It’s also essential that you and those you can get to help have:

  • A solid social network and/or mailing list – the larger the better.
  • Time – a crowdfunding campaign is at least a part-time job for one person.
  • Creative talent – to produce high-quality pictures, videos, and other media.
  • A website to go with your project.

Crowdfunding may also be a better option if you’re not able to physically participate in an accelerator program as most require. Crowdfunding Platforms (CFPs) have an option that you will only receive the money you raise if you meet your target. If you aren’t successful, funds are returned to the individual contributors. Meeting your target indicates that your idea has enough traction to warrant developing it further.

There’s nothing in the book that says you can’t pursue both. The time requirements of each are likely to preclude doing both simultaneously. Carefully evaluate which to pursue first as part of your overall funding and go-to-market strategies. Here, focus on prize-based crowdfunding, but you might check out Equity Crowdfunding Platforms.

Before you start crowdfunding

There are plenty of “How to Launch a Crowdfunding Project” guides available like:

Crowdfunding is a lot of work, so you will want to prepare as much as you can before you launch your campaign. Talk to others who have launched a crowdfunding campaign – there are several large crowdfunding groups on LinkedIn. These basic tips will bring you to a point where you can use our “insider” crowdfunding tips that other startups have used to extraordinarily great effect.


How to Successfully Launch a Crowdfunding Campaign from Dun & Bradstreet

Selecting a crowdfunding platform

As with everything, do your due diligence. There are many crowdfunding platforms, each with their own terms, conditions, audience, and areas of specialization. All receive a percentage of the funds you raise (3-5%), as do their payment processors (~5%).

Kickstarter is by far the most well-known CFP and has raised over $5.2 billion for 185,000 startups and entrepreneurs. Indiegogo is another top CFP having raised over $1.6 billion for 800,000 campaigns. Of special note, Indiegogo is headquartered in the same building as Y-Combinator – one of the top five startup accelerators on our international list.


Your Guide to Understanding Crowdfunding

The independent crowdfunding option

In all probability, you will want to use an established and reputable CFP for your crowdfunding campaign. They’ve got clout, an audience, reasonable safeguards, and a turnkey solution allowing you to plug-n-play your crowdfunding campaign. But, it’s not the only game in town. If you already have a solid reputation, you can launch an independent crowdfunding campaign.

Grinding Gear Games took this approach with Path of Exile with two crowdfunding rounds in 2012-2013. They raised over $2.5 million through their own web site. Here’s the kicker, among the prizes offered in their lineup were $1,500 supporter packs, outdone only by the $12,500 Ruler of Wraeclast Pack! Keep this in mind as in a bit we’ll get into tips for perks and prizes.

Advice for crowdfunding email campaigns

The vast majority of your efforts in promoting your crowdfunding campaign will take place via email. You’ll likely want to set up a specialized email service provider account to help you manage your crowdfunding mailing list.

  • Aim for maximum personalization when announcing your crowdfunding campaign. Segment your mailing list based on how you know each person – family, friend, neighbor, colleague, acquaintances. Create an announcement template for each audience segment. Personalize it with 1-2 short sentences based on how you know each person.
  • Create “Thank You” letters for each funding level before starting the campaign. Indiegogo has some good crowdfunding email templates for use throughout your funding campaign.
  • Indiegogo recommends periodically (perhaps 2x weekly) emailing project updates. Doing so tends to earn 286% more than less aggressive crowdfunding campaigns and can promote how people can upgrade their perks.

Constantly encourage everyone to share your announcement or the link to your funding campaign to their friends who may like your project. Always thank them profusely for their support.

Crowdfunding amount per backer metrics

Offer a prize tier for everyone, from $1 all the way up to $1,000, $2,500, or more. As the checklist above points out, the overall average crowdfunding pledge is around $80. Kickstarter provides more detailed crowdfunding pledge statistics, but pay attention to the following:

  • Pledges under $25 – 38% of all pledges, but 10% of actual dollars.
  • $25 pledges – 18.4% of pledges and 8.1% of backing .
  • $50 pledges – 11.4% of pledges and 13.6% of backing.
  • $100 pledges – 9.5% of pledges and 16.4% of backing
  • $500 pledges – 1% of pledges but 8.5% of backing.
  • $1000 pledges – .5% of pledges but 8.5% of backing.

While $25 and lower pledges account for less than 20% of all funds, they account for over 55% of pledges. Their extra value comes not only in helping to grow your mailing list, but promoting upgrades. If someone pledged $25, you might convince them to upgrade the $50 perk.

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Crowdfunding prize and award tips

Taking these statistics into account, Kickstarter offers some good advice when it comes to selecting crowdfunding prizes and perks to award the people backing you. They also offer a list of over 90 crowdfunding reward ideas. A few things are really important to underscore:

  • Economy of Effort. Do your utmost to limit the amount of physical effort needed to deliver your prizes. That includes creating handcrafted items, tasks requiring administrative overhead, mail runs and parcel pickups.
  • Profitable. Make sure that each prize you offer is profitable for you.
  • Digital Prizes. Remember Grinding Gear Games? Many of their perks were easy to implement digitally – account perks, vanity items, listing in credits, digital soundtracks, beta keys that your sponsor can hand out, and more.
  • Exclusives. Strategically limit the number of prizes available at certain tiers.
    Add New Rewards. Use new rewards to boost the impact of your updates and to entice upgrades.

If you are producing software, you have several inherent prize options, again using Path of Exile’s crowdfunding prizes as nice examples. This requires you to make sure it is time-efficient for your software developers and designers to create.

Whales, vanity items and the Pareto Principle

Most everyone’s familiar with the Pareto Principle or 80/20 rule – 80% of your revenue will come from 20% of your customers. By extension, and true throughout almost every economy of scale, 51% of your revenue is likely to come from just 1-5% of your customers.

In sales, these customers are called whales. It’s important to include them in your marketing plan, product packaging and pricing tiers. Some people like to be treated as VIP’s (i.e. “Platinum” styled credit cards), some want to stand out from the crowd (unique pets, avatars, forum names), others are super competitive (want all of the unlocks, special gear, add-ons). Others still want bulk purchase options.

They are willing to buy more of what you have to offer than your average customer. This is why only having a basic one-tier subscription model is a poor idea, it puts a hard cap on how much whales can purchase from you. Path of Exile’s $12,500 founder’s pack is a good example. At least four people bought it – despite it being a Free to Play game.

A study of the psychological aspects of vanity is worthy reading for any startup founder. A vanity product or service is relevant to nearly any type of business. By extension, consider prize options for your industry connections – company CEO’s, industry media, professional associations, and social influencers. Even if you don’t know them, a crowdfunding campaign is a good basis to introduce yourself to them.

Crowdfunding and the media

Going back a few years, Victor Shaburov started Looksery. Victor is a serial entrepreneur who started the file-sharing service known as Handster which was eventually acquired by Opera. The Looksery App was a real-time video augmentation app — that just a few months after launch was acquired by Snapchat for $150 million.

One gets the impression Victor didn’t really need the $30,000 of Kickstarter crowdfunding to launch his Looksery. He successfully raised over $45k, to include 12 backers with pledges of $1k to $10k. That’s not chump-change, but that wasn’t his objective.

He used the Kickstarter campaign to generate publicity. Before launching his Kickstarter, he contacted everyone in the media that he knew – TechCrunch, GeakBeat, Forbes, Business Insider, and many other top name media venues, as well as many bloggers. The publicity itself was of far greater value than the funding raised.

The Story for your crowdfunding project

Though a lot has changed in the six years since Looksery launched, a lot of things also remain the same. People are interested in good stories, as well as products or services that can help make their lives or work easier. Journalists are also always in need of more stories because they have quotas and deadlines to meet, too. Your goal then is to tell your story in one or two easy to read pages, with ready-made quotes, and easy-to-use media like a YouTube video. Make sure to have this on your website – probably on your Contact Us page, probably in a PDF format. In essence, this is your simplified press kit.Though a lot has changed in the six years since Looksery launched, a lot of things also remain the same. People are interested in good stories, as well as products or services that can help make their lives or work easier. Journalists are also always in need of more stories because they have quotas and deadlines to meet, too. Your goal then is to tell your story in one or two easy to read pages, with ready-made quotes, and easy-to-use media like a YouTube video. Make sure to have this on your website – probably on your Contact Us page, probably in a PDF format. In essence, this is your simplified press kit.

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Why crowdfunding and software outsourcing fit together

We’ve compared the costs of hiring employees vs. outsourcing software developers. Offshoring your software development will in most cases triple the amount of software development you can get with the funds you raise. That’s always going to be the case if hiring employees in the United States or Western Europe. By offshoring to Eastern Europe, you’re also likely to hire two developers for each local freelancer.

Even if you are flush with funds, bear in mind that software development is only part of your overall business requirements. You’ll likely need some administrative, financial, sales and marketing efforts to build your business.

A Perception Box Bonus!

There’s a lot to crowdfunding, but if you’re looking to launch a crowdfunding project – let us know! One of our team members is happy to look at your plans, materials, product, prizes, and everything else to help make sure you’re good to go!  He offers this as a completely free service, has nothing to sell, but loves to help startups.

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