Crowdfunding for Startup Capital — And Market Intel

Article by, Susan Johnston

Kickstarter and other crowdfunding platforms, where entrepreneurs and other creative professionals can raise money from consumers, have become a popular way for entrepreneurs to get funding without giving up equity. But these platforms can also provide valuable market insights and other benefits.

In Studio Neat’s first campaign, which sought to raise money to manufacture an iPhone 4 tripod mount and stand called the Glif, backers who pledged $20 or more received a Glif. Backers who pledged $250 received a Glif, plus dinner in New York City with the creators and recognition on the website as an executive contributor. When Studio Neat launched the campaign in October 2010, it hoped to raise $10,000 and sell about 500 Glifs. Instead, it attracted more than 5,000 backers and received more than $130,000.

While the money was obviously a comfort, Provost and co-founder Tom Gerhardt, also 28, took the success of their first campaign as validation of their product. We knew then “we were onto something and had an idea that a lot of people were interested in,” says Provost. In March of last year, after another successful Kickstarter campaign for a touchscreen stylus called the Cosmonaut, they quit their fulltime-design jobs to focus on running Studio Neat.

“One of the biggest misconceptions is that crowdfunding is purely about the exchange of funds,” says Liz Gerber, assistant professor of design, technology and social behavior, and director of the Creative Action Lab at Northwestern University. “We tend to focus on the exchange of funds, but there are many other resources that are exchanged.” Through crowfunding campaigns, she says, entrepreneurs are “getting experience communicating. We’ve jokingly called it a ‘Speed MBA’ in marketing and operations management. You have to effectively communicate over and over and over again.”

Even when a crowdfunding campaign doesn’t raise much money, it still can help startups refine their products and business plan. Many backers enjoy giving feedback and watching the product-development process unfold. “Mistakes and changes cost a lot less at the beginning than the end,” Gerber says. “That’s what’s really compelling about crowdfunding. It’s a very early-stage method for raising small amounts of money when mistakes are not so costly.”

Guy Hoffman, 39, created a Kickstarter campaign this summer for Shimi, a musical robot for your smartphone. Each time Hoffman and his co-founders tweaked their prototype, they would post a new thread on Kickstarter. “It’s a really interesting way to see what your potential customers are interested in during the development stage instead of when they vote with their wallet,” he says. “It provides very fine-grained feedback on this specific development.”

Similarly, when Slava Menn, 32, launched a Kickstarter campaign earlier this year to fund the production of a theft-resistant bike light, his backers also helped him improve the product. “One of our backers is an expert in security hardware,” he says. “He initially complained that our screw wasn’t secure enough, so we were able to have a dialogue with an expert in a very small sub-specialty.”

Menn says the crowdfunding campaign also helped validate the product’s pricing. Although some people told him $50 was too much money for a bike light, Menn predicted that others would be willing to pay even more for a higher quality product. In fact, more than 700 backers pledged $50 or more to receive a bike light from the first production run, and 10 backers pledged $600 or more to receive a 20-pack. Gotham Bicycle Defense Industries sold out of its initial production run and is pre-selling the second production run on its website for $65.

But as valuable as crowdfunding feedback can be, you still need to be wary. You can have a very passionate individual that’s not necessarily representative of other customers, Gerber says. “They just happen to have a loud voice.” To get around this, she suggests to first get feedback to understand how representative that feedback is. “Propose it in real time as a change, and see what the reaction is.”

Crowdfunding campaigns also shouldn’t serve as your initial consumer-focus groups, suggests Menn. “Do a series of mid-term exams that lead up to Kickstarter,” he says, adding: “Kickstarter is the final exam.”

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