When starting a business, fundraising is many entrepreneurs’ biggest need and toughest struggle. We’re all asking ourselves the same questions: How much capital do I need to get my idea off the ground? How valuable is my concept? Where should I turn for investment? Do I even have enough credit or credibility to raise outside money?
And when it comes to seeking funding to finance a dream, most entrepreneurs would agree on what constitutes the known universe of startup sources: bootstrapping, friends and family, angel investors, venture capital, contracts for services, credit card “lenders” and (but very rarely) banks.
Last year, I began working on my second startup, GoodFoot Socks -- a performance-focused men's business sock. To select the right strategy for funding our business, my partners and I determined how much capital we needed to launch and also considered how much we could afford to contribute. Naturally, those decisions aren’t easy. One of us has three kids, the other just bought a condo, and I’m a recent graduate just trying to eek by in the real world. In the end, we scraped together just enough for the website, marketing, and the first production run. Since it’s not a hugely capital-intensive business, we decided we could bootstrap it and avoid the risks and loss of some control that come with outside money.
After a few months of developing the concept, the brand and the prototype, we came to a realization: Fundraising isn’t always just about the funds. After careful consideration, we decided to reinvest the limited personal capital we had committed to the business in preparing a crowdfunding video and application on Kickstarter. And it paid off. We were able to successful fund our campaign.
Here is why we chose to pivot our strategy.
Risk abatement. Business owners are people too. Startups are inherently risky, something all entrepreneurs are aware of that. But that doesn’t mean we shouldn’t protect ourselves. Some of us have mouths to feed and savings to protect. Why commit our own savings to generate a production run of a product that we think and hope will sell but that we can’t 100 percent predict will be successful?
Crowdfunding offers us the opportunity to spread that risk among a large population, thereby guaranteeing that no one will bear the brunt of the loss if we fail. Furthermore, if we did not reach our funding goal on Kickstarter, nobody loses, as the project would have never come to fruition and no money would exchange hands.
Measuring demand. Crowdfunding also allows us the opportunity to gauge the demand of our product. For a tangible good, Kickstarter is essentially a pre-sale. This is incredibly valuable in terms of knowing how much inventory to order. If we were bootstrapping, we would simply invest in the minimum order quantity for our first production run. Kickstarter will tell us exactly how many to order, preventing inventory from sitting stagnant, as well as avoiding out-of-stock items.
Validating the need in the market. A crowdfunding platform acts as a form of market research to determine whether we should move forward with our idea. Of course, we did our research prior to the campaign, and we believe that with the right branding and advertising we can be successful. Nonetheless, the crowdfunding platform was an extra layer that provided another set of data points, helped solidify our idea and provided a more a definitive answer.
In the end, while we could front the money and move forward with the production of GoodFoot socks, pivoting to a crowdfunding strategy has helped to hedge the risk and maximize the potential for success of our business.