How To Tap Into Crowdfunding

Crowdfunding is about more than simply raising quick cash for your business idea. The potential benefits extend far beyond launch capital. By tapping into the wisdom of the crowd, you can refine your product and discover a business model that really works - while also raising those funds you need to get started.

By
You're reading Entrepreneur South Africa, an international franchise of Entrepreneur Media.

In 2013, Ryan Grepper launched a crowdfunding campaign on Kickstarter for a product he called The Coolest Cooler. Ryan described The Coolest Cooler as a “party disguised as a cooler,” and he equipped it with things like a cutting board, blender, Bluetooth speaker and USB charger.

Bigstock

The campaign was a failure. Ryan had set his goal at $125 000, but the campaign only made around $100 000. According to the entrepreneur, there had been a couple of reasons for this failure. He felt that he had set his goal a little too high, and he also thought that it had been a mistake to launch in winter when people weren’t thinking about beach parties and picnics.

Most importantly, though, his product hadn’t quite been ready. The prototype he based the campaign on wasn’t ready for market.  So, in July 2014, he went back to Kickstarter with a more polished version of his cooler. His target this time around was also a more modest $50 000.

When crowdfunding goes wrong

The campaign was an immediate success. Less than 36 hours after launching, he hit his goal, and astonishingly, a day after that the campaign hit $1 million. By the end of the campaign, The Coolest Cooler had raised more than $13 million — 20 000% more than its $50 000 target.

Sadly, though, this story doesn’t have a particularly happy ending. The Coolest Cooler became a victim of its own crowdfunding success. Ryan had a clever product idea, but nothing much more than that. In return for all that money, he had promised funders a reward in the form of their very own Coolest Cooler, and he now faced the daunting prospect of fulfilling $13 million in orders.

As many product-based start-ups also do, he had grossly underestimated the cost of building his cooler. During the campaign he had priced the Coolest Cooler at around $175, but it quickly became clear that he would need to sell it at $400 to make a profit.

Eventually, Ryan had to demand that funders send in an additional $100 to get their coolers, and he also started selling the product on Amazon before all the funders had received their coolers. Two years after the campaign, 36 000 people were still waiting.

The Oregon Department of Justice eventually started investigating Ryan’s company and reached a settlement in 2017 that will hopefully see funders receive a portion of the company’s future profits. Thousands of backers, however, will probably never get their Coolest Coolers.

Local Success Stories: Making Crowdfunding Work

If done correctly, crowdfunding can offer more than a capital infusion into your business — it can also allow you to test the market and find out if there’s an appetite for what you’re offering. A successful campaign won’t just help fund the business, but will also help you create a loyal and vocal group of customers who can help you spread the word.

As Ryan Grepper’s story shows, though, there are dangers. Given the very public nature of crowdfunding, you won’t be explaining problems to your investors behind closed doors — instead, you’ll have to answer to annoyed funders on social media.

For this reason, it’s important to understand exactly what crowdfunding is, and what the expectations of potential funders are likely to be.

"Crowdfunding is the new bank loan, without the pressures of repayments. Crowdfunding is an online method of fundraising that allows people all over the world to put their ideas or pitches onto a digital platform.

The 4 Main Types Of Crowdfunding

These pitches are then available for people worldwide to see, and to decide whether or not they would like to support the campaign. There are four main types of crowdfunding: Rewards-based, donation-based, equity-based, and debt-based, each with its own unique purpose,” says Nicholas Dilley of South African crowdfunding platform Thundafund.

“In South Africa, crowdfunding is still a relatively new concept and with many South Africans sceptical about making online transactions, it’s very much a rising industry. Rewards-based crowdfunding has become a growing force. Thundafund is the brainchild of entrepreneur Patrick Schofield, who founded the company in 2013.

The way that rewards-based crowdfunding differs from any other form, is that in exchange for the money raised, the project creator is expected to give something back to the backer in the form of a reward. These rewards can vary, anything from a thank you card to a tangible product.

However, when selecting rewards for your campaign, it is important that you keep your project and potential backer in mind.”

Crowdfunding As E-Commerce

In 2017 alone, Thundafund raised more than R8 million, which was almost equivalent to the previous four years combined.  “In South Africa, we say that, realistically, you can expect a maximum of R150 000 in crowdfunding. However, we are constantly being surprised.

It really comes down to how amazing your project is, how big the network is, and if the rewards are what people want. There is no reason to believe that any start-up couldn’t raise over R1 million if founders put the work in and justify how the money will be spent,” says Nicholas.

Sugerbird Gin's R1-Million Success

One of Thundafund’s biggest recent success stories was Sugarbird Gin, which managed to raise R1 086 973. The gin is an idea conceived of by a four-person company called Steel Cut Spirits. “As a company, we care about crafted products that have a story and an ability to excite, inspire and bring people together. We also have a proudly South African desire to put our produce on the global map, and an interest in great local gins that can use fynbos to create amazing flavours,” says Steel Cut Spirits CEO, Rob Heyns.

Despite having already had success in the industry, Rob and his co-founders identified crowdfunding as one of the best ways to bring Sugarbird Gin to the market.  “All FMCG products face the three-part challenge of competition, barriers to scale and working capital constraints. The model of rewards-based crowdfunding addresses all three of these challenges at the same time,” says Rob.

“By launching via a crowdfunding campaign, we were able to stand out from many other products on the market, and involve our new friends and fans in our ongoing mission at the same time. We were able to operate at scale from day one by consolidating these first orders and thus produce great gins at a better price by working with the volumes of more established gin companies.

“We were also able to access funds upfront before producing batches, which provided the cash flow needed to grow quickly. There are very few better ways than crowdfunding to test a concept, solve cash flow issues, scale to proper production from day one and stand out from the competition.

“When I decided to go ahead, I studied crowdfunding thoroughly for two months while ensuring that our team had the required skillset to be able to execute.”  

With the crowdfunding of Sugarbird Gin, Steel Cut Sprits decided to treat the campaign like the online selling of a product.

Rewards-Based Crowdfunding

“Rewards-based crowdfunding is essentially a form of e-commerce, as you are selling products or services, so we approached it from the angle of an e-commerce campaign. Your product and marketing thus need to be spot on. We employed an evolving product strategy of refining our offers based on sales feedback before and during the campaign.

We also applied a plethora of online marketing strategies, including audio-visual, digital marketing, social media, PR and even direct selling to large potential backers,” says Rob.  Nicholas agrees that crowdfunding needs to be approached in a professional manner.

Most people will judge your business purely on your crowdfunding campaign and its funding page.

“Businesses and start-ups must have campaigns that appear very professional. The campaign should also be viewed as a marketing exercise that will allow the entrepreneur to test his or her product in the real world and receive feedback. Doing fun activations, like launch parties and events can also be a great way to get the word out there about your project and brand.”

 

Crafting A Campaign

As is the case with just about anything, success in crowdfunding is a result of hard work and dedication. A great campaign requires an engaging story, a desirable product, clever marketing and a solid understanding of business fundamentals. Without a good story and product, people are unlikely to fund the campaign.

Without a good strategy to turn a successful campaign into a successful business, backers can be left angry and disappointed.  “While every project is different, we have found that one of the most common factors with successful campaigns is the project itself: The idea, layout of the project page, and the whole concept must say the right thing to the right audience,” says Nicholas.

“Another thing that project creators are always encouraged to do before their campaign goes live is to build up a network of supporters who believe in their campaign.”  Lastly, the rewards offered are obviously also important. “Thundafund is a rewards-based crowdfunding platform so, as expected, the rewards play a fairly large role in a campaign’s success.

While the rewards may not be the icing on the cake in every campaign, they can make a small donation turn into a large one in some cases. Certain rewards can help build the credibility of a new brand, or even test the market to see which of your products will be most successful in the future of your business,” says Nicholas.

 

Trust Is Key

When it comes to crowdfunding, the most important thing is trust. By funding a venture or product that doesn’t exist yet, backers are placing a massive amount of trust in the entrepreneur. This trust can never be broken. As seen in the example of The Coolest Cooler, the results can be disastrous, and can follow you long after you’ve abandoned your failed crowdfunding campaign.

From the outset, you should ensure that people understand what you are offering in return for funding. “Rewards-based crowdfunding is not very well understood in many parts of the world. When you say ‘crowdfunding’, people tend to think it’s some sort of charity, or that people are buying shares in a business. Rewards-based crowdfunding is essentially pre-selling a product online, and most people are not aware of this.

“It’s important that you make this clear to people,” says Rob. Trust usually comes down to honesty and open communication. Issues will almost inevitably arise, but it’s important to relay these to backers. Don’t disappear from your website or social media platforms for months and leave them wondering where you went with their money.

Keep them in the loop at all times, especially if you’re dealing with unexpected problems.  “You need to prove that you will deliver, and then you actually have to do so once the campaign is completed,” says Rob. “I personally took full accountability for this campaign, as it can be easy to hide behind a product, brand or company when problems occur.

“We also aligned with key partners to ensure we could deliver. We were supported by Yuppiechef, so we knew we could execute on the e-commerce part, and we chose Thundafund as we knew they were the best option to execute on rewards-based crowdfunding in SA.  We did mess up the communication with two backers who bought smaller rewards.

“It was merely a miscommunication, but it was eye-opening to me how great an effect such a mistake could have on a customer. We went to great lengths to solve the mistakes but it did concern me that there is an even higher trust-related expectation with crowdfunding than with normal e-commerce.” 

 

Funding A Project:  A Publisher’s Experience

Successful crowdfunding ideas come in all shapes and sizes. Publisher Colleen Higgs and author Ambre Nicolson decided to publish a book through crowdfunding.

Even if you’re an existing business, crowdfunding can provide a way to fund a product or project that would otherwise be out of reach. This was the case with A to Z of Amazing South African Women, a bright and colourful book with bold illustrations that celebrate impressive South African women. 

“I came across a book published in the US called An A to Z of Rad American Women and posted something on social media saying that I thought there should be a local version. A clever friend of mine called my bluff and suggested that we make one together, and so the idea was born.

Publisher Colleen Higgs immediately saw the potential for the project and came on board. From the very beginning, it seemed to resonate with people — particularly women — and it is really due to their support that the book saw the light of day,” says author Ambre Nicolson.

“Modjaji Books was very keen to publish the A to Z of Amazing South African Women, but we didn’t have the ready capital to fund a book like this, which is more expensive to produce than our usual text-based books,” says Colleen.

“We needed funding just for this book, so crowdfunding seemed like the right idea. There are not many other ways of funding books in South Africa.”  The Thundafund crowdfunding campaign was a success, raising R104 400, slightly more than the stated goal of R100 000.

“You need to remember that a crowdfunding site typically takes a percentage of what you make, and then there are the bank fees to consider as well, so aim for about 15% more than you think you need,” says Colleen.  And how do you create a campaign that’ll provide you with all the funds you need?

“I think the storytelling aspect of the campaign is very important. You need to give people a reason to care. In our case we wanted to showcase the strength and resilience of South African women, and this resonated with backers. Put time into the description of your project and into creating strong images. Your campaign has to compete with everything else vying for people’s attention online,” says Ambre.