If Your Startup Falls Into One of These Categories, It's Not a Fit for Crowdfunding Crowdfunding may well not be the best route software, mobile app or idea arenas. If your product is about Ruth Bader Ginsburg, you'll do well.
By Roy Morejon
Opinions expressed by Entrepreneur contributors are their own.
Supreme Court Justice Ruth Bader Ginsburg probably isn't the first name that comes to mind when you hear the term "action figure" -- unless, of course, you're Fctry. The product design company out of Brooklyn put its idea for an RBG action figure on Kickstarter, and according to CNBC, the campaign raised nearly $615,000 in a matter of months.
Crowdfunding has become an increasingly popular way for brands to launch new products. No longer is it necessary to waste capital bringing a bad idea to market -- you can now let the crowd speak with dollars at the proof-of-concept phase -- leveling the playing field for startups of all shapes and sizes.
And when one company raises millions of dollars and successfully creates a new product, other companies are inspired to do the same. Just look at Kickstarter: According to its site, the nine-year-old company has surpassed 150,000 successfully funded projects. Sure, it took seven years to get the first 100,000, but it took only two years for the next 50,000.
In other words, this method of funding is only becoming more mainstream. However, not every startup is fit for the crowdfunding scene, so you as an entrepreneur, will find it's crucial to find out whether your product is one that won't make the cut.
Related: The How-To: Choosing the Right Venture Capitalist for Your Startup
Finding a crowd
While crowdfunding is certainly an excellent way to bring an idea to life, it's not the answer for everyone looking to raise money. And in many cases, projects that are poorly suited for this type of funding share many of the same characteristics.
Topping the list is the lack of a working prototype, because it's nearly impossible to convince a backer to fund a project without one. Additionally, I believe it's difficult to secure funding without a unique, tangible reward -- in other words, what an investor will get out of the deal. If you're able to offer something of value, you can differentiate yourself from other campaigns.
Another great differentiator I've found is a strong network. Do you have support lined up from day one? Backers want to see a project that got off to a strong start; that advantage increases your project's credibility.
Covering the above bases can get you on the right track for crowdfunding, but it doesn't guarantee success. The best way to determine whether crowdfunding will be the best approach will require some honest introspection, especially if your startup falls into product areas that are more prone to crowdfunding failure.
Not fit for service
The following are three startup products that have the lowest chances of funding success. If you are in one of these groups, take caution when setting out for the crowdfunding approach:
1. Software
Most backers would rather invest in a software service that's already on the market. They know the applications have been tested and can review the functionality themselves. With software, however, crowdfunding only really works with more established companies when they're launching another version of their product or want to expand their user base to a much broader audience.
Being seen as too risky to invest in, software companies are better off targeting a more niche audience or resorting to a bootstrapping method. Take Epic, for example. The Wisconsin-based electronic medical records provider didn't resort to crowdfunding and instead relied on a self-funded method, leaning on the founder's colleagues and family members. This resulted in slow growth, but Epic is now one of the biggest software companies operating today.
If a self-funded route isn't a viable option for your up-and-coming software company, you can also shift gears to find support through venture capitalists who might be more willing to take the financial plunge. According to Business Insider, in the first half of 2018, $23.7 billion was invested into software startups, all coming from VCs' checkbooks. So make an effort to critically think about how attracting VC funding instead of public funding could make the difference your software startup needs to get off the ground.
2. Mobile apps
Like software, mobile apps are a hard sell with backers. For one thing, these apps are often developed for a single operating system, which automatically narrows the market. Another likelihood is that a competitor already has something similar in the marketplace -- at a fraction of the cost.
Take Etcher, for example. The iPAD app -- Not to be confused with a cross-platform tool with the same name -- leans on childhood nostalgialsurrounding those Etch A Sketch pads we all had.
Etcher similarly allows users to virtually "twist" knobs on a screen to draw images and then shake-erase their work. Because of the capability it gives users to save and share artwork to social platforms, the app received coverage from many tech-focused publications, but the crowdfunding campaign fell short, not even raising a third of the app's goal. Etcher was just too similar to an actual toy to make the cut.
Another crowdfunding roadblock for mobile apps is that most are completely or partially free to users, and backers don't like to pay money to fund something users can later enjoy at no cost. However, according to Clutch, many app developers -- 61 percent of those surveyed, according to one survey -- prefer to use a freemium strategy to pique backers' interest. Although the app is still free to download, apps can be easily monetized to help backers see the value of investment.
To do this with your own product, brainstorm in-play mobile app upgrades, such as virtual accessories or clothing, and other perks that users could eventually pay to unlock.
Related: Can the 'Freemium' Model Work for You? Here's How to Know.
3. Ideas that are seen as unfinished
Everyone's got an idea for a product or service. But sites such as Kickstarter aren't built for "a-ha" moments. According to Statista, only about 36 percent of projects have been fully funded on Kickstarter as of August 2018, which shows that backers want all of the information they can get before writing a check.
Not only can ideas be underdeveloped, but they can also be flat-out illegal or impossible. The uncertainty behind an idea and its execution can make any backer wary about investing. For example, according to Digital Trends, a GoFundMe was set up last year for an idea called "Search Internet History" -- based on people's motivation to purchase U.S. congressional reps' browsing data.
Politically fueled, the crowdfunding campaign gained traction and raised $190,000 before backers and others discovered that the search database was impossible on legal and technical grounds.
To avoid an idea gone wrong and to solidify any sort of crowdfunding success, you must come to the table with hours of research and an initial prototype. Look into patenting the design or process and testing the product in a real-world environment. The crowd can be brutal if you bring a half-baked idea to market without thinking it all the way through.
Related: How to Test a Business Idea Without Spending a Fortune
While crowdfunding allows you to test product-market fit and engage buyers as never before, it's not the best route if your startup falls into the software, mobile app or idea arenas. However, knowing where your product stands now before digging your heels in too deeply into crowdfunding efforts can help you navigate different paths to help you reach your funding goals.
