Crowdfunders Erode VCs Fundamentals: 4 Things You Must Know About Crowdfunders

David Drake |

Crowdfunders Erode VCs Fundamentals: 4 Things You Must Know about CrowdfundersWe see dozens of successful crowdfunding projects break the million dollar barrier: Pebble: E-Paper Watch broke $10.9 million last spring;  Amanda Palmer’s campaign broke $1 million for a music project; Double Fine Adventure raised $3.3 million and Ouya raised $8.5 million for their gaming console.  VCs are nervous.  The democracy of the crowd is nibbling at the VC community’s heels.

Here are a few fundamentals you need to know about crowdfunding to make it successful and within them additional explanations of how crowdfunders make VCs uncomfortable.

1. Crowd in Crowdfunding is the key word for success.

You have to be able to reach a crowd.  We work with many crowdfunders but reject working with startups without a crowd that listens to them.  The reason is simple.  Customer acquisition cost.  Simply, if you have the best gadget in the world but cannot reach a crowd of people that will pay attention then you will not fare well.

Imagine you sell meat and mass email one million vegetarians?  You will not sell anything.  What if you don’t email anyone.  Again you will sell nothing.  Get a crowd, or don’t launch a crowdfunding campaign if you cannot reach a crowd that will listen to you.

2.  Crowdfunding is a tool.

The most objections we get in discussing crowdfunding, be it with the energy efficiency program of the Swedish Embassy in Europe’s poorest country Moldova to University programs seeking innovation, is that it is a soup to nuts solution.  I differ completely.  Crowdfunding is a tool and in some cases is very efficient at a low cost to collect and scale the collection of capital for a project.  Look at it as a tool and remember you won’t stop using other tools like a face-to-face fund raising pitch, attending conferences and selling one on one.

3. Crowdfunding requires commitment called Marketing.

Crowdfunding has a low threshold to launch.  You do it as simply as typing a campaign in front of your computer.  However, it is the social media and marketing preparations for months prior that is pivotal.  You may even need 3—4 full time staffers just to manage your social media ecosystem.  You need to build demand and awareness and marketing becomes crucial.  You can use top US  leading social media firms like TeamLauncher and MicroMediaMarketing to handle that for your projects as finding the right full time staff is not necessarily your strength or core to your business.

4. Crowdfunding is a Financial Instrument.

Ok, so here we are boldly going against the technocrats.  We feel crowd sourcing components such as

1. Labor

2. Innovation

3. Creativity

4. Knowledge

5. Funding

are tangible resources while #5 crowdfunding is a financial tool.  Crowdfunding allows us to pre-sell a project, product or service.  It allows us to self finance and, yes, it also allows us to data mine and manage consumer relations.  You can empower your loyal customers and acquire new customers by allowing them to chose the design or color of a product.  You can also data mine their interests, demographics and replace part of your focus group budgets.  Yet I challenge us to view crowdfunding primarily as a financial tool and not as an internet technology play.

Crowdfunding is not for all, but crowdfunding is making the VCs nervous as they recognize a financial tool when they see one.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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