It gives you instant access to people actively looking to part with their cash and can provide valuable feedback on your product before you take it to market.
Yet those who have gone down the route of crowdfunding advise going into the process with your eyes wide open as it’s far from a quick and easy solution.
“It’s very much like the music industry – there are a few hits and then there’s music in the background that gets a little bit of interest,” says Piers Ridyard, inventor and chief executive of Manchester-based Nifty.
Ridyard has had varied experiences with crowdfunding, having raised $3,000 from 70 backers when he launched his first product on platform Indiegogo in 2012.
The Nifty MiniDrive was a solution to an issue faced by Ridyard himself – a frustration that the storage on his Mac portable computer was nowhere near big enough to hold everything he needed.
The device he and business partner Steve Levy came up with fits flush into the SD card slot of the MacBook and increases its storage by 50 per cent.
“The most important thing is make sure you have a product that’s suitable for crowdfunding, it’s important that it’s a consumer-facing product,” he says.
“It has to be something that has resonance with the average person or people using crowdfunding websites, which is typically male and 25-35.
“It also has to fall within a certain price range – your sweet spot is $40-50, ideally less if you could do it.”
While the amount raised hadn’t been what they were looking for, the stint on Indiegogo had provided them with early feedback – 50 people passionate about the problem they were solving. They had the seed of a campaign.
“You’ll create something and people say they like it, but you have to ask will they buy it – that’s the important bit,” Ridyard says.
“It’s a difficult question that a lot of people have problem asking and it’s something you should ask before you go into crowdfunding. Just because you can create something doesn’t mean it will be useful.”
When they later launched a campaign on Kickstarter they made some changes, producing a video to accompany their pitch, even though they were working on a shoestring budget.
“It was about as basic as you can imagine – we bought green paper and stuck it to a wall and then I stood in front of it while my friend videoed me,” Ridyard says.
But this, and the previous Indiegogo appearance, meant the response was strong; they raised $384,000 in just ten hours, smashing their target of $11,000.
Since then Nifty has gone through other rounds of crowdfunding, depending on whether the product is suitable.
The Xoo belt, a smart belt that charges your phone, raised $80,000 on Indiegogo, while the Thunder Rocket – providing external storage for media professionals – was gauged to be too specialist, so they went down a different funding route.
While he cites £40-50 as the ideal price, Ridyard admits there will be some exceptions to the rule.
“Your funders would have to be in a position that that doesn’t matter to them, or it’s something so revolutionary or important to their life that they’re willing to put a bit more money down,” he says.
“The first smartwatch was so interesting to the market that people were willing to put over $100 down and wait for it because it was so different, but if you do a smartwatch now you’re going to get less resonance.”
Accurately coming up with a price is an important point. Torquing, the Welsh company behind the collapse of the Zano drone, cited prototype amendments and hardware expenditure rising significantly as reasons for their demise, so Ridyard advises finding out exactly how much it will cost to achieve your design.
“You can get quotes but these won’t necessarily be ready for manufacture and that’s where people come unstuck,” he says.
“Engage your manufacturer fully and ask for a ‘design for manufacture’ price – it can be expensive but it’s money well spent.”
Your price should also include a buffer, he says, to cover the five per cent fee charged by the crowdfunding platform and the three per cent credit card fees.
Preparation is also important, spending time putting together your campaign, contact existing customers and call in favours from your media contacts, he says, adding: “Sometimes you get the feeling you have to launch now or someone else will bring the idea to market before you, but make sure the product is needed by the market and that they are willing to pay the price you suggest.”
Jon Holttum, director of Manchester-based Fissara, a work management software business, agrees, having spent six months preparing to launch a crowdfunding campaign on Growth Deck.
This included deciding on the best platform to use, and Holttum says the appeal of this particular arena came from the extra due diligence they carry out into each business seeking investment.
“We looked at angel investment and other some North West funds, but the thing we learned very quickly was a lot of people didn’t understand our business,” Holttum says.
“We thought crowdfunding was the place for us, but even a few of the crowdfunding platforms thought our business was too complicated and said their users wouldn’t understand it.”
Fissara, a subscription-based cloud service aimed at mobile workers, needed to build up subscriptions to cover operational costs.
The £500,000 funding sought is to act as a bridging loan, Holttum says, to get Fissara from mid-2015 to break-even point, which is predicted to be 2017.
His wider Framvern business, which Fissara is part of, has been trading since 2013 and has turned over £1m in three years.
Growth Deck takes a percentage of the business and puts a non-executive director on the board to act on behalf of its users who have invested.
The bid was at its infancy stage when BusinessCloud spoke to Holttum, following a six-month planning process that had included building an investment plan and looking inwards to ask questions like ‘are the projections realistic?’ and ‘are the right people on the management team?’.
“I think we’ve gone through 30 or 40 different criteria in our investment plan,” Holttum says.
“I wouldn’t want to put anybody off doing it but it’s probably the toughest thing you’ll ever do.
“I’d also say make sure you’ve tested your market, it’s no good saying you’ve got a great idea to drag icebergs to the Sahara – you have to have proven what you do and built up a user base before you try and get investment.
“If you don’t, somebody will want 99 per cent of your business and that’s not what you want.”
A North East-based business owner, who preferred to remain anonymous, highlights the time after your campaign has gone live as being equally important, saying people often underestimate the effort they must put in during this period.
“Nearly all of your success will come from working with your existing network and working any lead you get from the crowdfunding network,” he says.
“We had two people running that in our organisation and as much as 70 per cent of their time was taken up by managing the campaign and the marketing activity after it went live.
“The problem is these organisations don’t make you aware of how high-maintenance this is going to be because they don’t want to put you off.”
Prior to his campaign last year, he says, he spoke to 12 people who had gone through crowdfunding to ensure he knew what to expect.
He also advises having at least 30 per cent of the funds already raised from existing contacts before your campaign goes live – “it’s a bit like the sheep mentality, if people can see investment they’ll be attracted to it” – although he admits some may question the ethics of adding amounts already raised onto your platform.
For seasoned users of crowdfunding, the cautionary tales are outweighed by the benefits.
“Crowdfunding is powerful positive platform for entrepreneurs to be able to access people and markets they never would have been able to before,” says Ridyard.
“Retailers are paying more interest to crowdfunding platforms now and will follow these pages so they are amazing places to be launching.
“Often people have the idea that they will put it on and it will work; that’s not the case anymore – you have to work hard at it, it’s going to cost resources and time, pre, during and post campaign.
“But if you get it right it can be amazing.”