Crowdfunding vs. Traditional Investors : Under30CEO Crowdfunding vs. Traditional Investors : Under30CEO
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Crowdfunding vs. Traditional Investors

| January 4, 2013 | 4 Comments

As most entrepreneurs know, lack of access to capital is one of the biggest hurdles for startups to overcome. Some young companies try to avoid this problem by raising money through angel investors, venture capitalists, or other ways of private funding.  No startup just finds investors. It can take quality time that could be better spent on enhancing and developing your business. That is why I believe startups should consider raising money through crowdfunding platforms.

Kickstarter and other crowd funding platforms attempt to solve a startup’s cash problem by allowing people from all over the world to donate and fund your campaign in return for a reward relevant to your project. In our case, we rewarded our backers with a pair of our headphones.  We retained full control of our business while being able to move forward with our idea at a low cost.

My company Jamboo Headphones used Kickstarter, but there are many other crowd funding platforms to choose from including IndieGogo, Fundable, and Crowdfunder. Their primary function is to help companies raise money for their idea by offering rewards to supporters in order to reduce costs and scale their operations. Once the recently implemented Jobs Act is put into effect, crowdfunding platforms will have the option to give their users the ability to offer equity in return for monetary donations as well. Companies like EarlyShares plan on revolutionizing the process by being the first portal for equity based crowdfunding. This will give companies and business owners an even wider variety of platforms to choose from.

Prior to Kickstarter, I had to pull a lot of strings just to set up a meeting or phone call with a potential investor. Now that my campaign has been successfully funded, plenty of investors are interested in getting involved with Jamboo Headphones. With a successful campaign, project owners are able to show that there is a demand for their product or service. They are able to attract investors’ attention, and establish a higher value for their company.  Here’s how to utilize crowdfunding:

Low Initial Costs and Validation

Within hours of launching the campaign we had validated our idea before investing any money on inventory. In essence, your backers on Kickstarter are supporting you to help finance your inventory or idea. You then have guaranteed sales before committing yourself all the way financially to an idea or concept. In total we spent a few thousand dollars, which included sampling costs, video production, graphic design, etc. This could be done for much cheaper if you have access to video or graphic design talent, or are creating products on a smaller scale.

Outreach

Reaching out to friends and family is important in the beginning but also sharing your company’s success with blogs and websites is imperative to creating a solid web presence. This shows one of the greatest strengths of using a crowdfunding platform; your idea has the ability to attract interest from people outside of your normal reach. We had over 200 supporters in the first two weeks, and over 40 of them were from outside the USA.  Also, Kickstarter keeps track of your campaigns metrics and promotes projects that are either gaining an immediate following or are close to being funded. They will promote your company’s page by attaching it on the front page, or in the “Staff’s Pick” section helping to gain even more exposure and potential supporters.

Market Testing

Jamboo Headphones has similar core demographics as Kickstarter. You can see that almost half of the user base is between the age of 18 and 34.  This was a great place for our headphone company to test our target market and gauge interest. From these groups, we were able to identify a problem through interviews and feedback: boring headphones that constantly got tangled. We then were able to come up with a solution: hand-woven, colorful headphones made with bamboo that doesn’t tangle. The positive feedback we received was overwhelming and gave us the confidence that we were on the right track with a quality product.

Another way we were able to interact with our market, was through Facebook and blog posts about our company. By reading user comments we were able to determine which style of headphones were most popular. That gave us the ability to alert our manufacturers weeks before placing our order, saving time and money.

Searching for Investors

Many entrepreneurs would rather find outside investors than go with a crowdfunding campaign due to the length of time, money, and risk that goes with creating a campaign. However, finding potential investors isn’t as easy of a process as one may think! You will end up spending quality time that could be devoted to your business attempting to persuade investors and agree on contract terms. Either way, money and time will be spent. You must decide which option will allow your company to start off on the best foot.

Investors Coming to Me

With the launch of a successful Kickstarter project, you are able to get your product or service seen on a worldwide level. Possible investors will be able to see the demand for your company and the recognition you are receiving. Within the first week, 3 retail stores and 1 well-known online store contacted us.  We are now able to leverage the number of supporters, amount of money raised, and potential wholesale orders to our potential investors and receive a higher valuation for our company.

Conclusion

It is my experience that if you fit their criteria, crowdfunding sites are the best route for companies looking to launch a product or service. For us, Kickstarter was a perfect fit. When paired with an all around great product, crowdfunding is great for smaller companies who want to operate lean and efficiently. We were able to receive feedback from our customers and figure out what kind of demand there was for our product.  We were also able to continue enhancing our company and product line while working on our campaign, instead of attempting to find investors. It is important to not rule out investors entirely though. They can provide money, insight, experience, and access to the right people, which is what many startup companies need.

Ultimately, it comes down to having a product that people want and are willing to pay for. Kickstarter hosted our campaign, took care of payment processing, and even gave us real time analytics. All this allowed us to focus on what we do best, creating a one of a kind headphone that lets people #STANDOUTJAMOUT!

Austin Glenn is the CEO and Co-Founder of Jamboo Headphones, a San Diego based company that was successfully funded on Kickstarter.  Austin previously was the Director of Operations and Customer Service at Flex Watches. At Flex he was inspired to start his own product-based business, and fulfill his entrepreneurial drive.”
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Category: Startup Advice