Yes, the coronavirus pandemic has caused immediate and potentially long-term harm to both the US and global economy. But challenges inevitably bring out the best in people. For example, COVID-19 fueled layoffs which created record unemployment and the forced closure of countless small businesses across the country, but in response there has been a record high of new business applications submitted in the United States. That is right: Americans are taking those proverbial lemons and looking to make lemonade. A September article from Business Insider tells us that the number of people looking to start a new business is at a 13 year high, with 1.1 million new requests for employer IDs through mid-September, based on data from the US Census Bureau reviewed by the Wall Street Journal.
Now there are a myriad of reasons for this surge in entrepreneurship: job loss, increased consumer spending as the economy begins to open, the fact that innovation never ceases, etc.… But the most important factor to consider is what can be done to ensure these new companies have the best opportunities to succeed. Most people know that approximately 50% of startups don’t survive to see their fifth birthday, and while that does not bode well for many of those 1.1 million aspiring companies, there are pathways to building a business they can take to minimize the likelihood of induction into the fraternity of failed businesses. One of the best paths an entrepreneur can take when looking to launch their company, and there are many, is crowdfunding.
Traditional Ways to Launch a Business
Before we examine crowdfunding and the advantages it presents to these 1.1 million businesses, let us look at the more traditional ways to launch a new business:
- Bank or SBA loan: Depending on how much you borrow (provided you have the credit/collateral to qualify) you are looking at interest rates anywhere from 5.5-8% with repayment due in 7 years. Remember from above, 50% of businesses do not make it to 5 years. You do not want to be saddled with that debt.
- Make a withdrawal from your 401K or other retirement accounts: This does provide immediate access to capital, yes. However, it may expose you to penalties for early withdrawal and put your long-term future at risk if the business does not succeed.
- Partner with a VC or an angel investor: This is not a bad option and one that many startups select. However, you first must be savvy enough to get a meeting with one of them. Then to secure the dollars needed to effectively launch the business, you risk the potential of surrendering control to another person or a significant amount of equity in a company that you created to people who do not possess the same passion or will to succeed with this business.
- Borrow the seed money from family and/or friends. On the surface this sounds like a simple and easy path to take, and it can be… until something goes wrong. Bad business dealings among family/friends often can and will cause collateral damage that cannot be repaired. This will last longer and go further than the money ever could have, and let’s all be honest, NO one wants Uncle Jerry to have an even bigger chip on his shoulder during the holidays.
Please do not think that these four examples are going to result in doomsday for your or your business; there are thousands of companies that have taken of these or other routes to success. However, in the business environment we live in, these risks are real and entrepreneurs should always want to mitigate risk(s) however possible, which leads us to crowdfunding.
Crowdfunding is defined as “the practice of funding a project or venture by raising small amounts of money from a large group of people, typically via the internet” and it very well could be the best way to launch a new business in the 21st century. You may have heard of Peloton, which launched a successful crowdfunding campaign in 2013 and now has a market cap as of 11/2/20 of $33 billion.
Why is crowdfunding the best way to launch a product or business?
It eliminates the risks of the four options we discussed earlier, and a successful crowdfunding campaign can actually improve your position when entering one of the paths at a later date with leverage and strength, NOT from a place of need and desperation. The article in Business Insider cited information from Forbes magazine stating “7 out of 10 startups fail as a result of pre-mature scaling and a majority of startup founders conclude that their intellectual property isn’t a competitive advantage like they thought it would be.” The primary advantage crowdfunding provides the entrepreneur is the opportunity to learn whether there is a demand, audience, or market for their product or service. Thus, crowdfunding will help determine when/if to scale and if the product/service IP you possess provides the advantage you think versus the competition you have within your market category.
How does crowdfunding provide this advantage?
- It provides a valuable opportunity to not only learn the audience and demand, but also who constitutes the audience. Critical details like gender, geography, interests, and age range will not only educate on who to sell your product/service to, but also if they will even spend their money on it.
- Once the audience is identified you can then build that audience and position your product/service for success both within the category and in front of your future customers (product adoption curve concept) through storytelling, i.e. advertising.
- Launching the business through a crowdfunding platform (Kickstarter, Indiegogo, StartEngine) to take pre-orders or offer equity generates the needed capital upfront, minimizing the financial risk taken by an entrepreneur, and that revenue can then be put to work for manufacturing a product, paying for a needed facility, business operating expenses, etc. Those audience members who back the campaign would then receive the product, equity or ownership in the company, or whichever type of reward the entrepreneur chooses to deliver to the backers for their support.
- Crowdfunding centralizes everything the entrepreneur needs to get the business off the ground into one central location, allowing faster and better use of their time. This consolidation also makes it remarkably simple for the interested party to back the campaign from their mobile device.
- Achieving the campaign funding goal provides not only the needed capital, it also proves the beforementioned demand, audience, or market. This proof benefits your new business in two critical ways.
How proof helps
First, social proof. These early adopters are key to attracting the “early and late majority” which will be the bulk of your customers. The early and late majorities are the people who liked your idea but are not risk-takers or true believers. They require the added confidence to back a campaign that only comes from “social proof.” Social proof provides further evidence about the advantage or disadvantage of any intellectual property the product/service has.
Second, a successful campaign provides the opportunity through customer feedback to improve your product. You can do this as you leverage the campaign’s success and achieve your company’s goals. These improvements can help make for a more profitable transition into eCommerce or retail, provide the leverage and higher valuation necessary to secure an investment from an angel investor (the more money raised or units sold, the higher your valuation can be), open a new location (eliminate pre-mature scaling decisions), or make it easier and less stressful to take on a friend or family member as a partner (remember Uncle Jerry and those holiday get togethers).
To give you a better idea of how a company is built through crowdfunding, please review the following links to campaigns for the company Give’r. Give’r is a high performance clothing company out of Jackson Hole, WY. They have partnered with LaunchBoom for three campaigns to launch some of their most popular products:
There is no one ideal way to start a business. Every entrepreneur has a different story of when their business idea struck them and how they made it a reality. Even with these different stories, the opportunity to bring a business to life with as little risk as possible is a theme that all those stories and the people writing them would like to have. In the twenty-first century and amid a pandemic, innovation and the entrepreneurial spirit is alive and well in the United States. Crowdfunding is the best way to ensure these new companies have the best chance of success.
Crowdfunding mitigates the entrepreneur’s financial risk through pre-orders or equity investment, utilizes digital marketing to validate an audience of early adopters and demand for the product/service to provide social proof of concept, and consolidates everything into one location, providing better time management for the entrepreneur and a simple experience for the future customer. If there is a more efficient way to go about this process, please let us know.