Academic Director of Specialised Master in Innovation and Entrepreneurship
Alumnus ESCP Europe
The Statue of Liberty would be nothing without the crowd
Crowdfunding plays a major role in a world where crisis (economic, financial, societal and political) has led to the emergence of a sharing economy, where final decisions are taken by individuals empowered by information technology. In contrast to what you might have thought, crowdfunding is not such a new phenomenon. In October 1875, a century before the arrival of the internet, the Statue of Liberty was financed by the “crowd” through media campaigns, banquets and lotteries which gathered up to 400 thousand francs from the French people to make this gift to the United States… But to each age its own scale. With the advent of the internet, measurements are now expressed as millions fundraised and many entrepreneurs now attempt this exciting adventure, because this is what it’s all about. Several students from the Specialised Master in Innovation and Entrepreneurship at ESCP Europe Business School have been through this experience and this is some of their feedback.
Three ways of being “crowd-fundraised”
Before going further, let’s introduce the three main types of crowdfunding: donation-based, debt-based and equity-based. As its name suggests, donation-based crowdfunding is where the crowd finances entrepreneurs without any expectation neither in terms of revenue nor in terms of goodies. Debt-based crowdfunding draws on traditional bank loans but instead of getting support from a bank you are backed by individuals in exchange for an interest rate. In other words, it’s all about bank disintermediation. The last one, equity-based, is where entrepreneurs get financed in exchange for equity shares as with any investment fund. Three ways of getting financed, but what can you gain and expect from crowdfunding?
Turning clients into ambassadors while getting a “proof of concept”
A common example: financing the launch of a product. In fact it’s not actually that common as very few dare to carry the related risks of a product launch (cash intensiveness, delays, wrong time to market, does the market really exist?). Finding the right market is sometimes like having a cross to bear. It is no coincidence that many entrepreneurs pivot until they find their market and get what we usually name as a “proof of concept”. Being backed by thousands of people is a proof of concept in itself. It means much more than a ticked box: all the comments made by backers during the campaign are equivalent to a free market study, which lead to adjustments and improvements of your project. Here is where the magic happens: getting commitment from customers means that you turn them into ambassadors. In other words, you now have an armada of sales people, free of charge. Now you probably wonder where the tricky part is. There isn’t one, but...
Don’t think it’s easy!
Most people think that all it takes to run a successful crowdfunding campaign is to lean back in your chair, fill out an online form, then wait for the veritable craze to hit. There is a bit more to it than that: convincing hundreds of people to give you 1 euro is as difficult and time consuming as convincing 1 person to give you hundreds of euros. A 3-month campaign will require several months’ preparation (creating a marketing video, the pitch, the fundraising roadmap…) and while the campaign is running you will have to enhance and manage the community driving the project (posting on social media, answering questions). This must be taken very seriously. Moreover, the active community during the campaign, mainly composed of early adopters, will not reflect your market and future audience. Be careful not to be blinded by the success of your campaign because there is still a long way to go to acquire “real” customers. When you reach the end of the campaign, you will be completely alone, compared with using traditional ways of financing which are supported by an organisation and a network of experienced people. Be aware also that an aborted campaign is worse than traditional fundraising made behind closed doors in terms of media coverage.
It’s not a one-stop-shop solution
Do not think of crowdfunding as a one-stop-shop solution for financing. Methods can be incremental, and mixed with traditional solutions throughout the life cycle of a project. There is nothing better than a fully diversified range of financing solutions to create global champions.