Crowdfunding is one of the biggest buzzwords in entrepreneurship. The Securities and Exchange Commission just released a 585-page rulebook, a long-delayed document that effectively legitimizes its place in modern business. Sites like Kickstarter and Indiegogo are not just a cool way to help a friend launch a passion project or support the comeback of a cult TV favorite. They are established, regulated, high-potential, high-growth investment marketplaces with worldwide public access.
But the prevailing attitude among American entrepreneurs, particularly among millennials, is tragically out of line with this new reality.
Three facts about Kickstarter, one of the first and most recognized players in the space:
- 1 in 4 prospective projects are rejected.
- 1 in 10 accepted projects receive zero dollars.
- The failure rate is 56 percent.
These numbers can only trend down. Entrepreneurs don't need to be turned off, but they need a reality check.
A few things every young entrepreneur should know before considering a crowdfunding campaign.
- Crowdfunding is an alternative, not replacement for VC. It's a viable way to bypass the ostensibly slavish and old school venture capital world, but focusing on one funding stream alone is increasingly common. Ignoring or downplaying traditional funding mechanisms is arrogant and foolish.
- Dilution of the marketplace. New platforms to crowdfund projects are announced on a daily basis, many of which lower the bar for acceptance. This floods the intertubes with competition, much of it inferior, making it harder to reach key audiences. No matter how good the idea, enough potential investors need to actually see the campaign to donate.
- Relevant narrative telling is an art and a science. Countless campaigns fail because narcissistic inventors drink the juice. They fail to research and grasp the nuances in the psychographics and demographics of their target audiences. Attention spans don't exist anymore. If selling a game or app, they need to show how it works. Funny pitch videos lacking substance, ignoring the product or focusing on undeveloped mascots can deliver laughs. Not dollars.
- Real social media skills are needed. It's easy to get starry-eyed about the process, but having a good social network does not make campaign success preordained. Communications campaigns require audience development and strong messaging. Knowing how to use Facebook and Instagram is fine and well, but it's a big leap to move from having lots of friends to recruiting strangers to give up dollars.
- Regulation on federal and state levels means legal fees. The SEC rulebook is a 585-page document. States like Georgia and Kansas have been creating legislation since last year but most are years behind. Entrepreneurs need legal advice from a real attorney. Not Wikipedia or LegalZoom.
- More investors means more backend work. Much of crowdfunding's appeal is the freedom it gives to run the business independent of guys in suits. But having hundreds or thousands of investors can be just as restrictive as a single investor. Engagement doesn't end when the target goal is reached. It's just begun. Communicating with all of them is a labor-intensive and important process.
- Crowds are volatile. Faceless crowds can giveth and taketh. Anonymous wild cards take to Twitter and YouTube to trash corporate reputation every day with little hesitation. From a Domino's Pizza cook to a FedEx delivery person, viral phenomena build around poor customer service and acts of lone individuals. The results can be devastating on brands, but entrepreneurs frequently skip scenario planning and crisis management. When it hits the fan, it's too late.
- Success stories are just that: stories. The prevalence of anecdotes in the news media and social networks clouds the fact that most campaigns fail. With new platforms boasting higher acceptance rates, "failure stories" will climb astronomically.
- Selling incentives in place of stock doesn't work. The call to action can't be, "donate and we'll give you something of equal value." Rewards aren't enough in America's coupon culture. Consumers don't hope for deals, they've been conditioned to expect them. How long until there's a Black Friday in crowdfunding?
From Silicon Valley to Hollywood to Main Street USA, young entrepreneurs tell stories of windfalls and glorious escapes from established (read: outdated) standards and practices of business. They think positively and look on the bright side - never a bad thing - pointing to the fact that more platforms plus more investors equals greater opportunity. But business executives tend to look at contingencies. They understand that opportunity must be matched with innovation and hard work.
The American Dream is alive and well in Generation Y; its entrepreneurial spirit as strong as any generation since the so-called Greatest Generation. It would be a shame if the inevitable erosion of hope in crowdfunding turns entrepreneurs away. They just need to remember to do their homework, or else their business dreams will get caught in a fragile honeypot - seductive and outwardly appealing, but really just a dirty and sticky trap.