Crowdfunding — the new Way for Entrepreneurship in Europe during Euricorn times
Over the last year I supported several crowdfunding projects on Kickstarter and Indigogo. While doing so as a Venture Capital investor i was thinking what those projects would have an influence for my industry would have and what it will do to entrepreneurship in the future.
Lets face it: in the ages of unicorns and US based investors — despite being VCs or PEs — the industry has changed from 9 years ago. If you are the lucky one who scored the double and tripple million funding rounds you are all set and in the news. You are hot and on stage with DLD and TC Disrupt: Fine.
But if you are not you will be good to go at best to be acquihired by one of the lucky ones. Still good for the people in your company but bad for you as an entrepreneur. So start over again to try as a real pirate would do.
And it looks like I am not alone with my view on this — Forbes just released some numbers on this markets and they are very impressive:
Dave McClure at 500startups just raised its lates early stage VC fund with $30M in Japan and have some others in the range of $85M in U.S. and Europe. But still this is a rather low number compared to the biggest crowdfunding campaigns which are in the medium double digits for only one project. Angels and VCs will be outnumbered by crowdfunding in certain industry and product segments very soon. Thats the ultimate disruption of the VC and equity investment industry.
Crowdfunding will give a new way to bring products to market.
I was an early investor in the Coolest. This kickstarter project took the first spot with $16mio in funding from Pebbles first watch and lost it again to Pebbles second watch. Now while waiting to get my cooles in four weeks the guy who started this project has a blueprint and proved production line in place to bring more coolest to the market. He will also have an inproved version 2.0 some time in the future. Thats what I believe is the value of crowdfunding. Get to market your idea, have customer validation, generate experiences in the fields of your business and now how to deal with set backs. Looking at the social media capacities you have at hand — not all are for free — you will take the same route as all other startupa out there. The truly benefit you have: you did not give away equity! Thats something most entrepreneurs tend to forget in the early stages. It ia easy to give away 3% of equity for 300mio when you are a hot unicorn. But most of those founders gave away 20% for 200k at the first days of funding.
When investors talk about bootstrapping it is this part of life for a founder when you protect your equity.
What could go wrong I have seen in Lima, a storage project from Paris. The founders took a VC investment during their crowdfunding campaign. I am still in doubt if this was the right decission. Looking at the product I recieved at home some weeks ago I think it harmed the product. Instead of focusing on the project the founders where busy on fairs and press coverage. While the hardware shiped over a year later the software is still in alpha stage however called beta by the company. Why getting defocused while your customers are waiting for the product to be delivered? If you treat your early customers this way — what will I expect from those founders in the future when their business will grow?
Online Advertising and Social Media is key like everywhere else.
So how did I get informed about crowdfunding campaigns that spark my interest?
Both Kickstarter and Indigogo have implemented a smart semantic system to find the interests of a supporter. Like Amazon it is able to estimate which products should be interesting based on campaigns you backed in the past. On the other hand facebook and Twitter bring campaigns so much further reach. With Bluesmart, a smart luggage, I found out they are using retargeting with Creteo and others as well. While I was looking at the campaign for some time, I recognized a lot of online banners for bluesmart on ordinary publishers news portal like Spiegel Online and others. So the company did a prety good job in keeping me alerted until I finally signed up for their project. Next to this rather matured way of marketing, Bluesmart already took some more attention from the Unicorn world:
While many see crowdfunding as a way to finance their project on a low scale the truth is different. Without a medium sized budget it will be hard to drive enough traffic to your campaign landing page and get those supporters converted. There is nothing like free lunch — not even in crowdfunding.
A friend recently wanted to publish a book based on the blog posts he published during the last two years. I advised him on a crowdfunding approach rather then looking for sponsors in the industry. He managed to secure the funding within a week soley on private twitter and facebook activities. It was a four digit amount he raised to this seams not that hard. But even on this low level I got some insights on the metrics and feedback for this campaign.
Early customer feedback and product market fit comes for free with it.
When investors talk to founders of early stage companies it is most of the time regarding product market fit. Will the idea supported by enough potential customers? Will there be a need for this product in the market or is it just an app which will excite some people in the beginning and its usage will vanish shortly after release?
With crowdfunding you will get those data and information in the early stage from people who put money where their moth is.
So fast forward — into a world where entrepreneurs will bring their products to market via crowdfunding campaigns:
The founders still own 100% of equity of their companies
The product has been produced in a first beta or version 1.0.
A significant customer base has been build up
A working production line and sourcing platform is in place
Whith pre-payment and pre-order costs financial risks are limited
Pricing and margins are proven by markets already
I haven’t seen a startup presenting all this indicators in the early stages looking for VC investments. So soon investors will approach those successful campaign owners and discuss funding for the next version of their product release and international expansion.
In a region with, compared to Sillicon Valley, restricted funding ressources this will be a chance for entrepreneurs to leapfrog the venture market. While some startups will try to draw as much investments as possible — some others will try to take nothing at all.