Crowdfunding Tips for Getting Started and Minimizing Risk

By Pedro Hernandez | Posted September 04, 2012

Need to raise money for your killer business idea?

Crowdfunding has emerged as a popular way among startups and entrepreneurs to attract funds for a new product or service. And perhaps our recent roundup of top crowdfunding sites for entrepreneurs has motivated you to give it a shot.

Like with any business endeavor, crowdfunding could lead to big rewards but it's not without its risks.

Hitting it out of the park on a crowdfunding site can dramatically improve your startup's chances for success. It's not a bad way to make a name for yourself and your company, either.


However, failure to spark interest in your project brings with it more than a sense of crushing disappointment. You could wind up losing a good amount of time and money pursuing the patronage of the Internet at large.

Plus, you may have just poisoned the market against your own innovation by publicizing your project to shady parties that have no qualms about copying your ideas.

Crowdfunding can be an exciting and rewarding way to quickly raise funds. Here are some pointers to keep in mind before going that route.

Crowdfunding 101

In June, Andrew Lock shared some insights on Kickstarter for Small Business Computing. If you want the lay of the land, it's a great start.

While Kickstarter places a premium on creative projects, its formula has been adopted by other crowdfunding sites regardless of specialization. The process is fairly straightforward, explains Lock. Fund seekers prepare their pitches -- including an online video -- set a monetary goal and register their project with Kickstarter.

Sounds easy, but it's not a decision to make lightly. Like starting a new business, launching a crowdfunded project takes dedication and the discipline to follow through.

That means generating spiffy video and polished promotional copy that entice and delight. Depending on your level of online marketing expertise, you may have to invest some money to produce these promotional assets.

Once that's done, it's not a set-it-and-forget-it process. Prepare yourself for regular status updates to keep the buzz going. Social media factors heavily in the proceedings, so expect to spend time engaging with potential funders on Facebook, Twitter, Pinterest and Google+.

Funding periods typically fall into the 30-day range. If the goal isn't met, no harm no foul. Folks that pledge their money aren't charged a dime on their credit cards, and project owners are back to where they started, perhaps a little wiser for the experience.

If the funding goal is met, entrepreneurs get their windfall -- minus the crowdfunding site's cut. It's cause to celebrate, but those funds usually come with strings attached.

On the Hook

Another aspect of crowdfunding sites is rewards. In much the same way that pledging a certain dollar amount to your local PBS station earns you a Blu-ray of a compelling documentary, some crowdfunding sites encourage project owners to offer rewards.

Popular rewards include stickers, T-shirts, first dibs on a product or service; the options are nearly limitless. It's a tried and true way of driving up the pledge count. It also means that in some respects, your small business has just landed its first customers.

The trick is to balance compelling rewards with the ability to deliver them. And to attract big donations, it may mean you have to sweeten the pot.

For instance, if your finances allow, consider giving big-dollar donors first crack at the initial run of your product at a deeply discounted price. It's a way to build both anticipation for your product and goodwill.

Don't go overboard, however. Make sure that any perks that you offer have a negligible impact on the bottom line. All the fundraising in the world won't help if there isn't money left over to pay the bills.

Protect Your IP

Finally, let's tackle the thorny topic of intellectual property (IP). As the recent Apple vs. Samsung case showed us, intellectual property -- patents in this case -- can set off huge legal fireworks.

When two big corporations go to war in the courts, they generally have the resources to see it through to the end. Small businesses rarely have the resources to fight a protracted court case.

When you're seeking capital for a new idea on a crowdfunding site, you're putting your innovation out there for all to see. Look deep into a crowdfunding site's terms of service, and you're guaranteed to find a clause that exempts the site from any legal responsibility should some unscrupulous party copy your idea.

So it's up to you to file the necessary patents, copyrights and trademarks. Small business owners have free and cheap legal services at their disposal, so it's worth the effort to protect the IP that could wind up becoming the foundation of a thriving new business.

And despite the "share everything," social media-enabled nature of crowdfunding platforms, don't feel compelled to overshare.

Be selective in your disclosures. This includes keeping trade secrets under wraps and showing restraint in publishing specifications, artwork, diagrams, product shots and videos. The goal is to offer consumers a good sense of what a product or service is all about while denying experts the crucial technical aspects that they can use to replicate your idea.

Pedro Hernandez is a contributing editor at InternetNews.com, the news service of the IT Business Edge Network, the network for technology professionals. Follow him on Twitter @ecoINSITE.

Do you have a comment or question about this article or other small business topics in general? Speak out in the SmallBusinessComputing.com Forums. Join the discussion today!

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