Putting money into piggy bank

Finding the capital to launch your business or develop that first product is no easy task, particularly if you’re targeting a niche market or investors deem your innovation too outlandish to be successful. Fortunately, there’s an alternative to conventional funding structures that harnesses the very people you’re aiming to sell to: crowdfunding.

But crowdfunding is no longer an anomaly in the list of startup-funding mechanisms. “When you’re thinking of ways to fund your company, it’s no longer this outlier and this weird option that people go to when they have no other choice,” says Erin Bury, managing director of Toronto-based digital marketing agency 88 Creative. “It’s become one of the core ways for companies to get their first wave of financing.”

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Bury spoke to Peter Nowak at the Canadian Crowdfunding Summit about how crowdfunding has changed since it’s earliest days, and what businesses need to do to make the most of the opportunities it affords. Here are four key takeaways from their conversation:

Pick the right product

Crowdfunding has enabled everything from Hollywood movies to virtual reality tools to one person’s potato salad. Which campaigns succeed and which fail has a lot to do with what backers get in return for their money. “One of the most compelling reasons that a campaign will succeed is the quality of the rewards,” Bury explains.

Campaigners must balance the need to mollify backers with the imperative to use as much of the cash raised as possible to develop their startup. That’s why products tend to do better than services on crowdfunding platforms. “If you look at something like a product-based company like Pebble, you’re backing it and in exchange you’re getting a physical product,” observes Bury. “You’re not getting a T-shirt and a sticker, you’re getting the actual product you want.”

MORE CAPITAL MAXIMIZATION: How to Get the Most from a Crowdfunding Campaign »

Do your research

If you build it, will they come? It’s a perennial worry for entrepreneurs, who don’t always have a sense of the market for their product before launch. Market research is a time-consuming and often costly way to find out if your innovation will sell, and your own intuition about your million-dollar idea isn’t the most reliable yardstick.

Bury says startups are beginning to realize that they can use crowdfunding platforms as a market research tools. “People are turning to it to measure demand,” she says. “I saw an interesting article today that said crowdfunding is allowing pull manufacturing, which is where if you’re, say, Pebble and you have a smartwatch, instead of estimating how many you should manufacture in the first run, you’ll use Kickstarter to sell pre-orders and then know exactly what the demand is.”

MORE RESEARCH: A New Flavour of Market Intel »

Have a plan

Building up an expectant customer base before you’ve produced your first sale-ready piece has its drawbacks—too many crowdfunding campaigns end in broken dreams and unfulfilled promises. Once they’ve handed over their money, backers have a reasonable expectation that they’ll receive the reward or product that they were promised. Failing to deliver is a good way to generate a lot of bad publicity for your company.

“People are also wary of investing and not getting their product, so companies have to lay out clearly how they’re going to produce the product and do their research,” says Bury.

MORE CAUTION: 3 Hidden Dangers of Crowdfunding »

Offer a stake

Proposed new regulations will allow companies to offer equity in exchange for crowdfunding backing. Although the legal requirements mean this option isn’t right for every startup or growing concern, it does offer a more attractive alternative for backers than receiving physical rewards in the mail. “As a consumer that’s really exciting because I now have a chance to get in on the ground floor with a Canadian entrepreneur,” says Bury.

MORE REGULATIONS: What Proposed Crowdfunding Laws Mean for You »

Have you used a crowdfunding platform to raise capital for your business? Share your experiences using the comments section below.

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