Introduction
This assignment presents reasons for why it is preferable to use crowdfunding. Furthermore, there are listed three real-world examples of US based companies who have had success by the use of crowdfunding. The assignment ends with a conclusion, where the most important parts are summed up.
Why crowdfunding?
Crowdfunding is a great method to fund a business, primarily used in the early phase of the development. Typically, crowdfunding is useful when you have an idea about a product and want to make it real, but need money before it can be realized. In cases like this, crowdfunding provides the opportunity for present the idea and show a prototype to a very big group of people. If they like the idea, they will probably invest in the company.
There are a lot of reasons why crowdfunding is a preferred way to fund a business, but due to limitations of this assignment, only selected main reasons will be presented below.
First of all, crowdfunding provides the opportunity to receive a large amount of money without giving away part of the company. When talking about funding, the traditional perception is that you have to give away ownership of the company, but that is often not the case for crowdfunding. Typically, the communities who reach the money are satisfied, if they after a product launch can get the product for free or with a discount. The Guardian has an explanation for why people are willing to donate money[1]:
“When people fund anything anywhere in the world, they do so for one of four reasons: passion, participation, perks and profit. Funders are either passionate about the idea, team or project. They want to participate in its success; or they want to get something in return, such as a perk or even a profit.“
Secondly, by making use of crowdfunding you prevent risk. The reason for this is that you are raising money that you don’t have to pay back if the project is going to fail. This is a very big difference compared to, for example, a loan from the bank, where you have to pay the money back even if the project is going to behave well or not.
Thirdly, this way of raising money is also a way to show proof of concept. The upcoming product is going to be validated in the early stage and you are therefore sure that there are big interests for the product. This is a big advantage, as you then probably know that a lot of people will like the product after the producing or development of the final version. If a lot of people are interested in donating money, you then have a confirmation of a potential customer group. That said, it makes it probably also more challenging to raise money as you then have to convince maybe a lot of million people instead of just a group of investors. On the other side, if many people are not showing interest in the product, there is then probably not a market for the product. Therefore, by making use of crowdfunding, you in an early phase have the opportunity for establish a relationship with customers for the future.
Lastly, the engagements from the users are a great opportunity to establish a dialog with them. In this way, you can get a lot of feedback to your ideas about the product and the potential customers can be a part of the development process by offering new ideas. Thereby, it is a way to innovate the product by the involvement of users and this can in the end be very valuable.
Real-world examples
Pebble
Pebble is a product smartwatch and was funded by crowdfunding[2]. It was funded through Kickstarter in 2012 and the campaign raised $10,266,845 by funding from 68,929 people[3]. At that time, it was the most funded product ever. The product was released to the market in 2013 and provides a lot of different features and design opportunities for the user. Best Buy begun sells the product in July 2013 and the product was sold out five days later.
The product has been a great success until now, but now it is interesting to see whether they can continue the successful story, as “the big players” as Apple now are producing smart watches as well.
Oculus Rift
Oculus Rift is another successful product, which as well was funded in 2012 by Kickstarter[4][5]. 9522 people donated money and they rose in total $2,437,429. The produces a virtual reality head-mounted display and it can be used to increase the pleasure of playing video games as it makes the experience more real.
The really reason why it has been a success story, is that Facebook acquired the company in July 2014 for $2,001,985,000.[6]
Jibo
The last product presented in this assignment, is going to be a personal robot called Jibo[7]. The product raised $2,287,609 on IndiGoGo and the amounts were donated by 5550 people[8]. It is the most funded technology product ever on IndiGoGo and almost 5000 products are already pre-ordered.
It is still yet too early to call the product for a real success, but it seems that it will go on to be a big success. The campaign was launched in July 2014 and the product is expected to be available for the public in the summer 2016.
Conclusion
In a short overall conclusion, it can be stated that crowdfunding can be a great way to fund a startup company. In relation to an action plan, there are a lot of guides to how to get success with your next startup and it will be too much to list all the guidelines in this conclusion. However, The Entrepreneur and Forbes provide some good advice and these can be read by following the reference notes[9][10].
Another evidence for why crowdfunding is worth considering for your next startup is that Berkeley University has made an executive program about crowdfunding[11].
It can therefore be concluded that crowdfunding can be a useful way to fund a startup, but whether it is the best funding method is a big discussion as every method have the pro and cons and it depends on the situation of the particular startup.
[3] https://www.kickstarter.com/projects/597507018/pebble-e-paper-watch-for-iphone-and-android
[5] https://www.kickstarter.com/projects/1523379957/oculus-rift-step-into-the-game
[6] http://techcrunch.com/2014/07/21/facebooks-acquisition-of-oculus-closes-now-official/
[8] https://www.indiegogo.com/projects/jibo-world-s-first-family-robot-4-800-pre-sold
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