How to Start Your Business with Crowdfunding

Use sites such as Kickstarter, Indiegogo and Peerbackers to make your big idea a reality.

Do you have a great idea for a product or business, but lack the funds to bring it to life? Especially for you less-seasoned entrepreneurs who may not qualify for traditional loans or have a flush network of investors to tap, crowdfunding may be the perfect way to get your project off the ground. It certainly worked for Pebble, a watch that connects wirelessly to an Android phone or iPhone and lets its wearer run apps and see who's calling from her wrist. Last year, the entrepreneurs who created it aimed to raise $100,000 through crowdfunding site Kickstarter. They managed to wrangle almost $10.3 million. Not bad.

A bonus of submitting ideas to the public online is that innovators can get a feel for how popular their concepts might be with consumers. Gauging market interest is one of the primary reasons that Phu Nguyen, 26, and Peter Seid, 23, proposed their idea to the masses using Kickstarter in late 2011. The masses responded with gusto: The pair raised nearly $115,000 — well over their $32,000 target — to develop Romo, a robot that's controlled by a smart phone. A year later, they raised about $170,000 in a second Kickstarter campaign to develop advanced software for Romo. Today, their business, Romotive, has grown to 19 full-time employees, and the company has plans to expand sales of the robots from its Web site to retail locations.

You don't have to invent slick smart phone technology to get in on the game — crowdfunding sites are sprinkled with proposals for everything from a bike-in movie theater to a line of flavored coconut butters. But you do need passion and a plan. "You have to believe in your heart of hearts that you can create a certain amount of interest to get a certain amount of money," says Scott Gerber, founder of the Young Entrepreneur Council. If you think you have a winning idea, use these tips to boost your chances of raising big bucks. Or small bucks, if that's all you need.

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Pick the Right Platform

With sites such as Kickstarter, Indiegogo and Peerbackers, entrepreneurs can solicit donations for a project — as opposed to gathering investors who share in a piece of the business — to participate in crowdfunding legally. In return for contributions, funders may receive perks, such as a T-shirt or a shipment of the product once it's ready for prime time.

These sites charge nothing for you to post your project, but they collect a portion of the funds you raise. Some sites require participants to fully meet their funding goals; otherwise, the money is returned to the donors. Other platforms allow you to keep any funds you gather, but they may take a larger cut of the proceeds if you don't meet your goal. Indiegogo, for example, charges a 4% service fee to those who fulfill their goals but 9% to those on a Flexible Funding plan who don't meet their targets.

Set Clear and Realistic Goals

Don't pull a number out of thin air for your funding target. Potential backers may expect you to defend the amount you request. Do the math to figure out how much money you need for your project, and be able to account for every dollar.

You should start the process with an end goal in mind. But you don't have to fund the entire vision in your first round of solicitation, says Sherwood Neiss, principal at Crowdfund Capital Advisors. It's better to exceed a target for a feasible goal than to fall short of one for which you overestimated interest. Break the process down into smaller milestones if necessary. "The crowd will appreciate the fact that you're not biting off more than you can chew, and you'll build trust," Neiss says.

Be Engaging

Crowdfunding sites make it easy for potential donors to find you — they sort projects into categories such as technology, food and film, and call out the most popular, newest and soon-to-end campaigns. Kickstarter also features staff favorites. And the sites are equipped with buttons through which fans can "like" your project on Facebook and send posts about it to Twitter to help you and your backers spread the word about your idea.

But you'll need to do the heavy pushing yourself. Promote your work through such media as Facebook, Twitter, YouTube and blogs. Update your project's page with content such as videos and blog posts. Even after your campaign ends, keep the information on your page fresh, and send messages to backers to keep them posted on your progress. And don't forget good old-fashioned word of mouth — talk to your family, friends, members of the press and anyone who will listen about your big dreams and how they can help you make them come true.

Check Your Time and Energy

Account for the hours and manpower necessary to keep up with the work. Nguyen says that he and Seid spent an hour or two per day just responding to e-mails and updating backers on Romo's progress during their first Kickstarter campaign. Gerber used Indiegogo to crowdfund support for a Young Entrepreneur Council book, Fix Young America: How to Rebuild Our Economy and Put Young Americans Back to Work, which offers ideas and solutions to help Millennials get ahead. He says he had a team of three people on the case, assigned to handle such aspects as promotions and social media outreach.

Once your idea's a hit (high five!), be prepared to spend more time and energy on your project. You might even need to hire more help to increase production and ship the goodies you've promised to backers.

Learn from the Crowd

Nguyen advises using feedback from supporters to shape your idea into the best possible product. "Your intuition is never as good as what your customers tell you they want," he says.

And you may find future employees, too. Part of Nguyen and Seid's motivation to put their project on Kickstarter was to seek likeminded folks who could build phone applications compatible with Romo. They found developers and even ended up hiring a Kickstarter connection as an engineer.

Lisa Gerstner
Editor, Kiplinger Personal Finance magazine

Lisa has been the editor of Kiplinger Personal Finance since June 2023. Previously, she spent more than a decade reporting and writing for the magazine on a variety of topics, including credit, banking and retirement. She has shared her expertise as a guest on the Today Show, CNN, Fox, NPR, Cheddar and many other media outlets around the nation. Lisa graduated from Ball State University and received the school’s “Graduate of the Last Decade” award in 2014. A military spouse, she has moved around the U.S. and currently lives in the Philadelphia area with her husband and two sons.