Business

So You Want To Crowdfund Your Startup App?

If you’re a developer, you know how hard funding and traction are to come by. Most softwarestartups try crowdfunding and fail — they’re doing it wrong! To crowdfund your app, and supercharge your business, let’s look at what works, what doesn’t, and get started right!

It’s no secret that the crowdfunding industry is booming. It seems like every day you hear about an exciting new startup crushing their campaign goals and launching their company via Kickstarter or Indiegogo.

Despite the rapid growth of crowdfunding platforms and campaign successes, crowdfunding is still a foreign concept to most. As such, let’s briefly explain themechanics and guidelines for a more solid foundation before exploring launching a software startup with crowdfunding.

What Is Crowdfunding?

In its simplest form, crowdfunding is getting others to finance the creation of a product, project, business or work of art. It’s extremely advantageous for entrepreneurs and eliminates the overbearing upfront costs that stop most startups before they begin.

Today Kickstarter and Indiegogo are the unquestionable champs of rewards-based product crowdfunding (though many other donation, charity and investment platforms also exist). It feels like a good number (stats unfortunately unavailable) of startup successes and cool crowdfunded products you hear about began here. But if it sounds too good to be true, there’s often more to the story.

BACKGROUND AND CONTEXT

Crowdfunding did not begin as a prelaunch product platform. Indiegogo, the first major crowdfunding site was set up to promote arts and creative endeavors. Launched in 2008, Indiegogo (or IGG) led the way in empowering independent film projects.Kickstarter followed suit the following year.

What began primarily as platforms for “starving artists” to finance creative pursuits, quickly grew and evolved as entrepreneurs and product creators started to take note. And the success has been impressive. Today Kickstarter startups have raised over$1,756,706,971; though much less transparent and recent, as of October 2013, Indiegogo creators had funded over $99,000,000. Based on the growth of its site and numerous campaign successes, one can only assume Indiegogo has grown to a comparable size with Kickstarter.

WHY HAS CROWDFUNDING BEEN SO SUCCESSFUL?

With the advance and expansion of e-commerce, which now accounts for 7% of all consumer retail according to US census data, individuals are shopping locally less, now being able to buy anything with the click of a button. This has democratized the consumer–business relationship because customers have a far greater choice.

With the power to choose, consumers are opting more for small startups and more personal connections. Hence the explosion of crowdfunding. Furthermore, backers prefer to be early adopters, people who get the product first and are actively part of the startup’s success. In addition, entrepreneurs who were once unable or unwilling to pursue financing can now cut the risk and crowdfund instead.

Why Do Apps And Software Struggle

As a crowdfunding consultant and host of Art of the Kickstart, a podcast and blog on all things crowdfunding, one thing I get asked about incessantly are crowdfunded apps. Many of social startups and mobile apps companies raise massive outside investment looking to change the world and result in stock market launches (initial public offerings or IPOs) or acquisitions down the road.

Despite these successes, most people would be hard pressed to name a single crowdfunded app. Personally, I’d never heard of a successful crowdfunded app before performing in-depth market research for my first app client. Such apps are rare. But why?

Crowdfunding seems the perfect platform to launch an app or software product. Unfortunately, non-tangible products are poorly received. This stems from the origins of crowdfunding, because crowdfunding was originally conceived as helping creative people create that which could never exist without funding. For example, films have inescapable budgets, and physical products need molds, manufacturing and expensive minimums. Neither is possible without significant startup funds. However, apps and software are the exact opposite. Time and expertise are all that is necessary, inventory costs are zero and there is funding aplenty for those willing to part with equity.

Crowdfunding For App Entrepreneurs

Assuming you’ve already decided to crowdfund your app, it only makes sense to maximize your chances. Part of that is understanding and choosing the proper platform. To do that, it helps to know the crowdfunding eco-system. And there are three very different approaches here: donations, equity, and rewards-based crowdfunding — each obviously with pros and cons.

Several of the many crowdfunding platforms available to creators
Several of the many crowdfunding platforms available to creators.

CHARITABLE CAMPAIGNS

First let’s cover charitable campaigns; the ones that fight to make a difference. For apps and ideas along these lines, sites like GoFundMe, Razoo and CrowdRise are powerful donor platforms without investor or backer obligation that allow individuals to raise funds to pursue a passion or change the world. Understand, however, that their less stringent, open-to-anyone nature presents charitable sites as a less reputable and professional funding route (typically much less successful as well) and as such have not yielded any successfully funded app startups to my knowledge.

EQUITY CROWDFUNDING

Equity crowdfunding is an inevitable source of funding growth in the coming years (see the Jumpstart Our Business Startups (JOBS) Act). In equity crowdfunding the backers get a bit of the business. Equity platforms like AngelList, CircleUp and Crowdfunder are global networks connecting investors with entrepreneurs who need cash (imagine a small scale IPO). Unlike traditional venture capital however, smaller stakes are offered and founders often retain control of the business direction unimpeded.

Unfortunately, lack of significant investor commitment leads to less attention and help, and fewer connections common with traditional venture capital. And most equity crowdfunding efforts require more traction and a stronger track record to receive legitimate interest and funding opportunities. For larger, more established software startups like Dash, however, which recently raised $1.5 million on AngelList, equity crowdfunding can present a powerful tool to quickly expand.

REWARDS-BASED CROWDFUNDING

Finally the rewards-based crowdfunding, the picture most of us paint when thinking of crowdfunding. These operate as businesses have for centuries, but with a preorder twist. In a nutshell, startups “presell” products to fund product production. Though many rewards-based crowdfunding sites exist like Quirky, RocketHub, AppBackr and Tiltexist, we’ll focus on Kickstarter and Indiegogo, as these are the largest and most successful when it comes to products and business. Although both serve similar functions and have a great deal in common, there are several key differences worth noting.

Types Of Campaigns

One of the biggest differences between Kickstarter and Indiegogo are the types of campaigns. Kickstarter projects have set goals and falling short means a no-go on funding. Indiegogo offers both this and flexible funding, a campaign setup where founders receive funds either way and have the ability to extend projects beyond original deadlines.

There are pros and cons to each. While flexibility is always nice and continued campaigns increase funding and exposure, the urgency of do-or-die deadlines usually leads to bigger successes.

Success Rates

Kickstarter is pretty open with its stats while Indiegogo unfortunately is not. To date, 37.8% of all Kickstarter campaigns succeed. It’s worth noting that only 21.26% of tech projects get funded. While lack of data makes it challenging to analyze, experience andscraped stats from late 2013 suggest a lower success rate and smaller average funding for IGG creators.

Gender

Indiegogo is more diverse than Kickstarter. For projects and apps targeting female users, this is important to note. Research indicates only about 22–30% of Kickstarter users are female as opposed to 42–50% for IGG. Apps or products focused on female audiences should keep this in mind.

Expectations And End Products

Indiegogo is less restrictive than Kickstarter. For creators this means fewer rules and regulations to slow you down. For instance, Kickstarter requires creators to showcase product prototypes where applicable while IGG does not. With this, campaigns on Kickstarter are typically more polished and the products more finalized, making Indiegogo more favorable for some earlier stage startups.