On April 11, 2012, a young engineer named Eric Migicovsky posted a project request for $100,000 development funds from “the crowd” for his Pebble prototype, a Bluetooth smartwatch that wirelessly connects with Android and iPhone smartphones to display email, calendar alerts, social media updates and caller ID. It also plays music, runs apps like GPS, and of course, tells time.
By May 18, Migicovsky had reeled in an astonishing $10.2 million from nearly 70,000 backers. The first $1 million was amassed in only 28 hours! The donation model, exchange perks and product rewards – not company equity – for contributions to the project were simple. In this case, depending on the amount donated by any member of the “crowd”, backers would receive one or more Pebble watches before market release, adding up to thousands of presold products.
“We stayed in touch with our backers as much as we possibly could,” Migicovsky said in a video at the 2012 LeWeb, Europe’s largest technology conference. “We’ve posted 11 or 12 updates about each new product feature, responded to enquries almost immediately and we asked backers to vote on a fourth color for the Pebble, after white, red and black, on Twitter and Instagram; that way carrying them along through every step of the prefunding process.”
Overnight Sensations actually Take Years
Of course, the Pebble quickly became legendary, proving that not only does crowdfunding work but it can generate some serious money, if you understand what you are doing.
Nonetheless, Migicovsky’s success was years in the making. As far back as 2008 in college, he developed a smartwatch called InPulse, which synced with BlackBerry devices. In 2011, while working at a prestigious startup incubator, he burned through about $375,000 of angel investors’ money by developing cooler features and manufacturing a lot of InPulse devices which failed to sell. At the time people were already moving on from BlackBerry devices and required smartwatches that paired with Android and iPhone handsets.
With lessons learned from his previous startup, he developed the Pebble. But, the Silicon Valley Venture Capitalists who had been keeping tabs on the Pebble’s progress walked away, leaving him without access to capital. They didn’t see enough consumer demand (note how wrong VCs can be).
Crowdfunding was Migicovsky’s last resort, and this was after he had already marketed a working product that generated buzz (InPulse). Even with the $10 million crowdsourced funds, the release of his invention was fraught with iOS glitches and manufacturing delays, serving as a lesson to anyone who assumes that crowdfunding automatically smoothens all rough patches.
Working the Options
The worst mistake you can make is thinking that it would be easy. You have to create a campaign. Anytime you raise money, it is real hard work and requires the development of channels for engaging with your target customer community, because crowdfunded investments cannot go forward unless projects are fully funded at whatever financial target the entrepreneur sets. So set realistic goals and stick to them.
The prefunding part is the opportune time to explore what works as you:
- formulate your plan (need one? talk to us at [email protected])
- identify funding communities that are empathic with your idea
- develop a narrative and video, and
- perhaps fund a project yourself to experience the process.
Shaping the Pitch
Crowdfunding reverses the usual entrepreneurial process by designing and building a product before seeking investment. It provides market validation and identifies people who actually want to buy your product.
You still need a convincing business plan. But with a funding pitch, you should not so much seek to impress spreadsheet types as to seek to truly engage potential investors.
Here are more tried-and-true tips from crowdfunding projects that worked:
- Figure out exactly how much funding you really need to raise then ask for a little more.
- Settle down and create your social networking platform, along with a business plan, long before you post your request (most crowdfunding will come from fans and followers on social media, as well as from friends and family).
- Develop an engaging story ([email protected] can help you with this). Personality, voice and storyline count; humor is optional, but it better be very good! Tell your story directly and share your personal passion for the business, its vision, mission and values.
- Choose your reward(s) carefully. Until the SEC releases any proper investor regulation(s), your only crowdfunding choice is donation-based, so spell out exactly what perk(s) contributors will receive. Be specific about timing, as well as delivery options and delivery. Offer rewards in different investment categories, as it is likely that most of your funding will come from there.
- Keep your pitch as concise as possible. Make your video short, clear, and authentic, with a call to action. The optimal length for pitch videos is three minutes.
- Keep in touch with all, and we mean ALL your backers, and consistently expand your social network. It is hard but critical work.
- Spell precise investor ‘exit’ terms clearly and be unequivocal about it. (If all goes south; do they get their investment monies back? How, when and where? If all goes well and their investment value appreciates, how can they liquidate or cash in, etc).
- And finally, be prepared for a very critical financial review or audit. Do not shy away from it, but rather welcome it and keep your opinions to yourself. Listen, learn and grow.
Crowdfunding is built around strong personal relationships. It is an extremely difficult but very possible phenomenon…you just need to think through it, or simply ask us at [email protected] to help you set one up.
About the Author
Whenever he is up nights, Brain Essien faffs around the internet gathering material for detective novels he is not sure he’ll ever publish. He likes to play investment and brand strategist in the mornings and website architect/builder in the afternoons. On weekends he likes to throw on a few apparels and gadgets and go bounce people out of their own parties if they become a handful. Besides that, he loves reading detective novels, building muscle, daredevil racing, video games, shadow chess and cooking.