Home JOBS Act Fallout: Making Crowdfunding Work Without Selling Stock

JOBS Act Fallout: Making Crowdfunding Work Without Selling Stock

On April 5, President Obama will sign the Jumpstart Our Business Startups (JOBS) Act. Among other things, the new law will allow privately held startups with a fundraising goal of $1 million or less to sell unregistered stock to the public through approved crowdfunding sites. And that means startups seeking money from the public will now be able to offer investors a cash return, not just a promotional gimme, a token service or a hearty “Thanks a lot!” in exchange for their largesse.

How can companies giving away T-shirts compete with that? With a perfect pitch and cool perks. Like a phone call from a celebrity – it worked for George “Dr. Funkenstein” Clinton!

The JOBS Act makes selling stock easier, but that certainly doesn’t mean it’s a smart move for every startup. Fortunately, selling stock still isn’t necessarily required to land large sums of cash. Double Fine Productions, a San Francisco gamemaker, raised a record $3.3 million for a new game and documentary through crowdfunding site Kickstarter. Contributors were given a copy of the game, the film and other gifts. People who gave over $10,000 got to have lunch with the game’s designer.

Double Fine founder Tim Schafer told the San Francisco Chronicle that he’d think about selling shares down the road but notes that giving up equity in return for just $1 million doesn’t make sense for Double Fine. “We raised three times that giving away lunches and T-shirts.”

But the law will doubtless bring an increase in the number of businesses looking to sell stock online. And that means stiffer competition for any company hoping to raise money online the old-fashioned way, by offering contributors cool perks. So how can your startup stand out at a crowded crowdfunding site?

We asked Slava Rubin, CEO and cofounder of four-year-old IndieGoGo, the largest crowdfunding site by number of campaigns:

Perfect your pitch. Your pitch should be engaging – and nothing engages like video. Rubin says it’s essential to any funding campaign. Companies with a video pitch raise 114% more money than those without. “It can be video of anything but you want it to be personal and engaging. Not just you selling aggressively or begging for money. That absolutely does not work.”

Set a hard deadline. Short campaigns work better than long ones. Rubin says successful campaigns typically reach their funding target around day 36 of a 47-day campaign. “Be aggressive with your deadline and keep the ball rolling. If a deadline is too long there’s a lull that’s detrimental to your campaign.”

Start fast. Nobody funds a company if nobody else is funding it, which means your campaign will stand a better chance if you get early contributions from friends and family. “We know you need to get 30 to 40 percent of your funding from your inner circle,” Rubin says. “That includes friends, family and all your social network connections.” Once you get that, strangers are more willing to jump on board. “Also, it helps you get on our homepage and in our blog or newsletter, which raises your exposure even more.” Rubin says campaigns get, on average, 20% of funding from complete strangers, 30 percent from friends and family and 40 to 50% from their first-degree network.

Stay busy. You can’t simply post your fundraising campaign and walk away. You must update regularly to keep the narrative fresh. Rubin says fundraisers who update every five days or less raise four times more money than those who update every 20 days or more. “And ‘update’ means saying something like, ‘We have a new perk today. Or, ‘Thank you John, Jan and Billy for contributing.’ Or, ‘Hey, we just found a new designer for our new product.’ You also really have to leverage you social media networks on email, Facebook, Twitter, YouTube, etc.”

Offer cool perks. Rubin says 90% of the IndieGoGo campaigns that hit their target offer gifts and perks – and the more creative they are, the better. “We’ve seen everything from a personal phone call from funk legend George Clinton, who was raising money on the site to refurbish his recording studio, to a personal thank you etched on an antique Seltzer bottle, from a Seattle-based startup that delivers seltzer water in antique bottles.”

Better perks for bigger donors. Rubin recommends offering different perks for different levels of contribution. Say, one for donations of $25 or less, one for donations up to $100 and one for donations over $100 “You also want an aspirational perk for really high contributions of like $5,000 or $15,000. We actually see these four-digit contributions a number of times a day and for aspirational perks we’ve seen like a private show of a band at your house or a private dinner catered for you.”

Find strength in numbers. Rubin says startups with four or more people on the team raise 70% more money than those with just one person.

Set a realistic goal. Not realistic as in low. Realistic as in reasonable. Rubin says funders viewing your pitch must see that it’s doable. “It means people can feel they can trust what you’re setting out to do can be accomplished. So don’t raise $3 million for a short film and don’t raise $20 to build a new mall.”

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