Invent It, Sell It, Bank It!: Make Your Million-Dollar Idea Into a Reality (18 page)

GOFUNDME
A crowdfunding site for just about everything, GoFundMe is for just about anyone, so long as he or she has a Facebook page. GoFundMe taps your social networks for money.
People have raised money to pay for surprise birthday parties, medical bills, and surgery to heal an abused puppy’s broken hips. GoFundMe receives a 5 percent fee per donation, and the donations are paid out as they come in. Recently the site launched an all-or-nothing reward-based campaign option, like those on Kickstarter, which is specifically targeted to help fund the individual projects of artists, inventors, and entrepreneurs.

In sum, there are a number of pros and cons to crowdfunding:

PROS

• You can test the market and gauge demand for your product.

• It allows you to raise capital without giving away equity.

• You can mobilize an audience that will become loyal fans, eager to see you succeed. (Kickstarter donors became Coughlan and Deese’s biggest supporters and actively promoted their product on social media platforms.)

CONS

• If your product appeals to a different target demographic than that of the crowdfunding
platform, your market testing will be flawed and getting backers will become much more difficult.

• The amount of time you put into your campaign directly correlates with how much money you raise; attracting backers is basically a full-time job.

• On Kickstarter, if you don’t raise the full amount you ask for, you don’t get any money at all.

• If you haven’t taken the correct steps to protect your idea through a patent or trademark before running your campaign, you’re at high risk for idea theft. Factories looking for ideas and new products regularly trawl crowdfunding sites for ideas they can steal and quickly knock off.

• Crowdfunding campaigns run online forever; failure to complete a campaign will always be “Googleable” and may damage your reputation.

• The crowdfunding market has become saturated, especially on Kickstarter, and so it has grown more difficult to break through the clutter; some donors may be experiencing burnout.

EQUITY-BASED AND HYBRID CROWDFUNDING

A relatively new form of crowdfunding, equity-based models started gaining momentum following the passing of the Jumpstart Our Business Startups (JOBS) Act of 2012, which was a bipartisan law aimed at reducing the extent of securities regulations so that private companies could solicit investments from the public. Crowdfunding sites that offer equity, like CircleUp and AngelList, give investors a stake in the outcome of the project or company they decide to finance.
Whereas the donations
on sites like Kickstarter come in small but steady streams, the money exchanged on equity sites can range from the thousands of dollars to the tens of thousands of dollars.

Have a backup plan. Not all crowdfunding projects meet the required goal.

In addition to strictly equity-type crowdfunding sites, there are hybrids like the popular Crowdfunder, which offers a blend of donation-based and investment crowdfunding. Similarly, Fundable is like Kickstarter in that inventors and entrepreneurs can solicit reward-based donations to fund their business, but it also offers new start-ups the option of choosing to raise their capital through several crowdfunding strategies, including equity- and debt-based donations.
In addition, Fundable brings together distribution companies, retailers, and other brands looking for the next new thing. As of this writing, it charges $99.00 per month to fund-raise. As in all crowdfunding, inventors should proceed with caution.

The range of crowdfunding options can be a bit mind-boggling, especially when each site caters to various small-business needs. Plus, crowdfunding sites constantly make changes to how they do business, and they rise and fall in popularity, so always do your research and make sure to stay abreast of whatever new options become available. Magazines like
Entrepreneur
or Inc. often write articles or publish lists related to crowdfunding sites that can help you determine which one is right for you.

Creative Funding Sources

If you’ve exhausted all traditional fund-raising channels, or you want to make sure you’ve left no stone unturned in the hunt for capital, get creative. It’s like what you do when you’re hunting for your misplaced car keys—when you’ve looked in all the usual places, start looking in the unusual ones.

GOVERNMENT GRANTS

The advantage of grants is that they do not need to be repaid. However, they are not free, in that getting them takes a heck of a lot of work. Competition for grants is high, the grant-writing process can be extremely complicated, the various grant sources often have stringent reporting standards, and there are usually strict limits on how you are allowed to use the funds. Grants aren’t appropriate for every business, either. For example, federal grant money cannot be used to launch new businesses, and most small businesses do not qualify for federal grants. For that, you generally need to turn to state or local entities.

If you accept a grant, be sure you understand what percentage of your business, or portion of your product revenue, you will owe the government.

Grants are useful, however, if you have already launched your business and want to use them to fund additional research and product development, especially in science, agriculture, or technology. Grants are usually awarded with the understanding that they will be used in conjunction with matching funds or a loan.

DRTV COMPANIES

Direct response television (DRTV) companies are different from television shopping channels like HSN or QVC. The DRTV companies sell products on television through short-form spots—one or two minutes—or long-form infomercials, which last thirty minutes (we’ll call them both infomercials here). QVC’s programming is a form of direct response television, but QVC is a home shopping channel, not a DRTV company. One of the differences is that on a home shopping channel, a presenter may offer any number of products for sale in a segment, whereas an infomercial is typically dedicated to a single product. A home shopping channel also works hard to build a long-term relationship with its viewers.

While some DRTV companies promote their own products, like Ronco, others typically promote products licensed from others. In fact, they will even fund new products. There is often a catch, though. While DRTV companies may seem like attractive partners, some can also be a little like the Sirens of Greek mythology, luring you closer with beautiful songs until you dash yourself on the rocks. If a legitimate DRTV company truly wants to support your business idea, it should also be willing to put up the money to produce and test-market the infomercial.

Also, negotiate a quick exit in your contract. Give the company a short bracket of time in which to decide whether or not to move forward with your product, and if the infomercial doesn’t work, make sure you get 100 percent of your product rights back in no longer than 60 days after the test.

Many companies will tell you that they love, love, love your idea, but
beware if they want you to put up the money to film the infomercial and pay for the media time (the air time for running it on TV). It is expensive, and paying for it yourself is extremely risky because the infomercial success rate is exceedingly low. I generally wouldn’t recommend that you fund the production and media testing of your own infomercial. If a DRTV company is interested in making an infomercial for your product, they should be willing to pay for the production, make molds if needed, source and finance your inventory, and pay for the media time.

Typical royalty rates in deals in which the DRTV company assumes all responsibilities and risks range between 1 and 3 percent of gross revenues. If you have a patent, you may be able to get a slightly higher rate. One additional note of caution: some contracts give the DRTV company exclusive rights to your product for years, making it impossible for you to take it anywhere else. Be extremely careful what you sign, and if at all possible have an attorney review the contract to be sure you are not being asked to give up too much. Try to insist on some form of performance benchmark (like a minimum annual royalty) in order for the DRTV company to retain its rights to your product. Your attorney may have other suggestions to protect your interests, and it is usually worth spending the money to get advice on how to ask for what you want in language that is most likely to elicit a favorable response. At the very least, make sure that before signing any agreement you understand
exactly what rights you are granting, what rights you retain, and for how long the contract will remain in effect.

Be leery if a DRTV company is salivating over your product, even though every other expert and lender has shown extreme caution and has backed away.

CONTESTS

Kevin O’Leary has compared
Shark Tank
to a bank. He calls it the “Bank of Tank,” as a matter of fact.
And indeed,
Shark Tank
and contests like it are marvelous opportunities in today’s tough economic climate, providing many inventors with much-needed capital even as banks turn people down when they would have easily qualified for loans just a few years ago. The more popular
Shark Tank
gets, the more local businesses, chambers of commerce, and even mayor’s offices are sponsoring similar product and business idea contests, though on a smaller scale.

Typically, the winner gets a cash prize and mentoring from local business people, who can give an inventor access to machine shops, marketing experts, and other resources that can help them steer their idea to the next level of production and sales. The influx of capital might not be as large as what a successful contestant might get through a deal on
Shark Tank
, but it’s something (without any obligation to give up equity), and the access to expertise can be invaluable.