Crowdfunding helps product companies with sales and marketing, not just fundraising


(Courtesy of M3D/M3D)

Bethesda-based M3D concluded the first week of its Kickstarter crowdfunding campaign with more than $2.3 million in the bank from some 8,200 financial backers who want to see production begin on a 3-D printer that consumers can use at home.

But the bulk of the supporters — one of whom pledged $5,000 — double as the company’s first customers. A link on the firm’s Web site to “pre-order” the printer directs you to the Kickstarter page where you can contribute the initial retail price of $299.

The company’s rapid success points to the corollary benefits product companies receive from using crowdfunding sites: In addition to the money, they have a built-in marketing and sales mechanism that is less costly and, often, less time-consuming than tapping more traditional channels.

M3D, as an example, has effectively sold more than 7,700 3-D printers without the first batch passing down a manufacturer’s conveyor belt or stores agreeing to stock the device on their shelves.

“Going to Kickstarter is just one alternative and is especially useful for smaller companies that can’t afford the investment required to go directly to retailers,” co-founder David Jones said via e-mail.

“If we had raised that amount of money from investors, rather than customers, we could not have gotten major retailers to carry us, because their inventory requirements are prohibitively high. A small company would have to hope that the retailer wants the product so badly they would pre-order and invest to get it on their shelves,” Jones added.

Sales and marketing weren’t the chief benefits that crowdfunding advocates touted when the practice was being scrutinized by lawmakers two years ago. The Jumpstart Our Business Startups Act that passed in April 2012 allows for equity-based crowdfunding, though the regulatory guidelines are still under review.

The goal of crowdfunding is to give entrepreneurs with limited access to venture capital, bank loans or wealthy relatives the ability to collect small sums of money via the Internet from people who believe in their idea.

Fred Hicks, co-founder of Silver Spring-based Evil Hat Productions, took out private loans for his tabletop game company before turning to crowdfunding. His company garnered $433,365 from a single campaign, the largest amount of any Washington area company until M3D’s campaign last week.

“Crowdfunding isn’t just about the ‘fund’, it’s also about the ‘crowd.’ Going with crowdfunding gave us an opportunity to focus the attention of our existing fans and catch the eye of new ones while getting the money we needed for the project,” Hicks said.

Similar to M3D, the campaign Hicks ran last January allowed customers to pre-order the latest version of his production company’s role-player game, called Fate Core.

“We were able to go into the manufacturing phase with a very clear idea of what our initial demand was going to look like. That’s a really critical piece of data and goes a long way toward reducing risk,” Hicks said.

Ultimately, the marketing and sales components of crowdfunding lead to a third benefit: mitigating risk. If a product doesn’t attract sufficient attention on a platform such as Kickstarter, an entrepreneur may call into question whether consumers at large will take to the product either.

“Kickstarter is a way for companies to prove and vet their products on the market without requiring even longer periods of investment and very expensive production runs of products that have not been vetted by a sufficiently large number of customers,” said Jones, of M3D.

Steven Overly covers the business of technology, biotechnology and venture capital in the Washington region for The Washington Post and its weekly Capital Business publication. In that capacity, he has written about start-up struggles, investment trends and major drug discoveries.
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