Interview with Ivan Widjaya of Noobpreneur.com

Small business owners are usually concerned about loans financing while overlooking the new wave possibilities the Crowdfunding brings. We have invited Ivan Widjaya of Noobpreneur.comto exchange some thoughts of success and pitfalls of crowdfunding as well as shed some light on types of Crowdfunding that SMB Startups Need to Know

Ivan, what are some recent success stories of Crowdfunding?

By now, most of you have heard all about successful companies like the Coolest Cooler which raised nearly $15 million on KickStarter – or the Haley’s on Indiegogo who raised over 8 grand for IVF treatments to help them conceive a baby. There’s no doubt that crowdfunding online has lots of potential to help freshman startups get the money they need to get their new business rolling.

Right, and the other side of the story is…?

There’s just as many scary stories out there, with the recent Oculus VR scandal on Kickstarter (see here). The company got over $240,000 from close to 10,000 backers in order to get their virtual reality gaming helmet finalized and off to market, then promptly sold the designs and company to Facebook for a cool $2 billion shortly after closing the funding portal on the site. This enraged most of the thousands of funders, who felt like they’d been somehow cheated by the sell-out brand.

Zach Braff is another fundee that got Kickstarters up in a rage a year or so ago when he asked fans to help him fund Wish I Was Here; a sequel to his first popular film Garden State. He asked for the money because he didn’t want to give up final production rights to the big Hollywood heavyweights who’ll hand over their money in exchange for a return of the profits and final say on budget, casting and production decisions. Braff got over $3 million (over the goal of $2 million) from Kickstarters, then went out and secured another $7M in funding from private backers, giving up equity and rights to the film in the end.

What is the Kickstarter stance on that?

In the Oculus case, Kickstarters really had no reason to get angry. They backed a product they loved, got it off the ground, and now Facebook will take the reins (and the profits) and will definitely still bring the virtual reality goggles to market. Funders got the “rewards” they were promised, the product will be released, and there was no real deception that took place

In Braff’s case, he used the site’s strictrewards-based funding model to essentially trick $3M out of his fans. He played the pity card, claiming to not want to give up equity in the project – on Kickstarter – a site that doesn’t offer pledger’s equity but instead a reward such as free movie tickets, a copy of the product being funded, CD’s, an inside look at the funded project and it’s processes, or memorabilia. These people had every right to get mad because Braff could have got his funds from less-arty funding sites like AngelList or Fundable.

What are main things the average small business owners need to understand about the Crowdfunding?

In order to understand what’s the best kind of crowdfunding for your business, you need to understand that there are definite differences in what funders will require from you in return for their investment and of course, the total amount of funding you can expect. So, there are different types of crowdfunding: 1) Donation, 2) Rewards-based, and 3) equity-based.

So, what’s Donation?

This type of crowdfunding is for charities, disaster relief efforts, and people who need emergency medical funds – for the most part. Basically, non-profit projects. I won’t delve into this type of crowdfunding, as it doesn’t apply to business startups. No rewards or equity are shared with those whodonate funds to the project.

Ok, the Rewards-Based model much more popular now, right?

Yes, this is the model employed by Kickstarter and Indiegogo (though the latter suggests they’ll soon venture into equity-based, described next). Backers are promised a non-monetary “reward” in exchange for their money. Usually a free service when the project is up-and-running or a free product, such as the that which the funded company makes or an article of clothing – etc.

Most funding campaigns offer different rewards for different levels of funding (eg., a branded t-shirt for $10, 1 month of free services for $50, free iPod for $100). This is really popular among SMB’s, inventors and artists who need money to start a business or complete projects like albums or movies (ie., Braff). No equity or financial return is offered. Rewards-based is much easier to get funding in most cases, since most investors are investing very little and doing so because: A) They like the idea of the business or project – or B) They feel the reward offered is more than enough compensation for the amount they’re giving.

What about the Equity-Based model?

Crowdfunder, Seedrs, and Crowdcube are possibly the most popular in this segment, but there are many more popping up all over every month. Equity-based crowdfunding or “investment crowdfunding” as it’s sometimes called, is exactly how it sounds. People give their money to a project in return for the promise of dividend payouts or prearranged financial distributions for a set time or the life of the company. This type is less popular for SMB’s because investors are going to be far more savvy about what they invest in, since there’s no guarantee that every small business will become profitable.

Which is Right for me? That’s the question small business owner would ask first

Right, this is one of the toughest questions to consider for starting your business. Aside from a low-interest loan from a bank or private angel investor (or mommy and daddy), crowdfunding can offer you significant savings compared to venture-capitalist-sharks who’ll try to take as much equity and stake from you as they can.

Choosing between rewards or equity-based comes down to what you’re willing to give up in exchange for the funding.

As I mentioned earlier, investment crowdsourcing sites have savvy investors, who have to be accredited (ie., prove they have money to invest), and will want to see real profit potential. For many of you who’ve tried to get a business startup loan from the bank but were rejected because the loan officer didn’t have faith in your idea, this means equity-based crowdsourcing may not be for you.

However, a rewards-based crowd of backers could still be interested enough in your idea and the prizes you offer, to give you some cash. You also need to consider that rewards-based is a one-off deal that leaves you with the startup funds you need, without any future payback required other than the promised prizes.

Last, once deciding on the platform that suits your funding needs and reward/equity obligations, each site focuses on specific types of startups and projects, and each have set guidelines you must meet before posting a campaign.

Ivan Widjaya is the Founder of business online magazine Noobpreneur.com and online marketing agency Previso Media. He is a web publisher, web property investor, blogger and web property builder.