Starting a business can be intimidating for anyone, but the “boys’ club” reputation of the startup scene can be especially discouraging to female entrepreneurs. Consider these stats:
- Women represent 23 percent of angel investors and only 4 percent of senior partners in venture capital firms.
- In a study by professors at Harvard, MIT, and the University of Pennsylvania, 68 percent of participants chose startup pitches narrated by male voices over identical pitches narrated by female voices.
- Three percent of venture funding goes to women, and less than one percent goes to women of color.
- Male-led businesses are three times more likely to reach the $1 million revenue mark than female-led businesses.
This adds up to many talented female founders missing out on opportunities to grow, and investors missing out on opportunities to gain. (And they could gain a lot — another study showed the presence of female executives is correlated with increased profitability.)
The good news is that starting a business is becoming more attainable for female entrepreneurs, thanks to the rise of crowdfunding — a way to raise money online from a large number of investors. And the numbers speak for themselves: female-led businesses raise 21 percent more funds than male-led businesses on the platform CircleUp. And between 2009 and 2014, the percentage of funded startups with at least one female founder increased from 9 to 18 percent.
Crowdfunding is a girl’s new best friend.
The Basics of Crowdfunding
So how does crowdfunding actually work? There are three distinct types of crowdfunding, according to a report by Ventureneer, a digital media and market research company.
- Rewards-based crowdfunding: Funders receive a tangible item or service in return for their money. Some businesses collect the cost of the item from customers before the product is manufactured, some beta test products with consumers, and others raise money in exchange for a token gift. Online platforms include Indiegogo, Kickstarter, and Plum Alley.
- Equity-based crowdfunding: Investors receive a stake in the company. Currently only friends, family, and accredited investors (people with verified net worth greater than $1 million) in the U.S. can invest in a company for equity. Online platforms include AngelList, CircleUp, Crowdfunder, and Portfolia.
- Lending-based crowdfunding: Small businesses pitch their credit to investors who will lend money for interest, rather than for a piece of the company. Online platforms include Lending Club and Prosper.
A quick history/law lesson: Equity crowdfunding is a new option for startups. Since 1933 the Securities Act banned the advertising of investment opportunities by private companies to the general public in an effort to protect inexperienced investors from fraud. But in 2013 Title II of the Jumpstart Our Business Startups (JOBS) Act went into effect, opening the way for businesses to solicit accredited investors using crowdfunding platforms.
In this post, we’ll focus on rewards-based crowdfunding, but many of the principles for success are similar. You can check out the Ventureneer report for more guidelines on navigating equity and lending crowdfunding.
A Crowdfunding Success Story
The Ventureneer report profiles numerous entrepreneurs who have forged startup success with crowdfunding. We chatted with one of them, Bluehost customer Julie Bombacino, who used a campaign on Indiegogo to launch her company, Real Food Blends, in 2012.
Bombacino’s success story starts with what seemed like a setback for her son AJ, who was placed on a feeding tube when he was six months old. The commercial formulas prescribed by doctors (which are made primarily of corn syrup, water, and vitamins) were making him sick.
“Then I went online and found this tribe of tube-fed people and caregivers that were blending real foods and having really good results with it,” she says. Once she started blending real foods for AJ, “it was kind of like a veil lifted in our household; it changed very quickly. He stopped vomiting. He started gaining weight. The results spoke for themselves.”
Bombacino also recognized a business opportunity. Tube-feeding formulas are an annual $3 billion market in the U.S. and are expected to reach nearly $6 billion by 2020. “Using real food isn’t rocket science, but it was a very different way of looking at tube-feeding nutrition,” Bombacino says. “It was an industry that was growing and ripe for change.”
Bombacino worked with nutritionists and food scientists to develop a process to make nutritious tube-fed meals from real food and to give them a stable shelf life.
But it was hard to convince investors that a new kind of product was needed — and that’s where crowdfunding came in handy.
“It was proof of concept,” Bombacino says. “Crowdfunding really gave our investors and potential investors, as well as our manufacturers and suppliers, a boost of confidence for our company — that we were on the right track and that people wanted to buy this. For them, it took the risk out of the equation of investing.”
Bombacino says the success of the crowdfunding campaign also helped her raise $550,000 offline from startup and healthcare-sector angel investors. The funds covered the costs of the first production run as well as the distribution of free meals to kids at St. Jude’s and Lurie Children’s Hospitals, and Real Food Blends is increasing distribution to hospitals and care facilities throughout the U.S.
The campaign was also an “incredibly effective marketing tool,” Bombacino says.
“There is a very viral nature to crowdfunding,” she says. “We used it as a way to get the word out to potential customers and let them pre-order, which helped us gain momentum.”
Pro Tips for Crowdfunding Success
It didn’t hurt Bambocino’s chances that prior to starting her business, she had 15 years of experience in marketing and earned an MBA from DePaul University and a BA from The Ohio State University. Bombacino suggests these tactics for running a successful crowdfunding campaign:
Do your homework. “First and foremost, do your homework,” she says. “You don’t need to reinvent the wheel. You can Google ‘best crowdfunding campaigns’ and ‘how to run a successful crowdfunding campaign’ and really study what has worked for people in the past, and you can pick and choose what you think would be best for your brand or product.”
Treat it like a launch. “Hitting ‘publish’ is not a plan,” Bombacino says. “People tend to think that ‘if you build it, they will come’ but that just doesn’t happen, especially as the crowdfunding space gets more crowded. Just because you have a nice video doesn’t mean you’ll be the next big thing.” She and her team treated their crowdfunding campaign as a soft launch, so they had a marketing campaign behind it, including reaching out to social influencers to share the campaign.
Create rewards that appeal to a variety of donors. “One of the best things that I learned was to give everybody the opportunity to donate,” Bombacino says. “Not everyone is going to want to buy your product or make a large contribution, but they may want to support your cause and give you a dollar or five dollars, or they want to share it. Having those lower tiers available allows more people to become invested in your product and share it, which helps your entire campaign become more successful.”
Holly Munson is a freelance writer, editor, and content strategist based in Philadelphia. She has been reporting on business trends for seven years and has also worked in marketing, magazines, and museums.