What Is Crowdfunding?

From Anne Giles Clelland:

We have announced that we are going to launch a crowdfunding campaign for our behavioral health software platform, Cognichoice (TM) on Tuesday, January 15, 2013.  (You can read the back story and the whole story as it unfolds in our Cognichoice category on Handshake 2.0). I am so excited that colleagues, friends and family members are asking me, "What is crowdfunding?" I'm not an expert by any means and this will be my first crowdfunding experience, but here's my thinking on the answer to the question.

What is crowdfunding?

What is crowdfunding?Crowdfunding means we’ll ask people to donate money to fund our campaign as individuals such that they collectively become a crowd – hence the term "crowdfunding." Although according to this Wikipedia entry, crowdfunding has been around since 2000 or so primarily to fund charitable causes, because of the JOBS Act of 2012, an increasing number of for-profit startups have begun asking donors to fund ideas as causes. 

Donating to a for-profit startup’s crowdfunding campaign can be counter-intuitive because it’s rarely an exchange of goods, services or benefits for dollars.  A donor doesn’t get a tax deduction for donating to a for-profit startup.  In the U.S., a donor isn’t an investor and doesn’t receive equity in the company or shares of company stock because SEC regulations currently forbid online soliciation of investment.  Except for possibly receiving some logo-imprinted swag for donating at a certain level, or a promise of a product when it's finished, a donor rarely gets anything tangible for donating to a crowdfunding campaign at the outset.

So why do people donate to startups’ crowdfunding campaigns?

From a phone interview with Patricia Salber, founder of health crowdfunding site Health Tech Hatch and vice-chair of the National Crowdfunding Association, I learned that donors to crowdfunding campaigns generally fall into three categories:  1) donors know the founders, believe in them and in their idea, and want to support them personally, 2) donors think the idea is great and want to contribute to helping make it a reality, 3) donors think the idea has financial promise and want to keep close to its development from the beginning – or a combination thereof. For example, I fell into category #2 when I donated to this startup’s crowdfunding campaign because I thought it had a great idea.

Why do startups launch crowdfunding campaigns?

I can't answer the question on behalf of other startups, but we're launching a crowdfunding campaign for two reasons: 1) potential funding for our idea, 2) a market test of our idea.

1) Funding for the Idea

Cognichoice (TM) is a behavioral health software platform and, therefore, falls under the category of health IT, a challenging industry for a startup to enter.  We've, frankly, entered it boldly and already have a pilot study underway, putting our app in the category of tested health apps, rather than the 95% category of consumer-only health apps, most of them untested

Crowdfunding requires transparency so here's mine:  Oh, my, I had no idea how time-consuming and costly creating software would be.  Our founding developer, Alex Edelman, "released" the first version of what became Cognichoice on July 5, 2010 to one user – me.  Since then, we’ve spent two and half years and thousands (tens of thousands?) of sweat equity hours working on the software.  We've released various pre-alphas, alphas and betas, including achieving the accomplishment of a prototype in the App Store

Me and mine have skin in the game. When our free labor wouldn't pay the bills, I spent over $30,000 from personal funds, and "friends and family" have added or pledged another $25,000.  I have pitched to angel investors and venture capitalists for outside funding to keep developing the software but have been asked, "Does it work?"  I know Cognichoice works because it’s evidence-based, but my knowing hasn’t opened investors' pockets.  We’re in the paradoxical position of being asked to spend money we don't have on software development to merit software investment dollars.

Health apps likely need more than our one pilot study to prove their efficacy and to earn the confidence of health care providers to recommend or prescribe them.  When our crowdfunding campaign launches on Health Tech Hatch on January 15, 2013, we will ask for just under $67,000 1) to fund the development costs of deploying editions of Cognichoice for new research studies,  and 2) to continue our lean startup model of adding the cool new features users and testers suggest to us.  The more users like the app, and the more often and more deeply they use its features, the better they will do. 

2) Market Test of the Idea

As Naval Ravikant, CEO and founder of AngelList writes for the Wall Street Journal, "Figuring out if there is sufficient demand for a new product or service can be challenging for founders of startup companies with limited marketing funds."  Crowdfunding is one way to test market demand.

I am following Patricia's Salber's advice to "Activate your network."  I am asking colleagues, friends and family members to donate $25 each and to send the link to the crowdfunding campaign page to a few people when it goes live, and to post the link on Facebook and Twitter.  Here’s my thinking:  2680 donations of $25 each equals $67,000.  When over two thousand people donate to a health app's successful crowdfunding campaign, given over half of Americans own smartphones, and 19% of those smartphone owners have downloaded a health app - that's a market.

"Cognichoice – The App That Helps People Change," our crowdfunding campaign on Health Tech Hatch, launches Tuesday, January 15, 2013.

Follow our crowdfunding story in our Cognichoice category on Handshake 2.0.

Of further interest:

Cognichoice Crowdfunding Project on Health Tech Hatch Announcement
4 Ways to Increase the Likelihood of Crowdfunding Success

Crowdfunding Shopping Guide for the Gift-Challenged
4 Ways to Increase the Likelihood of Crowdfunding Success

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