What’s the #1 reason a start-up fails?
It runs out of money!
And why would it run out of money?
Because nobody wants the product it’s selling!
For early-stage investors, this presents a bit of a conundrum:
If a product doesn’t exist yet, how do you figure out if there’s demand for it?
And how do you figure it out before you invest?
Recently, we came across an ingenious solution to this question that leverages crowdfunding – and today we’re going to share it with you.
It all starts with a “Sixth Sense…”
When I say “Sixth Sense,” I’m not talking about special psychic abilities…
I’m talking about a recent campaign we discovered on the crowdfunding site, KickStarter.
KickStarter is what’s known as a “rewards-based” crowdfunding site. It features projects – from documentaries to physical products – you can donate to. In exchange for your donation, you might receive an early version of the product, or a gift like a T-shirt.
|“Basically, you can point it at any organic object and it’ll instantly tell you what it is, and provide you with data and information on its contents.”|
KickStarter isn’t an equity crowdfunding platform like the ones we write about on Crowdability. The big difference? If you fund a project on KickStarter, you don’t receive a stake in the business, or share in its success and profits.
We recently discovered a campaign there for a product called: SCiO: Your Sixth Sense.
The SCiO project caught our eye for a few reasons:
1. The technology is revolutionary. The SCiO device (see below) is a pocket-sized molecular sensor. Basically, you can point it at any organic object and it’ll instantly tell you what it is, and provide you with data and information on its contents.
As a simple example: imagine you’re in a grocery store and you stop by the apple aisle. There are 6 different kinds of apples on display. You don’t know which is which, or how many calories they have.
So you pull out your SCiO device (it’s the size of a keychain), point it at the apple – and within seconds you get a notification on your iPhone: it’s a Granny Smith apple, and based on its size, it has approximately 120 calories.
2. The results for this campaign were impressive: the company reached its initial funding goal of $200,000 within 24 hours – and within 30 days, it went on to raise over $2 million. All from people who were excited about the product and wanted an early version of it.
3. And here’s the most notable thing: at the very same time as the KickStarter campaign, the company behind the SCiO device was accepting investors on an equity crowdfunding site.
Let me explain…
The Company Behind the Campaign
You see, the company that produces the SCiO device is a technology start-up called Consumer Physics.
The company had been working on the SCiO for over 3 years, and now they needed more funding.
So why were they looking for donations on KickStarter?
Because they wanted to prove there was consumer demand for their product!
So just before the company attempted to raise a new round of funding on equity crowdfunding platform OurCrowd, they created a KickStarter campaign as well.
Their theory: If they could round up $200,000 in donations from consumers who found their product exciting, that would demonstrate demand. With that established, they’d have an easier time raising capital from new investors.
Rewards + Equity = Profit
The SCiO campaign was beyond successful.
They blew past their funding goal of $200,000, received a ton of press, and demonstrated massive consumer demand.
This lowered the perceived risk for new investors…
And helps explain why their $3 million equity crowdfunding campaign on OurCrowd filled up in less than 24 hours!
Use Rewards For Big Gains
While this was the first time we’d seen this funding strategy, we believe it will become a trend:
Before committing capital to a new venture, investors will demand that companies prove the viability of their product.
Rewards-based crowdfunding sites like KickStarter provide a perfect mechanism to do that.
Combined with equity crowdfunding, this is a recipe for success – for the entrepreneur, and for investors like us, too.
Sites like KickStarter don’t allow you to profit directly from the projects they feature, but you’d be smart to keep tabs on them:
That’s where you might spot the next opportunity like SCiO and Consumer Physics.
This article originally appeared here on the Daily Reckoning.