Why Crowdfunding and Social Media Goes Hand-in-hand

As crowdfunding is evolving into a real opportunity for entrepreneurs to get their businesses of the ground and we are seeing an enormous amount of interest from both the media as well as entrepreneurs themselves, crowdfunding certainly has not been without its criticism.

Interesting then that a recent study by South African crowdfunding platform StartMe have found a much more clearer picture of what leads to crowdfunding success. What seems to be particularly important for would-be recipients of crowdfunding is for them to understand social media and the way social-technology users think. We must not forget that crowdfunding in itself is very much a technology based solution, so those involved are inherently driven by and accessible through technology. Today of course know that a key part of technology and how we use it to communicate is related to social media.

First, crowdfunders seem to understand the high risk of putting money into a new idea, the survey shows. They’re well aware that most small businesses fail. As a result, they spread their investments. Moreover, many take due-diligence seriously, and they limit their investments to amounts they can afford to lose. In other words, they may be inexperienced, but they’re not stupid.

Second, what seems to be happening is that the “social media culture,” in which people feel close to and want to be part of brands they like, is extending into social investing. StartMe cofounder Ben Botes says two-thirds of investors surveyed expressed the need to feel some emotional connection with a target company. People are investing into ideas that mean something to them.

Entrepreneurs hoping to use this new channel to attract funding to their venture needs to keep this in mind when creating their crowdfunding strategy. A crowdfunding strategy is in other words really a social communication strategy.

An understanding of the social-media mind-set certainly helped South African alternative energy innovator Urban Turbine, which heavily engaged with potential funders through social media. Founder Brian Mawdsley is also further involved with a South African community of South Africans who want to build the South African economy from within through supporting each other. Mawdsley used FaceBook, and Twitter extensively, answer questions about his project and relentlessly getting the word out about his idea. It encouraged people to spread the word on social media among their friends, virtual and otherwise. Very quickly it became clear that the excitement was as much about belonging somewhere as about money, resulting in his Urban Turbine project being funded successfully to get of the ground.

The survey does support some of the conventional wisdom: Most investors in crowdfunding aren’t high-net-worth individuals (only 6% of them fall into that category). That means they tend to make small investments. And at times, their enthusiasm may trump their rational judgment. A wise company will stress the risks to avoid a backlash on the same networks that it used to raise cash. It’s important to explain to would-be funders exactly what the purpose of the new money is and to provide a realistic description of how the whole thing could collapse. StartMe and other crowdfunding sites like Kickstarter make it very clear that startups are more likely to fail than established businesses.

Probably the biggest lesson is that companies can benefit in ways that go beyond increasing their capital. Urban Turbine’s Brian Mawdsley says the social and marketing benefits of the company’s crowdfunding campaign have been impressive. “People are interested in my business and what I’m doing. The news of my business and campaign has spread far beyond the crowdfunding campaign.”

So if you are not yet comfortable with the social media mind-set then that is certainly an area that you would need to get involved in as quickly as possible. Social media is about making connections This doesn’t mean you should set up a Twitter account or Facebook profile just for the sake of your crowdfunding campaign. People will make the assumption that you did so only because you need money. Being social is what social networking is all about. You have to build up your core audience first by engaging in meaningful 140-character conversations with people who share your interests and by clicking “Like” on updates and Facebook pages. Become friends with the folks in your field. Retweet interesting Tweets. Help other crowdfunders with their campaigns and they’ll in turn help you with yours. Today, it’s most important to always be a person before a campaign.

The old saying states that ‘People Invest in People’ and this seems to be even more the case today then what it was before crowdfunding emerged.

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