Entrepreneurship 101: Funding and Financing - Crowdfunding Rewards-Based, Equity, Debt

What This Is

Crowdfunding is a financing model where individuals or organizations raise funds from a large number of people, typically through an online platform. This concept matters for entrepreneurs as it provides an alternative to traditional funding sources, such as venture capital or loans. For instance, Warby Parker, a popular eyewear brand, used crowdfunding to raise $2.4 million in 2012, which helped them scale their business.

Key Frameworks & Metrics

• Business Model Canvas: A 9-block framework to map how a startup creates, delivers, and captures value. It includes customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure.
• Lean Canvas: A simplified version of the Business Model Canvas, focusing on the essential elements of a startup's business model.
• Customer Discovery: A process to validate a startup's problem-solution fit by gathering feedback from potential customers.
• Unit Economics: A set of metrics that measure a startup's financial health, including Customer Acquisition Cost (CAC), Lifetime Value (LTV), Monthly Recurring Revenue (MRR), and Churn Rate.
• CAC (Customer Acquisition Cost): Total sales & marketing cost divided by the number of new customers – a key unit economics metric.
• LTV (Lifetime Value): The total revenue a customer generates over their lifetime, minus the cost of acquiring and serving them.
• MRR (Monthly Recurring Revenue): The revenue a startup generates from recurring customers each month.
• Churn Rate: The percentage of customers who stop using a product or service within a given time period.
• Payback Period: The time it takes for a startup to recover its investment in customer acquisition.
• Equity Crowdfunding: A type of crowdfunding where investors receive equity in the startup in exchange for their investment.
• Debt Crowdfunding: A type of crowdfunding where investors lend money to the startup, which must be repaid with interest.

Step-by-Step Process

1. Validate the Problem: Use customer discovery to gather feedback from potential customers and validate the problem you're trying to solve.
2. Build a Business Model: Use the Business Model Canvas or Lean Canvas to map out your startup's business model and identify key elements.
3. Calculate Unit Economics: Use metrics like CAC, LTV, MRR, and Churn Rate to understand your startup's financial health.
4. Prepare a Pitch Deck: Create a clear and concise pitch deck that showcases your startup's problem-solution fit, unit economics, and growth potential.
5. Choose a Crowdfunding Platform: Select a suitable crowdfunding platform for your startup, considering factors like fees, target audience, and regulatory requirements.
6. Launch and Promote: Launch your crowdfunding campaign and promote it through various channels to reach your target audience.

Common Mistakes

• Mistake: Building features without validating the problem.
• Correction: Validate the problem first using customer discovery, and then build features that solve the problem.
• Mistake: Ignoring unit economics.
• Correction: Calculate and track key unit economics metrics, such as CAC, LTV, MRR, and Churn Rate, to ensure your startup's financial health.
• Mistake: Over-optimistic financial projections.
• Correction: Use conservative assumptions and realistic projections to avoid over-promising and under-delivering.

Investor / Pitch Tips

• Show Traction, Not Just Vision: Investors want to see evidence of traction, such as revenue growth, customer acquisition, and retention.
• Know Your Unit Economics Cold: Investors want to understand your startup's financial health and unit economics to assess its potential for growth.
• Be Clear and Concise: Use a clear and concise pitch deck to communicate your startup's value proposition, unit economics, and growth potential.

Quick Practice Scenario

Scenario: Your startup has a 5% monthly churn and CAC of $50 – what is the payback period if LTV is $300?

Answer: Payback period = CAC / (LTV - CAC) = $50 / ($300 - $50) = $1.67 months.

Explanation: This calculation assumes that the startup recovers its investment in customer acquisition within 1.67 months, based on the LTV and CAC.

Last-Minute Cram Sheet

1. Crowdfunding: A financing model where individuals or organizations raise funds from a large number of people.
2. Business Model Canvas: A 9-block framework to map how a startup creates, delivers, and captures value.
3. Lean Canvas: A simplified version of the Business Model Canvas.
4. Customer Discovery: A process to validate a startup's problem-solution fit.
5. Unit Economics: A set of metrics that measure a startup's financial health.
6. CAC (Customer Acquisition Cost): Total sales & marketing cost divided by the number of new customers.
7. LTV (Lifetime Value): The total revenue a customer generates over their lifetime, minus the cost of acquiring and serving them.
8. MRR (Monthly Recurring Revenue): The revenue a startup generates from recurring customers each month.
9. Churn Rate: The percentage of customers who stop using a product or service within a given time period.
10. Payback Period: The time it takes for a startup to recover its investment in customer acquisition.
11. Equity Crowdfunding: A type of crowdfunding where investors receive equity in the startup in exchange for their investment.
12. Debt Crowdfunding: A type of crowdfunding where investors lend money to the startup, which must be repaid with interest.
13. 'Pivot' is not a failure – it's a structured change in strategy based on validated learning.
14. 'Perseverance' is also valid if product-market fit is proven.
15. Crowdfunding platforms: Examples include Kickstarter, Indiegogo, and Seedrs.