Exclusive: The secrets behind how crowdfunding can transform your startup

Crowdfunding comes in many forms and is taking off across the world - from its origins in consumer crowdfunding, to large business industries such as peer-to-peer and equity crowdfunding. In New Zealand, there are many big players such as PledgeMe, Snowball Effect, AlphaCrowd and global names such as IndieGogo and Kickstarter.

Blair Wang, an IBM technical consultant, has had an in-depth look into the world of crowdfunding. He conducted extensive, exploratory research as an honours student at UNSW Australia, in collaboration with Eric Lim and Christine Van Toorn. He understands how SMBs can take this phenomenon for all it's worth. The huge growth in the industry is a sure sign that it's not just a fad, and Wang says there are many reasons why that could be the case.

"Crowdfunding is the ultimate digital expression of the principles of capitalism and democracy. In economics theory they talk about the power of the invisible hand that moves resources to places where they're most sought after. On a crowdfunding platform, that invisible hand isn't so invisible – it's the hand of each member of the crowd as he or she moves his or her mouse to click on the 'OK' button to send money," he says.

And there is the way that technology has played a huge part in making crowdfunding what it is today. Wang says that while it has been around since the days of arts patronage, now it's much more accessible to everyone.

"This is great for both sides – funders have more options to choose from, and entrepreneurs have a larger pool of funders. It's a bigger market. I'd argue that it's also a more competitive market – with so many projects to choose from, the more persuasive ones are the ones that will survive," he explains.

The survivors are the strong ones, particularly as only the success stories are the ones that really get coverage. Startups need solid ideas, but they also need a loyal funding base.

"What moves loyal funders is sustainable persuasion. I'd like to emphasise the word 'sustainable' - projects get caught out quite quickly if they've got slick marketing but not much substance. The crowd is clever and the specialists in the crowd catch you very quickly. If you're sustainable, your persuasion isn't deception – it's just effective communication," he says.

But it's not just about persuasion, it's also about the crowds themselves. There are two types of crowdfunder, Wang explains.

"The first type is a casual funder, dropping a small amount of money – maybe just enough to get a novelty perk like a sticker or a t-shirt – and having just a little bit of emotional investment. This type of funder hopes you'll do well but won't be too heartbroken if you don't succeed," he says.

"On the other hand, the second type of funder is very serious. He or she has done his or her research. He or she wants you to succeed and will be very sad if you fail. This is the type of funder that pours in a great deal of money, enough to get the high-tier perks. This is the type of funder who will send you hundreds or even thousands of dollars, spend time with you, get to know you, in a sense, be in a partnership with you."

He says that while both funders are supporters, startups will probably find a lot of the first type and maybe a few of the second type, if they're lucky. But in the end, both types want to donate money. because "Nobody gives money to someone unless they like you even a little bit. I'll hazard a guess that you'll probably find that you'll get a lot of the first type and maybe just a few of the second type - if you're lucky," he says.

While Wang's research examined perks-based crowdfunding rather than the giant equity-based crowdfunding, he believes that the industry as a whole is a powerful tool for entrepreneurs.

"And it is particularly important in places like New Zealand where venture capital is often harder to find than in larger markets like the US," he says.

Knowing your projects in extensive detail is crucial to success in crowdfunding initiatives, and Wang cites a research paper that showed how entrepreneurs work eleven hours per day just building relationships during campaigns, including answering questions and addressing concerns.

"People want to see that your idea is feasible and they want to know that you're making progress. You need to know exactly how your proposed idea is going to work. You need to know exactly where in the schedule you're up to and you need to know if you're likely to be delayed, so you can set expectations," he explains.

Marketing your project is a two-pronged attack: Wang says that there's the inside of the crowdfunding platform, and the outside of it.

"On the crowdfunding platform, detail is king. People feel more confident about you when they get to know about you – your story, your inspirations, your background, your skills. They also feel more confident about your project if they can see evidence that suggests you'll succeed. Project updates are a great way to show this, especially if there's photos and videos, because that's concrete proof – as they say, 'pics or it didn't happen'. Endorsements are also good – a lot of projects stick logos and quotes onto their campaigns indicating that a big company has said something positive about them, and that kind of reinforcement goes a long way."

"Outside of the crowdfunding platform, I'm sure you already know that social media is a very powerful channel to spread awareness. Set up your Facebook page, your Instagram channel or whatever, and encourage your fans to spread the word about your project. As one of my interviewees from my research said - people don't always check Kickstarter or Indiegogo or whatever, but they always check their social media."