How to Launch a Product Without Getting a Loan

By Carol Tice

If you're an entrepreneur with an idea for a new product, it can be frustrating trying to get it off the ground. You may have the dim sense consumers would possibly buy it...but how can you tell for sure?

More importantly, if you don't have the capital to manufacture your product, you're trapped in a vicious circle. People don't buy your product because you can't make it, and you can't make it because people aren't buying it and giving you revenue.

Typically, this cycle gets broken with a loan. But for startups -- and these days even for many established businesses -- getting a loan can be tough. If you can get one, it may come with sky-high interest rates.

What if you could just get people to give you the money?

That's the premise behind Kickstarter, an 18-month-old online platform for fundraising. While peer-loan sites such as Prosper.com or LendingClub allow you to appeal to the masses and try to get a fixed loan amount at a fixed interest rate, Kickstarter goes it one better. You set a minimum funding amount you want -- but if people give more money than that, you get to keep it all.

This paid off in spades recently for Chicago design firm Minimal, which set up a $15,000 campaign on Kickstarter and ended up raising a staggering $940,000.

Kickstarter basics

Now that I have your full attention, let's back up and learn a bit more about how Kickstarter works. The first thing to know is it is not a venue for getting funding for your general business operations.

Kickstarter initially allowed companies to raise working capital. But shortly after new social-media startup Diaspora raised more than $200,000 on the platform last summer, Kickstarter changed the rules.

Now, your funding request must be tied to a specific product or project. Kickstarter fancies itself an artists' funding portal that sits "at the intersection of commerce and patronage," as Kickstarter spokesman Justin Kazmark described it to me. Many projects are films, jewelry or artwork. So the project focus makes sense.

But increasingly, some campaigns are for products companies want to mass-produce and sell. And they can do great on Kickstarter, too.

To get visitors to donate to your project, most site users offer rewards. Often, the rewards include below-retail priced copies of the product for which the money is being raised.

For instance, Pittsburgh startup Wear the Shift gave each $80 donor one of their custom-sized A-line dresses as a perk. They sold out their 40-dress initial order in a day. Co-owner Megan Dietz reported in mid-December the company had already raised more than its $5,000 goal, and had several weeks to go until its campaign ends.

"As much as the money," she says, "we also wanted people's feedback. Kickstarter let us develop a community even before launching."

Kickstarter may have an artsy feel to it, but small business owners are jumping in with both feet. Minimal founder Scott Wilson -- a former Nike watch designer who's recently done projects for Xbox 360 and Dell -- thought there might be a market for a device that would turn an iPod nano into a multi-function watch.

Minimal offered discount-priced versions of two nano-converting watch designs, the TikTok and LunaTik, to donors. Turns out, more than 13,000 people wanted a watch.

So the money's great, but even better, Wilson says, Kickstarter allowed Minimal to find out immediately that it had a winning product idea.

"We have been astonished by the outpouring of support from our backers," he wrote me from China, where he's busy ramping up production.

How to win on Kickstarter

A few best practices I gleaned in talking with entrepreneurs who've succeeded on Kickstarter:

• Tell a compelling, visual story. Many companies have videos up on the site about their product, such as Wear the Shift's video above.
• Be ready for success. Don't put a project onto Kickstarter for funding if you can't deliver on it later.
• Design your campaign carefully. If you don't want to sell 100,000 of your new product basically at cost, limit the number of units you offer to donors.
• Offer rewards at every level. Even for a $1 donor, you can offer something. One popular perk Kazmark mentioned that costs entrepreneurs nothing is to offer "behind the scenes" email updates on the product's progress.
• Figure in the fees. Kickstarter takes 5 percent of what you raise, and Amazon takes another 3-5 percent for processing the donations.
• Seek media coverage. Minimal's success was due in part to coverage of its campaign on Gizmodo and other influential tech blogs.

Have you used an online fundraising site? If so, leave a comment and tell us about your experience.

Photo via stock.xchng user ba1969