A Guide to Crowdfunding

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As an entrepreneur, you may heard about crowdfunding, but you may curious to know how this can affect your business.  Let’s start with the basics.

What is Crowdfunding?

The simple definition of crowdfunding is “the practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the Internet.”  Instead of traditionally funding your business from investors, loans, and/or your own capital, crowdfunding uses piecemeal incentivized “donations” to fund a goal.  Online platforms like Kickstarter, Indiegogo, and GoFundMe offer an easy-to-implement template that can inject capital into your business, product, or idea before you know it.

Why would you use crowdfunding vs. traditional methods of raising capital?

From a cursory look, it seems that crowdfunding might simply be confined to producing products in the entertainment industry (games, bands, etc.).  This may be true, but there’s a vast segment of the crowdfunding industry that helps businesses realize ideas that may be outside of their financial reach.  In exchange for the donations of varying amounts, businesses offer incentives including, but not limited to the product, service, or idea being realized.  There’s also more personal touches, like namechecking donors in thank-you videos, free products, or even in-person meet-and-greets.  The rewards are limited to your donations.

For instance, taking a look this Kickstarter reveals that:

– For £5, you get “All you need to make a robot of your own. One Crafty Robot card template pre-cut, pre-creased and with adhesive already applied, plus one Fizzbit.

– For £500, you get “ Your own personal Robot design! I’ll design a new robot/figure to your specification. Want a swarm of mini versions of yourself? Or maybe a special robot to promote your business or celebrate an event? Whatever you fancy (as long as it’s legal) I’ll design for you and make a run of 50. Comes with 50 Fizzbits.

As you can see, the incentives change based on how much the donors are willing to spend.  The difference of several hundred English pounds can lead you to directly influencing the product output of the designer.  What you set for your rewards is limited to your imagination and ingenuity.

Getting Social

While most products released on the traditional method rely on their launch, crowdfunding’s ingenious method secures both the funding and the target audience in one package.  This is a form of “shadow testing”, but in a much more public way.

All the aforementioned crowdfunding platforms offer instantaneous social media connections.  Using Facebook, Twitter, and other social media sites, your crowdfunding venture becomes spread among your followers, picking up an organic snowball effect.  Much like a telethon, you can thank each donor as they increment your project towards its completion.  This builds up organic hype and social validity of your idea, saving you on advertising costs that ordinary business models tend to accrue BEFORE a product or service is in the market place.  Even better, crowdfunding allows you to exceed your target budget if your idea is well liked. And let’s not forget that your audience (and beyond) roots for your idea to be funded to completion, mutually basking in the triumph that you may have felt was merely a personal victory.  Can you think of a similar traditional funding model that mirrors this?

The Side Effects of Crowdfunding

The Benefits of Crowdfunding

Crowdfunding’s best attributes are that it gives you a solid idea about the feasibility of your idea.  If the marketplace really likes your idea, you can see how much people are willing to pay.  It also shows you the reach of social media network and can be a metric for your social media prowess.  Finally, it can also display the novelty of your company’s ingenuity.  Many businesses have had continued success through exclusively selling their products in this manner.

Downsides of Crowdfunding

Of course, for all the enthusiasm, there are several downsides.  First, Kickstarter requires that your project meets your budget’s goal.  If you don’t within a predetermined timeframe (30 – 60 days) , all the money is refunded to the donors.  Indiegogo, on the other hand, allows you to keep the money you funded within a predetermined timeframe (1 – 120 days), but charges a higher 9% fee on whatever donations you did receive, not including funds transfer fees.

Failing on a crowdfunding venture also is a very public failure.  This may lead to some public disappointment and your audience (and potential audience) may lose faith in your idea—or worse, your existing business.  Of course, you can always tweak your budget to accommodate the diminished budget, but you’ll have an uphill struggle to ask those same donors to commit their money again to an already-failed project.

Those same platforms that offer unlimited potential also take their cut.  If a Kickstarter project is funded, they take a 5% take on your donations, with Amazon taking another 3-5% to transfer funds to your account.  That’s already ~10%, which you may have to factor in before setting your budget.  Indiegogo offers a smaller 4% cut on the the final budget (with 3% for funds transfer), but that’s still relatively significant

Finally, you have to come through on what you proposed for each donation tier.  If you promise the stars but can’t deliver, this can result in some serious backlash.  There’s even been recent changes in legal measures being taken to ensure that projects fulfill their end of the bargain. (www.gamespot.com/articles/kickstarter-scammers-beware-ftc-now-taking-legal-a/1100-6428046/)

The Way to Go?

In conclusion, crowdfunding is here to stay as a viable form of funding your business to achieve a predetermined goal.  While there can be pitfalls, the benefits of crowdfunding surely outweigh the negatives and can offer very public ways to show off the viability of your ever-growing business.  Be sure to explore all the various ways that your business can utilize this new and expanding form of funding that captures the zeitgeist of our modern world.

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