Crowdfunding has garnered incredibly attention over the past few years, with the rise of KickStarter, IndieGoGo, RocketHub and literally hundreds of others. Crowdfunding picked up steam in 2007-2008 in the midst of the global financial crisis, by providing an alternative to traditional small business financing through banks, loans and high interest credit card payments. I spent a year investigating crowdfunding, interviewing platform founders and project owners, and another year managing a CFP-capable platform. There are some points that I’d like to share that you may not find elsewhere – useful if you have contemplated a crowdfunding project or are seeking to finance your business.
Crowdfunding is a social networking method for raising finances for a particular purpose. The purpose could be to produce a book, a movie, start a business, do a concert tour, create an app, etc. The social networking component starts with the people closest to you – your family, friends, colleagues, alumni, etc. The hope is that your project will go viral – reach thousands and thousands of people you don’t know, that they will like your idea and contribute money toward it. In its simplest context, crowdfunding is a pre-order marketing mechanism.
There are two sides to crowdfunding – equity and non-equity. Equity-based crowdfunding means that people who contribute to your project have a financial stake, or share, in your project. It is considered an investment and is typically more heavily regulated (and should be) than non-equity crowdfunding. The non-equity side essentially promises a product or service in exchange for someone’s financial contribution.
I won’t get into equity crowdfunding here. It is more complex and in some countries, like the United States, the rules for it are still being written (by the Federal Trade Commission and Financial Industry Regulatory Authority, Inc.) Equity-based crowdfunding is making much more headway internationally, but it requires a country by country and platform by platform breakdown.
Conventional crowdfunding campaigns are not very efficient – they direct everyone you know to a middleman’s web site, where your customers pay them to pre-order your product.
In some cases, going through a crowdfunding platform is your best option. This is particularly so if you are:
In most other cases, you should seriously consider running the crowdfunding campaign on your own web site, running pre-orders utilizing the same kind of crowdfunding prize options as you would on a middleman’s platform. Before doing this, you will need to look at the terms and conditions of your credit card processing service as some do have limitations on pre-order arrangements. Leastwise, you should be able to find a way to satisfy your credit card processor’s conditions. Membership and subscriptions options are great ways to augment your business operations.
The core issue is to develop relationships with your customers. With your own site, you are not limited in space, content or links that you can place on your own site. You are also free to promote multiple products, multiple projects.
Cost is another consideration. Virtually all Crowdfunding Platforms have their own credit card transaction fees, typically in the 3 to 5% range. Most also charge a nominal administrative fee. Administrative fees vary widely – sometimes free, but some run up to 10% of the funding you receive.
It can be easy to dismiss the impact of these funds. For projects under roughly $10,000, running with a 3% transaction fee and a 5% administrative fee, you are missing $800. That becomes $8,000 if the project was for $100,000.
Two other points run with this. Your crowdfunding projects on a middleman’s platform are typically for fixed terms – from 30 days to 18 months. Once the project is finished, the value of that page diminishes rapidly. By focusing your crowdfunding on your own web site, the value and duration of your pages are of value for as long as the site exists.
Most ecommerce enabled web site platforms can cover all of the functions needed by small businesses, even medium-sized businesses, for less than $100 a month including the base credit card payment servicing fee. Odds are you will be looking at something like a 3.2% per transaction fee, in all cases.
Some mobile developers do not have web sites of their own. I can’t think of a reason why one would not have a business web site, mobile friendly or not, just for the potential that a web site can have in the long-term. One reason might be that you don’t want to make money.
This is in no way to say that running with a middleman crowdfunding platform is in any way wrong. It is situation dependent, suffice that most developers and business people seeking funding don’t look at “DIY – Do It Yourself Crowdfunding” as an option at all.
There’s much, much more to add on crowdfunding. I hope that these points will help you evaluate how to get optimal results from your funding efforts.