Businesses used to rely on investment from just a handful of people such as banks or, on the larger scale, shareholders. Over the last decade, an alternative has become popular and that is crowdfunding.
Crowdfunding in a nutshell
Crowdfunding, though not a new concept, is still finding its true definition in the digital age. It is an amalgamation of micro-investments in a project and patronage by supporters for commerce, so giving a little money to get an exciting product or experience.
The way it differs from conventional means of raising capital for a business is that it is simply for one project and not investment in the business as a whole.
Anyone can be crowdfunded, all they need is an exciting idea. The project needs to capture the imagination of potential backers and it’s the creator’s job to sell that idea.
It is obvious what the creator gets from crowdfunding, the capital to make the project work, but what does the backer get? Rewards, as they are often referred to on crowdfunding platforms will be products or services such as a new gizmo, or a being the first to see a new stage show or movie. The reward may also be nothing at all apart from the knowledge that the backer is helping a good and worthy project come to life.
Our fictional example
One of the dog-loving members of our team at the fictional business of Flying Goggles Direct, providing the flyest goggles about, has suggested a new line for those pilots who want to take man’s best friend up into the blue yonder: Dog Gogs.
The upsides of crowdfunding
We’ve all convened around the table at Flying Goggles Direct, each member of the team resplendent in their company-issued goggles. We are here to discuss the ways and means of funding this new venture, and the concept of crowdfunding has been raised.
Crowdfunding can reduce financial risk in new projects
Unfortunately, the current demand for flying goggles isn’t great and we don’t have the capital to put into this venture. Even if we did, it’s a bit of a risky business, flying goggles for dogs. For this reason, we’ve decided to look at the option of crowdfunding this project.
Crowdfunding gives businesses an opportunity to test markets with new products on a smaller scale
It’s a pretty niche product, flying goggles for dogs. By launching it as a crowdfunder we are able to test the waters with just a few units rather than committing to an entire line.
Crowdfunding can connect businesses more directly with customers
Over the last few years, really since the age of aeroplanes with exposed cabins, we feel we may have lost touch with our customer base. Crowdfunding is a way of presenting an idea to backers but also getting their feedback during the entire project. This has the double effect of making them feel invested in the project and producing a final product that is more in line with our customers’ desires. This provides us with crucial market research for the future of the business as a whole.
Launching the crowdfunding campaign
So, we’ve decided to go for it and attempt to crowdfund our moderately risky product. Now for the next steps to make this project a soaring success.
The creator sets a deadline and a funding goal for the project, a threshold that must be reached before the project goes ahead. If funding falls below this goal no money is exchanged between backer and creator.
To create the new product line and make a profit, we’ve worked out that it will cost £10,000. We have therefore got a goal of £10,000 to reach before the project can go ahead.
We’ve decided on a window of 30 days to get all the funding in, this will give the campaign time to gain traction, to hopefully get some publicity and get those all-important backers in to fund the project.
Finding your platform
The platform is where you host your crowdfunding campaign and find your backers. These include Kickstarter, Go Fund Me or Indiegogo all of which will charge a percentage of any successfully funded project. For example, Kickstarter charges 5% of the project cost. Other platforms use different models such as charging less for using the platform but retaining some ownership of the final product, so make sure you check those terms before clicking accept.
We decide to go with Kickstarter as it’s enabled the funding for over a quarter of a million projects and it appears to be the leader in the market.
It is important to offer a range of rewards for funding the project. This means that people who might not be able to afford the finished product or service can fund on a smaller scale but still receive something for it. Conversely, someone who is very interested in the project can get an exclusive reward for funding more.
As well as a pair of the Dog Gogs as a reward, we have decided to offer some other fun rewards that backers can get for lower cost. A t-shirt of a dog flying a biplane, a chew toy with the same image on it and pin badges. All of this merchandise is easily created and will help to reach that final goal of £10,000 whilst spreading the word about our genius idea.
For our top-level backers, £500 and above, we’re offering a chance to come to the factory, see where the magic happens and receive a custom set of both human and canine goggles plated in gold and presented in a sumptuous velvet lined box.
Platforms have stipulations on what they consider to be a project. For the most part, project completion involves the exchange of goods or services. There are platforms that deal exclusively in charitable projects such as crowdfunder where the backer and beneficiary are different people, which are excellent but no use to us.
Likewise, there are some projects which are not allowed for legal or ethical reasons. These prevent the platform from being shut down but also maintain a level of trust that the backers need before turning over their hard-earned cash.
Where to find backers
As pledges are made via the internet and smartphone apps, backers can be from almost anywhere in the world.
Just having our new and exciting product on Kickstarter will not give us instant success. We have to launch a campaign, build a buzz in the media and on social networks and let everyone know about Dog Gogs.
When projects fail
Despite our best efforts and the seemingly fantastic idea of flying goggles for dogs, our project has failed in the worst possible way.
We reached our target of £10,000 which is both good, and bad. Because the target was reached the project became active, and it was our turn to roll up our sleeves and get building these goggles.
The contract created between backers and you is a rather grey area. The platform, using Kickstarter as an example, make no assurances on your behalf of how you will spend the money or even if you will deliver. Potential backers are told to use their judgement but also warn you, as a creator, that you can be liable for legal damages.
Misjudged funding requirements
Despite hours of calculations and projections at the start of the project, the funding we received isn’t enough. We’ve only been able to produce half the number of goggles that we promised to our backers. Unless we can raise money from elsewhere to complete this project, it is a failure.
In the meantime, we send out the goggles we do have to the first backers and cross our fingers for a miracle.
In short, it is best to treat funding from the backers as a contract and make the best efforts to complete it.
Despite the obvious genius of goggles for aviator puppies, the final product really hasn’t shaped up. All the sizings are wrong and it turns out that the rubber used to a-fix the goggles to our hound’s head is absolutely delicious to dogs. Backers are calling in saying that their canine co-pilots are not wearing their new goggles but eating them.
Poor quality product or service
On top of not being able to produce enough units, we’ve realised that the Dog Gogs are lower quality than we anticipated. The perspex is prone to crack and they just don’t feel like the premium product we’re used to selling.
The bottom line
Reputations can be built or lost on a crowdfunding project. For small companies and start-ups that have not yet developed a brand, this isn’t too much of an issue, however, for more established businesses a failed project can be devastating.
On the other hand, brands who are already trusted and who have proved themselves elsewhere in business find it far easier to get funded whilst the start-ups are seen as unreliable and high risk.
Crowdfunding is an excellent way of getting funding for projects and, when done right, can lead to great success with little risk. The issues arise when creators don’t manage to meet expectations of their backers and though there is no firm contractual agreement between the parties, there is the implied obligation. Furthermore, failure by the creator to provide the product or service can lead to bad press and loss of trust.
The fact that there is only a loose obligation from creator to backer that the project will deliver means that building trust through transparency and explanation is essential both when seeking backers and during the project.
Keeping backers in the know every step of the way with the project means that they follow the story, the difficulties, the successes and will be more understanding if the project doesn’t quite turn out the way it was anticipated.
Crowdfunding is a communal project, the creator provides the idea, the backers provide the funds and, hopefully, together something new and great is created.