Crowdfunding – “Making it rain” in the financing world

People who have just seen your aspiring business idea give you money? Sounds too good to be true?

I have written a semi-academic research for a video game company about Kickstarter and similar crowdfunding projects. I’m hoping to share the information I’ve learned with my readers.

In this blog post I will explain the basic fundamentals of crowdfunding. In addition, I’ll go through some of the platforms and shortly review their pros and cons. I’ll also compare crowdfunding to traditional funding methods. However, how groundbreaking this new form of funding may be, there are problems.

Three parts are needed, in order to make crowdfun123ding work:

  • Project
  • Crowd
  • Platform

So essentially, you need to have an idea, the crowd of

people who support your idea, and the platform that

connects the both.

 

What motivates people to fund a project?

There are different people  and consequently different motivations.

The most common reasons why people throw their dollars at you

are:

 

  • Online communities
    • People are seeking other likeminded people to discuss matters that they find exciting
  • People want to feel part of something bigger

 

  • Perks – oh yeah the perks
    • You can get “funder-only” items like collector-miniatures or a poster with signatures. The sky is the limit here, some projects even offer funder-only parties etc.
    • The perks can be material or immaterial like a skype call with a project leader

 

  • Sharing the same values
    • Many projects have a desire to do something good and beneficial to the local community or the world

 

  • Some people fund to join the phenomenon
    • These people might just donate once or twice to be a part of the hype-train, to earn the bragging rights etc.
    • Some people don’t even have a motive, and just want to try it out

 

 

Who can start a crowdfunding campaign?

In principle, anyone. However,  this type of funding usually kicks off (no pun intended) if the project is   in the need of financial aid for real,  such as a start-up company.  In addition, usually people like   projects   making products that help people, and   companies that  have strong ethical values. So make sure to have a great idea, promise the community something in return, and be ethical.

 

Where can I start a campaign?

There are many options, but here are the most common ones, the most popular ones on top:

1

Kickstarter – the  most popular site which utilizes a all-or-nothing type of funding – meaning if the project doesn’t get the amount it requires, the ”pledgers” get their money back. This is to ensure that if you fund, the project will have a higher chance of success, because they are getting the amount they asked for. They take 5% of the amount raised, plus 3-5% as transaction fees. Application needs to be approved by Kickstarter staff. This is a to make sure of the quality of the projects.

 3

Indiegogo – Open and accessible, all-or-nothing like Kickstarter. Charges 4% of reached goal, 9% of unreached goals. Expensive if goal not reached. No application required.

 4

RocketHub – Offers unique visibility with A&E Project Start Up. Also you get to keep all the funding, even if the goal is not reached.

4% free for completed, and 8% for partial campaigns with 4% transaction fees applying to both. Less traffic than Kickstarter and Indiegogo.

 5

FundRazr – Anything from personal causes to nonprofits to entrepreneurial projects. Fees are 5% for all projects plus 2.2% + $0,30 transaction fees. Deep social network integration, but less entrepreneurial projects.

 6

GoGetFunding – London based used for all kinds of funding needs. As a downside, only a few business projects.

 

 

 

 

 

 

 

 

 

How to make my project work?

 

There’s not a 100% foolproof formula how to make your project work. Some guy got 10k for making potato salad – go figure.

Potatoes aside, there are some general guidelines on what to include  in your project, and what qualities are important for success. These points are proven by many studies to be the ingredients of a great campaign.

  1. Quality
    • The single most important thing, your project needs to scream quality
    • professional video, professional words, professional writing
    • Proven brands help out, try getting support from a known company
    • Famous people who are somehow related to the subject are great
    • Some sites have friend-systems. Make use of this and show your connections
  2. Updates
    • Update your social network, crowdfunding site7
    • This shows commitment to the project
    • Social network works as advertising

 

  1. Social network
    • Have a strong social network
    • Most early funders are friends, family, co-workers and people you know
    • The local community is very important to get a crucial amount of money early off to gain more visibility – That’s why the most successful campaigns are bases in California and New York

 

  1. Language
    • Some words are proven to be related to success and others to failure
    • “Pledgers will receive” is calm and assuring, and is highly positive
    • “Even a dollar short” is money groveling, and is highly negative
  2. Project Video – Great Examples
    • Almost all successful projects have got one8
    • It shows the people behind the project – and people like people
    • It should be short, to show off the project in a nutshell

 

  1. Timing of the project
    • The most successful projects  have  started in the middle or the beginning of the month – times when people have their bills off  their minds
    • The best days are Tuesdays, Wednesdays or Thursdays – People are alone, and browsing the internet.

 

 

Pros and Cons of crowdfunding vs. traditional funding methods.

While crowdfunding sounds cool and convenient, only a select few make enough money to cut out all needs for borrowed capital

Pros:

  • Crowdfunding doesn’t require split owning of the company, or pay interest on loans
  • If successful, it’s basically the cheapest capital available
  • You can gain loyal customers before you’re even selling anything
  • You can gain information on  the markets
  • If the project offers something totally new, banks often don’t have the information on the market, therefore they are less likely to give you loans (The Oxford Handbook of Entrepreneurial Finance)
  • Low risk
  • Bankers usually loan to companies with a steady cash flow – something start-ups don’t have.(Write Your Own Business Plan)

Cons:

  • You probably won’t get the guiding that VC firms can provide
  • You probably won’t get business partners like VC companies can provide
  • If you make a successful campaign and start growing, you might need borrowed capital anyway – However you can probably negotiate better terms at this point

 

 

To conclude

 

Crowdfunding is a new phenomenon, and still changing. I believe that in the future it will keep growing, and fundamentally change some parts of the scene. My advice is, that if you have an idea, and a team behind it, go for it! After all, the risks are relatively small, a failed project probably only costs the work put into it. As a bonus you’ve gained experience!

I hope you enjoyed reading my blog post, feel free to comment and share ideas and suggestions.

 

 

Sources

Write Your Own Business Plan, Eliot House Productions, Entrepreneur Media Inc. 2015

The Oxford Handbook of Entrepreneurial Finance, Douglas Cumming, Oxford University Press 2012

A study made by me and my classmates in 2014.

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