The Crux of
Crowdfunding
What is Crowdfunding?
When you have a business idea or product and you want
to gather outside funding, you can, go to the bank and beg for a loan, borrow
from a friend and possibly spoil the friendship; or obtain venture capitalists
funding. But many do not know or think
about crowdfunding.
Crowdfunding is a simple but very effective way of
raising funds to grow and even produce a product or service. Essentially, crowdfunding is the process of
appealing to the masses and collecting money with the aim to eventually supply
each person that has contributed with the product or service. They are
basically pre-ordering your product even though it hasn’t yet been manufactured.
They are buying into the idea with the hopes that they
will receive the product in the near future.
You generally ride off a prototype and a good marketing campaign to
promote and sell the product or service.
However, crowdfunding isn’t just about products. You will see this as we delve into the crux
of crowdfunding.
How did it
originate?
Crowdfunding has been around for centuries and while
it wasn’t given a name, it has been used many times over.
Very commonly, authors would use crowdfunding to
promote an unpublished or unprinted book.
They would put it out to the market with a teaser paragraph or two and
then wait to see whether there was a big enough interest before they went down
the costly and lengthy process of printing and publishing.
Today, crowdfunding has built up fast momentum with the
assistance of social media. One of the first well-known modern crowdfunding
campaigns was for a U.S. rock band Marillion, who promoted their want to tour
and drew in enough donations to eventually sell actual tickets in lieu of
actually arranging the entire tour.
The Pitch
Of course, the pitch or marketing arm needs to be
pretty decent as this is what you are selling your product or idea on. What you put out there to the public must be
grabbing, catchy, and easy to understand.
People, nowadays, don’t have time to wade through
reams of information. They want to get it in the first few seconds or at least
be intrigued enough to read or watch further. The pitch or advert you put together
is your sales person. This needs to hook people in and make them want to spend
money. Simple! But not so simple!
Investments from entrepreneurs and venture capitalists
have dropped by 20%. However, crowdfunding
has increased by 91% since 2011.
That in itself tells us a story and one that should be
taken seriously.
What are the Benefits
of Crowdfunding?
Capital
Crowdfunding
raises capital. Period! And that is what you need in order to take a
potentially lucrative product or service from just an idea to becoming the real
deal.
Risk Hedging
Taking
well-earned money or savings, or even a loan from a bank, can mean you are hedging
your bets very high. You are hoping that
your idea will reap in the money and be a raging success. But you don’t know. By crowdfunding you push the risk away from you. There is no risk. The contributors know that what they are
investing in may just not come to fruition.
Advertisement
When
you send out a message about your idea, whether it be on Facebook, Twitter,
email, text or even word of mouth, you are advertising. Crowdfunding, by utilising social media today
can have huge repercussions in the good sense.
It can go viral within a few minutes, and that is the beauty of crowdfunding
in today’s modern world.
Ideas
One
good idea can lead to more. You may have
a rude and rough prototype of a “sort of” idea, but putting it out to the
world, to the many brains out there, you may just receive further ideas back in
how you can make that product or service better. People do, on a base level, love to help
other people, even if it’s for no gain for themselves.
Building Customer Bases
You
are building a customer base when you send your idea out to the masses. Some may not like it but those that do will
remember it and even if they don’t invest upfrontstraight away, they will look
to spending their dough down the line.
There is more than enough to go around out there and take your share
from.
Free
And
the real perk is that it’s completely free.
Sure, there is a little investing to be done on a prototype and an
advert of sorts, but essentially the concept is free.
Types of Crowdfunding
Options
Here
we will cover the two main crowdfunding types, although there are others like
Debt-based, Donation-based, Litigation-based and Software Value Token types.
Reward-based
This
type of crowdfunding can be two-fold.
Either a Keep-It-All (KIA) or an All-Or-Nothing (AON). The former, meaning that the company or
individual raises funds for their goal and keeps the funding no matter whether
the goal is met. The latter works on the
same principal however they do not keep the funds should they not meet their
goal parameters.
Equity-based
With
this type of crowdfunding, individuals support an effort by the initiator or
organisation in the form of equity. The
creator must produce the product or service at the end of the day as well as
accumulate equity through the company.
Pros and Cons of
Crowdfunding
There
have been many a debate around crowdfunding and whether it is a good thing or
not, whether it is destroying the notion that building a business takes hard
work and real effort, or whether it’s the next best start-up idea since the
Wright Brothers took to flight.
So,
let us break it down for you.
PROS
✓ Super
Fast Super Funding
There is no denying that you can raise a load of funds in a short
space of time. So, dependent on what you
are developing, it can be a good push in the right direction.
✓ Instant
Gratification
You
will know within a lightning time period if your idea is the bee’s knees or the
idea that should have been flushed down the toilet. Today, social media allows
everyone to have their 3 seconds of opinion, and this is exactly what a
crowdfunder wants. You then have the opportunity to adjust your idea or goal,
keep it exactly as it was advertised or scrap the whole thing, without having
to fork out any meaningful cash.
✓ Create
the Hype and Following
What
better way to create a fan base? Crowdfunding duals as a free space for
marketing as well as creating that following that you want. Whether it is this idea or another idea that
takes off the ground, you will forever have a group of people that will be
interested in what you think up next.
And in addition, you can reach the entire world with good social media
usage. A few years ago it was unheard of
to be able to touch the lives of millions in a matter of minutes, or even
seconds.
CONS
✗ The
market is limited
The SEC (Security Exchange Commission) has put a cap on how much
funding a crowdfunding donator can invest.
That equates to about $2,000 per year.
So effectively this limits the initiator of a crowdfunding venture quite
substantially. In addition, the creator
of the crowdfunding operation may not accept more than 500 investor’s donations
in total. They may as well call it
Limited Crowdfunding, right? But, there
is some talk of the SEC cooling it a bit and that they are stating that they
needed to put some constraints in place until they know what they are dealing
with for the bigger picture.
✗ Lenders
are in turmoil
We are deciding still whether this is, in fact, a Con. The financial institutions are trying to
counter this crowdfunding trend, well, they think and hope it’s just a trend;
by providing personal and business loans to these start-upentrepreneurs.
But, we all know the cons to taking out a bank or lender loan –
high interest rates, inflated benefits and long-term issues should your
business plan not come to fruition.
✗ Complicated
falls short
In
this we mean that if your idea or product is a complex setup, then generally
leveraging it via crowdfunding doesn’t work. As you are utilizing social media
most times to push your idea, we all know that people will move on if the
initial engagement is complicated and takes time to wade through. It,
essentially, needs to be simple and to the point, which is not always the case
with a new project idea.
✗ Inflexible
Irritations
Once
you have detailed and set your parameters for your idea you generally cannot
adjust it down the line, at least not to drastic measures. You also need to stick to the timeline that
you propose upfront in delivering the product or service; otherwise you will
land up looking like a ‘wannabe’ and in effect hurt your brand and good name.
The Pitch Process
Just like a good elevator pitch, so your Crowdfunding
intro has to be very impressionable! You
want to grab the public in the first line and keep them reading on or clicking
through to watch your video advert.
On that note, what should your pitch entail?
One-Liner
They need to read something in order to get the feel
and energy of your pitch. So, make that
first line the best line you have ever created.
Short, sharp, to the point, and built to make them want more.
Easy-peasy, right?
Mmmm – not so much, but very doable.
Video Link
Next, it would be advisable to have a video link which
shows them exactly what your product or service is all about. Again, keep this short, precise, and
credible. Don’t go over 3 minutes and
have a call-to-action at the end.
Medium
Whether you use Skype, Facebook, Twitter, or any of
the other social media avenues, you want to keep the KISS philosophy at all
times.
Layout
There is much to say, we understand, but you need to
get it all out there in a systematic and easy manner. Here is a tick list to follow:
✓ Hello,
I am … - tell them who you are
✓ What
it is … - what is it that you are wanting to fund – your product or
idea needs to be fleshed out
✓ Due
Date … - when do you plan to launch? This helps the public know the level of
urgency
✓ Why
you need it … - tell them why you need to raise funds – be honest
✓ What they can do … - the call to action – how they can get
involved and what benefit, if any, there is to them
What are the Benefits of Crowdfunding?
ü Increase in
entrepreneurial activities
The world needs more entrepreneurs and crowdfunding gives
those small fry a chance to have a real go at it
ü Increase in
business opportunities
From a small idea, so can big opportunities arise. Putting it out there will open up the many
business opportunities that can stem and grow
ü Increased
developmental opportunities
Even though your small idea or product offering may seem
like it will only benefit you, you may find that from that many others will
benefit and grow, developing their own ideas and gathering inspiration from
your progress
ü Investment
opportunities
The world is full of eager investors and by putting your
plan out into the public, you never know who may be watching. Your crowdfunding plan may just turn into a
venture capitalists dream
ü Conversion
of raw talent to opportunity
Never underestimate a small idea or a seemingly mediocre
person. Those little ideas and raw
talent can explode into the next best thing in seconds
How can Crowdfunding Benefit Developing Countries?
Crowdfunding
was built for developing countries!
Where the loan market is just too high risk and of
course high in interest, a crowdfunding venture can take a small wanna-be into
the global market, outside of his developing country.
This will expose him to so much more than if he were
to just focus in on the population within his community or just in his own
country.
A developing market cannot always fund a project as a
developed nation can. From idea to prototype to customer engagement, a
crowdfunding initiative can start a rolling stone of opportunities, boosting
those that thought their idea would always just remain an idea.
While you may be thinking that most developing
countries don’t have access to the internet, never mind a mobile phone, you
would be very wrong. Developing doesn’t
mean poverty stricken. It just means that their capacity to produce the volumes
that developed country’s produce is much lower. Many see a country labeled as
developing as this rural setup, where everyone lives off the land and animals
roam wild. Think about South Africa, a
developing country, where one of the biggest business hubs in the world exists.
How can Crowdfunding Benefit Developed Countries?
The developing countries need to be the epitome of a
good example. Sharing best practice when
it comes to the Crowdfunding way of marketing a product or an idea can boost
even the most downtrodden nation.
The Franchising opportunities that can stem from a
small project and even into neighboring countries can be a saving grace for the
entire population.
The
Players Involved in Crowdfunding
The
Administrator
The
person or persons who put the crowdfunding campaign together. This may be the same person as the
beneficiary, but not always the case.
Benefits? The Administrator will have some kind of a
stake in the entire campaign for their involvement. This would normally be negotiated up front
before it goes live.
The
Investor
The
people or person (s) who invest into the crowdfunding venture. Yeah, you the public.
Benefits?
Well, depending on the model of Crowdfunding, the investor i.e. the public, may
not receive any benefit or at least not initially. The model will prescribe what type of
benefit, is available to the investor, which could also be shared equity.
The
Beneficiary
Beneficiary is the person benefiting from the crowdfunding
donations. He or she is normally the
inventor of the idea or product and may very well also be the Administrator.
Benefits? The
beneficiary receives the most rewards but also can take the most losses. There
is no sure fire guarantee that the Crowdfunding venture will take off the
ground, but when it does, the beneficiary will see the benefits. If successful,
all parties will benefit.
What are the Risks for each Party?
Simply, loss of time spent on the venture, loss of any
monies contributed to start up the Crowdfunding project, and sometimes loss of
face, i.e. Reputation in the market place.
Is
their Training Available for Potential Crowdfunders?
Crowdfunding, as mentioned, is a relatively new concept and
while there is plenty Intel on the Internet, there is no official training per
say. Having said that there are a few
innovative companies that are realizing that the potential to helping out those
“good idea’ guys out there, and essentially getting to know what they have to
offer before anyone else does, is a worthy business platform.
So, in a nutshell, yes, there are some training facilities
and programs online. One that comes to
mind is Crowdfunding Heroes. It is inevitable
that someone will make money out of this fabulous way of launching your ideas.
Notable
Crowdfunding Testimonials
Kickstarter
Kickstarter was one of the first platforms to boost
Crowdfunding and many a success story has followed from their early days.
TikTok
Scott Wilson only asked for $15000 initially to kick start
his innovative TikTok and LunaTik wristbands, but ended up being one of the
biggest success stories in the world to hail from Crowdfunding. In the end, he managed to raise an impressive
1 Bar of interest.
Elevation
Dock
A docking station for iPhone’s, the Elevation Dock team also
made a screaming success, pulling in around $1,4 million from their small
startup in Oregon, USA.
Double
Fine
Eight hours and $3,3 million later, Double Fine comes up as
one of the fastest crowdfunded ventures in all time. The computer game company won its place in
history by even getting their own “day name” – “Double Fine Day” on the 13th
of March.
Crowdfunding
Business Opportunities
So,
you ask yourself, after reading all this Intel – How can I get involved? How can I find a business opportunity within
Crowdfunding?
Well,
you will be surprised to hear that it isn’t as difficult as you maybe thought.
There
are a few websites out there that give you the “investor” or even
“co-collaborator” an opportunity to get involved in the next best idea. The likes of FundingTree
in the UK shares, with the world, projects looking for investments and funding.
The
most popular campaigns to date are those involving restaurants, design type
businesses, gambling, wedding planner, clothing brands, property and anything
related to IT and gaming.
Take
your pick!
A
Snapshot of Crowdfunding Regulations and Legislations
The rules are pretty simple and have been put in place, as
with any initiative involving money, to curb over-abuse.
Here is a quick snapshot of the regulations:
ü A maximum of $1 million can be raised via a crowdfunding
venture in a 12 month period
ü If the investors have net worth or annual
income below $100,000 then they may invest greater of either:
-
$2,000
or
-
Five
percent of the lesser of their annual income or their net worth
ü If both net worth and annual income,
collectively, is above $100 000 then it will be limited to 10 % of their annual
income or their net worth
ü In that 12 month period the total
investment amount may not exceed $100 000
ü When it comes to company’s investing the
rules are slightly different but with
limitations based on their company tax returns
Who can Benefit from Crowdfunding?
Governments
The governments can gain great benefit because of the
increased revenue generated through more tax.
In addition, the GDP will be increased in the long run as
well as an improved and more powerful economy.
By creating a new platform for potential earnings, if all
goes well, this can reduce the % of unemployment throughout the world.
If we want to push the envelope further, we can even say
that by creating more jobs and possibly a good investment for all, one can
reduce crime.
The empowerment of micro communities will definitely be on
the rise as the world sees smaller, developing countries, as well as entire
sections of the public getting on the bandwagon and improving their situations.
Individuals
Of course, the crowdfunding vendetta started off with an
individual and will continue to do so, allowing fresh new entrepreneurs to
explore and build their skill sets.
A successful crowdfunding campaign will empower all those
looking on and in turn build up productivity across the nations. If one person
can do it, why can’t many others?
The opportunity for gainful occupation gaps to be filled as
well as huge financial gain, is what many are seeing the crowdfunding hype to
be all about.
Companies
Many corporates are seeing this as another way to increase
their profits and while sometimes it can be a risky investment, so can many
other avenues of investing your capital.
Crowdfunding
Administrators
The administrators that get involved in a crowdfunding
venture are often the beneficiaries or start-up guys, but not always so. Nevertheless, the idea is to make a profit
out of the product or idea and in turn possibly empower communities to do the
same.
Investors
The investors or funders that are sold into the idea can
reap great financial returns even if they see themselves as the common man on
the street. Everyone can benefit from a
great crowdfunding venture.
Entrepreneurs
The business potential rewards for anyone that considers
themselves an entrepreneur can be huge.
Maybe not the first time but down the line with consistent persistence,
anyone can benefit.
What
Kind of Budget is Required?
As with any business plan you want to make sure you have
worked out your budget or funding goal upfront.
You need a clear idea of what it is you want to raise and by when.
The experts tell us that you need to work that out and then
add on about 30% extra.
There are many aspects to your budget:
ü Labour Costs
ü Office or factory space rental
ü Design work
ü Marketing and Advertisement
ü Costs of permits, licenses and or Rights to your
idea/product
ü Sales Costs
ü Distribution Costs
ü Equipment and Machinery
ü Materials
ü Admin and other overhead expenses
Disclaimer
This blog is a guide. Those who partake in the opportunities
this blog offers, do so at their risk. You are advised to do your findings
before embarking on any activities.
