A $5.1 billion market, crowdfunding is literally changing the landscape of possibility. What wasn’t conceivable 10 years ago due to a lack of resources, is now just a click away. The only thing that is required of you is a great idea and the tenacity to see it through. Yet, has crowdfunding wrongly given small business owners the hope that any idea can be brought to life if it’s placed online for community support? Before you venture out in the crowdfunding market, there are some basic facts, risks, and drawbacks you should be aware of.
You should know that there are three different types of crowdfunding sources. The first, investment funding, allows contributors to become shareholders. The second, localization funding, is centered on geography; it caters to local campaigns exclusive to your neighborhood. Lastly, and more generally speaking, you have remote funding options usually premised on a community of donors.
As discussed in my previous post, there are about 10 different crowdfunding platforms – each ideally suited for a specific need as detailed in the post. However, as with anything in life, there are fine lines to be read for each platform that at the end of the day can matter more to your campaign than any other factor. Take Kickstarter for instance, which charges a flat 5% fee for every successful project. Perhaps you don’t have an issue with the fee, but it’s something that needs to be factored into how much money you need to raise. If you’re asking for a hefty amount, then 5% of that also is quite a hefty sum. At this point you’d need to consider whether Kickstarter is right for you provided you also have a finite window of opportunity to raise this sum. In this way, Kickstarter is an all or nothing game – much like any other gamble. However, if you’re not a U.S. resident, then you don’t have to worry about any of this since Kickstarter is only exclusively available to this group.
If you don’t like the drawbacks here, Indiegogo might be a better option for you. Indiegogo isn’t limited to U.S. residents and nor are you penalized for not reaching your goal – at which point you’ll be charged a 9% fee before you can walk away with your earnings. The latter also has a more flexible fee schedule that includes 4% from every fund raised, with 3% for credit cards fees and a $25 fee for wiring money outside the U.S. Yes the increments are smaller but they all add up at the end of the day. Still, for non U.S. residents, this might be a small price to pay. Almost all other crowdfunding portals have the same minimal yet broken down fees, which I find people either favor or are wary of. It could be the one reason why Kickstarter is preferred; there are no additional fees to waiver beyond a flat percentage. For many, the risk of all or nothing is worth based on that option alone.
Let’s say you get your money. Stanford Graduate School of Business thinks you might still be losing out – or at least some graduates think so, including class of 2012 graduate Steven Dupree. In an article plainly labeled as “Crowdfunding 101: Pros and Cons”, Dupree feels that entrepreneurs coming up with less initial capital from friends and family members are actually doing themselves a disservice. He writes, “By putting less of their own skin in the game and no longer facing investors one-on-one, entrepreneurs lose out on the truly valuable step of convincing others. Entrepreneurs collect less pointed feedback from critics so their early business models aren’t honed as well.” He also feels remote investors are more likely to be “further removed” making it tough for them to make the right call on important decisions. Just because someone has the means to invest doesn’t mean they understand the right step forward for your business; and by sharing the reigns you’ve just handed over significant control of your company to people who (while they’ve vetted you) you haven’t vetted for yourself.
So before you take your next idea or project public, take a minute to consider all the facets of your campaign. The end goal isn’t about raising the money; it should be about getting together the right group of people to push your idea forward.
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