Key Things to Know About Crowdfunding
Crowdfunding has been a surprising way to raise funds for good causes, creative projects by musicians and artists, and product ideas from entrepreneurs. But more and more manufacturers of tangible products are finding crowdfunding a way of pre-selling new products.
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Crowdfunding has been a surprising way to raise funds for good causes, creative projects by musicians and artists, and product ideas from entrepreneurs. But more and more manufacturers of tangible products are finding crowdfunding a way of pre-selling new products. Crowdfunding is usually defined as using Internet-based platforms and social media to raise money through relatively small contributions by large numbers of people. This list summarizes the basic facts about crowdfunding that manufacturers should know before embarking on a crowdfunding campaign.
- According to data shared in December of 2018 on Startups.com, Crowdfunding campaigns raised $2.1 billion USD from 2014-2016 and are projected to raise $300 billion USD by 2025.
All indications are that crowdfunding platforms have the potential to continue to double the amount raised each year for the next several years.
- There are over 500 crowdfunding platforms. New crowdfunding platforms are coming online literally weekly.
And many of these are specializing in niche markets such as motion pictures, medical devices, higher education, or gaming.
- There are at least 5 distinct types of crowdfunding.
Not all crowdfunding platforms are alike. One classification of campaigns identifies the variations as good cause, reward, pre-order, debt, and equity (Source: Martin Zwilling, Will the Real Crowdfunding Model Please Stand Up). The latter 3 are the most relevant to manufacturers. Pre-ordering asks contributors to pay in advance to fund production of a new product. Debt-based campaigns structure a loan that will ultimately be paid back to contributors. Equity-based crowdfunding has been evolving but ultimately allows contributors to make investments in a company.
- Crowdfunding platforms charge a fee, but they don’t all charge the same amount.
Crowdfunding platforms are businesses that were started by entrepreneurs who saw an opportunity to make money. Their profit comes from fees they charge that are a percentage of the money raised. These fees can range anywhere from 2 percent to 10 percent depending on the platform. They also charge credit card fees and sometimes foreign transaction fees.
- Most platforms make you choose between “all-or-none” and “take-what-you-make.”
Some platforms only release the raised funds when the campaign hits its target amount. Others allow campaigns to take whatever amount they raise but then typically charge a higher fee.
- It is important that potential contributors feel like they are getting a good deal.
In pre-order crowdfunding, contributors generally expect to pay less for a product than if they ordered it through other means. Manufacturers should be prepared to give a discounted price for a new product in order to be able to raise the funds in advance to produce the product.
- Few crowdfunding platforms can attract contributors to your campaign.
It’s usually up to you to attract interest. The most successful crowdfunding campaigns are the ones that can tap into a pre-existing database of potential contributors. That’s why musical groups are among the most successful campaigns—they start with a “fan base” eager to see them produce a new recording. Only a few sites have the power to attract strangers to a campaign. (Kickstarter, Indiegogo, RocketHub, RockThePost, Crowdfunder)
- Only a few crowdfunding platforms cater to manufacturers.
Amid all the crowdfunding platforms that promote musicians, artists, non-profits, and community projects, there are some that specialize in commercial products. Crowdsupply focuses on the pre-ordering of manufactured products and adds engineering, design, fulfillment, and warehousing assistance to the product campaigns. Unlike Kickstarter, which specifically states it is not “a store,” sites such as Crowdsupply offer continued sales even after the fund-raising goal has been met. Another platform, Crowdfunder, calls itself “Crowdfunding for Businesses” and adds the capability of matching manufacturers to a network of potential investors.
- For some consumer goods, the more popular general platforms may still be your best route.
Even though they are not focused on manufactured products, some of the general platforms mentioned in #7 may be the best bet for popular consumer products. There is something to be said for being able to reach thousands of people on behalf of your product.
- In the coming years, equity-based crowdfunding will hold the most promise for manufacturers.
The passage of the JOBS Act in April of 2012 opened up a whole new set of possibilities for crowdfunding by beginning a process of waiving a number of restrictions on publicly offering the sale of shares of stock ion a company. For manufacturers specializing in OEM and B2B products, equity-based crowdfunding provides an incentive for contributors to earn income from their contributions to successful manufacturing projects. In the coming years, this is likely to have the largest impact on the scope of crowdfunding activities.
Source: Bob Cohen is the CEO of the Braintree Business Development Center (www.braintreepartners.org) in Mansfield, Ohio. You can follow him on Twitter @doctorcohen.