What You Need to Know About Crowdfunding

by / 1 Comment / 160 View / June 11, 2014

When most people think of crowdfunding, Kickstarter probably comes to mind. The fact is, however, that the general concept of crowdfunding is much more expansive than the model employed by Kickstarter, so let’s elaborate upon the four main types of crowdfunding:

  1. Donation-based: People contribute to a project or cause without receiving anything in return. The most prominent example of a donation-based crowdfunding platform is GoFundMe.
  2. Equity-based: This form of crowdfunding is most like venture capital contributions, whereby people are granted more equity of the company the more money they donate. Of course, the company seeking funding would place a cap on the equity it is willing to give away (and thus a limit on the funding it needs).
  3. Debt-based: Through this medium, organizations can obtain loans from investors as opposed to banks. The debtors are expected to pay back the loan at a rate that is agreed upon by the parties involved in the transaction.
  4. Reward-based: Kickstarter finds itself in this category. Here, people can solicit varying amounts of money from others in exchange for certain rewards (that are, often times, the product being funded or something related) that depend on the amount of money contributed.

Because the reward-based model is by far the most popular form of crowdfunding, I’ll use Kickstarter’s model to detail what you need to know about its pros and cons.

The Positive:

  • Initial Capital: While this may be an apparent benefit, the capital raised will often times help fund the first production run of a product. For instance, consider the company that created the Pebble Watch—the money it raised through Kickstarter (over ten million dollars) truly enabled a mass production of its timepieces and an expedited introduction to market on a massive scale.
  • Idea validation: This type of crowdfunding essentially polls the public and will serve as a fantastic indicator as to whether the product or idea will be successful when brought to market. Simply, despite the fact that rewards are an output, the more people willing to fund the project, the higher the probability the product will be successful when mass-produced. That being said, note that as of June 2014 approximately 43% of Kickstarter projects have met their funding goals; so, while goals must be realistic, you can see that less than half of the thousands of projects on Kickstarter have been successfully funded. Keep in mind, however, that the funding on Kickstarter projects is “all-or-nothing,” meaning that a project receives none of the money contributed if it doesn’t meet its funding goal.
  • Publicity: A Kickstarter or other form of crowdfunding campaign can be fantastic publicity. Many projects are pushed through social media and highlighted on the local and national scale through news outlets, such as Forbes and CNBC.

The Negative:

  • Time and effort: Launching a crowdfunding campaign can be a time drain. Not only does it take significant effort to promote the product, but it also takes time to craft rewards for each donation level, continually notify the backers with updates, and manage the project.
  • Actual amount of disposable cash isn’t equivalent to the amount raised: This typically isn’t a major concern for those coming to Kickstarter, but it should be a major consideration that is contemplated carefully. Although a certain amount may be raised from the campaign, a substantial portion of the funds could go towards fulfilling the rewards for all the backers. On top of that, Kickstarter takes five percent of the money collected.
  • The need to deliver: Once successfully funded, there is a level of strain that will be put on the creators to manufacture the product in a timely manner. Failure to complete a successful production run could be disastrous for the creators of the project and their reputations (due to an inability to produce the product with the funds raised), as Kickstarter itself acknowledges.

 

To date, over a billion dollars have been pledged to projects on Kickstarter, proving that its model works and validating the fact that reward-based crowdfunding can truly be a viable path in any case. Ultimately, each founder needs to decide not only whether crowdfunding can meet the needs of his/her idea, but also whether crowdfunding aligns with the vision for the idea and company many years down the road. At the end of the day, the whole concept of crowdfunding and the way we’re able to contribute through the Internet today is simply revolutionary, and we’re just at the tipping point.

Works Cited

Barnett, Chance. “Crowdfunding 101: The Basics.” Forbes. Forbes Magazine, 02 Aug. 2012. Web. 10 June 2014.

“KICKSTARTER.” Kickstarter Basics » Frequently Asked Questions (FAQ) — Kickstarter. N.p., n.d. Web. 10 June 2014.

“KICKSTARTER.” Kickstarter Stats — Kickstarter. N.p., n.d. Web. 10 June 2014.

“Pebble: E-Paper Watch for IPhone and Android.” Kickstarter. N.p., n.d. Web. 10 June 2014.

  • Olivia

    Interesting article! Short, but informative!