crowdfunding Archives -

28 Feb, 2014

Equity Crowdfunding: Is It Hype- Worthy?

Crowdfunding is hot, kick-starting not only our companies but entire economies. It is the go-to miracle measure to create ambassadors, marketing, money and products out of nowhere.

These expectations came into existence after major crowdfunding successes, like that of Pebble Watch. There are different types of crowdfunding however, and each type of crowdfunding benefits a specific type of company or a specific need within that company. Let’s look at the differences to get a grip on how crowdfunding can help your start-up!

Peer-to-Peer Lending

Much of what people expect banks to do has been replaced with bottom-up initiatives, like peer-to-peer lending. As an entrepreneur, it is easy to understand: The money you receive is not yours, you’ll have to pay it back to the many investors who then benefit from the interest rate the entrepreneur proposed. Though understandably for the lender and therefore easy to sell for the entrepreneur, lending brings some potential problems. It may hurt your cash flow, you might not be able to pay back the loan as soon as you expected, or the company goes bankrupt and you have to pay back the debts yourself. Finally, it doesn’t increase the value of your company as the money isn’t owned by you.

Lending can be beneficial for companies that expect revenue in the near future and companies with a good solvability. However, if the bank didn’t give you the money, it might be wise to double check with your account before asking the crowd for a loan.

Example: http://www.pret-dunion.fr/

Donations and Reward-Based Crowdfunding

These hardly need an explanation. Donations are very valuable for your company if you want to increase your company’s image (think about“Food-for-Africa”-run with your employees or setting up schools). Reward-based campaigns are valuable because you can test people’s willingness to purchase your product, test the product, and of course train your own marketing skills. And of course, as a start-up, you probably need the cash. Also, being able to add revenue and products sold to your investment or loan offer, donations increases the chances an investor or a bank will give you money.

The major drawbacks are that the product has to be as good as ready to produce. In order to do that it’s often required that you create a prototype for which you need, you guessed it, money. Unless you have a very good prototype or a product that doesn’t require one, it’ll be hard to convince the crowd to invest. Because these two forms of crowdfunding are so popular, there’s also the chance that you might drown in the offers that would-be backers are confronted with. Marketing is the key with this type of funding.

Example: http://www.kiva.org/

Example: http://www.indiegogo.com

Equity Crowdfunding

Equity crowdfunding in Europe has been in development for the last four years in the US, and has been practised in Europe during that time. It turns out to be a tough nut to crack. Not only legally but also because “buying a company” is not what the majority of people do on a daily basis. Even if they have the general knowledge of what the meaning of being a partial owner of a company is, the entrepreneur will still receive a lot of questions about the equity crowdfunding platform, the legal aspects, the expected ROI, and so forth. It requires the entrepreneur to have a well thought plan and an even better (and understandable) pitch.

On the bright side, raising funds via equity crowdfunding will increase the value of your company. You’ll have more access to knowledge, networks, additional money in a later stage, and you will create stakeholders that help you promote the company. Also, the investors and the entrepreneur establish a long-term meaningful relationship. Thinking about another round? Chances are your old investors will want to be there first: higher the investment, higher the involvement. Finally, your solvability will be improved, increasing the chances of a loan, if needed. Be sure to double check the safety of the platform however, by seeing who the financial and legal partners of the equity-funding platform are and whether or not they are CAPS-accredited.

Example: http://www.symbid.com

Ludwine Dekker

2291

20 Feb, 2014

The Dangers of Crowdfunding

In a previous blog entry (http://citizentekk.com/2013/11/08/engage-contract-manufacturer/), I mentioned that crowdfunding was a good way to get initial market validation as well as obtain some capital so that your hardware startup can build some product.

There are lots of good reasons to run a crowdfunding campaign (https://blog.indiegogo.com/2013/04/5-benefits-of-crowdfunding-for-hardware-makers.html), especially since the funds you can raise are comparable to what you may be able to raise from seed investors. But, when should you choose between doing a crowdfunding campaign vs. finding seed funding?

If you think you may be able to raise somewhere between $100k - $1M in crowdfunding, you start hitting the amounts that you could similarly raise from seed investors. Seed investors are closer to traditional venture capitalists, in that they are primarily investing in the founding team, in addition to looking closely at the market potential and the business model. They are also interested in seeing the team develop something that will turn into a viable business one day. Most seed investors will take an equity stake - as a result they have a vested interested in seeing you succeed and will offer advice and connections in order to help you out. One of the hard parts of getting seed funding is actually obtaining it – you have to have a pitch deck, network your way into meeting seed investors, have some semblance of a business plan, and oh yeah, a working prototype would be nice too. While seed investors may be willing to invest in an idea, having a working prototype definitely helps.

In comparison, one of the best things that a successful crowdfunding campaign gives your startup is high visibility marketing. According to its stats, Kickstarter has 5.5M backers on its site – not all of them are backing hardware projects, but it’s a large number of potential customers that you can tap, not to mention the media attention that hugely successful campaigns (like Pebble) attract. A successful campaign helps you raise the funding you need to build your product (minus crowdfunding platform fees), without losing equity to a set of investors.

So, you get funding, don’t lose equity and are not beholden to investors. This is great - what could go wrong? Well, once you’ve finished with a successful campaign, you can’t really pivot on the product, and you have to deliver. The thing about successful crowdfunding campaigns is that backers tend to buy interesting products even though the crowdfunding sites are not intended to be stores (https://www.kickstarter.com/blog/kickstarter-is-not-a-store). While many of the backers do tend to be early adopters who may be more forgiving when your product doesn’t quite live up to the quality they are hoping for, many can be very demanding. Unlike getting seed funding, where you may have only a handful of investors to report back to, with crowdfunding you may have hundreds (or thousands) of people to answer to. Especially if they are upset that you haven’t shipped the product when you said you would. Many times, especially in the earlier crowdfunding campaigns in the hardware space, startups underestimate how much it cost and long it will take to get a product to market and end up getting angry emails from backers. (http://www.digitaltrends.com/social-media/dude-wheres-my-kickstarter-stuff/)

Several weeks ago, I got an email from a backer of one of the crowdfunded startups in our portfolio asking whether we were indeed working with the startup and if manufacturing had started yet. The product was delayed, and the person was looking for information. The main downside that I see to crowdfunding is that the backers don’t care if you have a viable business model or if you have the expertise or funding to actually build the product. They want the product that they paid for, and they want it when you’ve promised it to them. And, if your product is delayed, they want reassurance that you’re doing all that you can to get the product ready.

We see that a lot of startups that have successful crowdfunding campaigns have immense pressure to get a product out as soon as possible, regardless of whether or not the product is manufacturable. Many startups come to us with prototypes that they think are ready for production, but when we do the analysis, they’re not ready yet – it will take months of work to take them from the several prototypes that they have to a full product that’s ready to be produced by the thousands. One of the dangers of crowdfunding is that it can turn a startup’s focus away from building a business to shipping a product right now.

Crowdfunding in the right way can yield successful products and startups that will eventually raise investor funding. But, it’s necessary to keep in mind that for all the wisdom that a crowd can bring, it is possible for that same crowd to turn into an angry mob.

Winnie Yu

2612

9 Dec, 2013

4 Crowdfunding Apps to Help You Get Gifts

Holidays, birthdays, weddings and anniversaries are all some of the happiest moments in a person’s life; and with it comes the issue of gifting.

The task of finding gifts is not exactly easy. Neither is it fun to receive gifts that are not quite what you like. Frankly, it kind of sucks. Not to mention, the task of obtaining the money for these gifts is even more difficult.

Fortunately, there is an easy solution to this called crowdfunding. Crowdfunding is the concept of having people donate money online towards an objective or a cause. As of just recently, a few companies have applied crowdfunding to gifting. Here are four great apps that help you get gifts you want.

Crowdtilt

You can pretty much use Crowdtilt for any project, event or fundraiser. They have a word for their crowdfunding services – tilting. They claim to raise money faster and with fewer headaches. All you need to do is start the campaign, spread the word and once people start offering their bit; you get the funds via direct deposit. It tracks down the people in your social network to raise the money you need, which in this case is for gifting.

The downside is that is that Crowdtilt is only available to you if you live in the United States and have a valid U.S. bank account. However, anyone anywhere with a credit card can contribute to your cause. Speaking of your cause, since Crowdtilt is only based in the U.S., the promotion of your cause is limited to this periphery.

GoGetFunding

GoGetFunding is similar to Crowdtilt, except that they are an international website so your campaign can be promoted worldwide. Like Crowdtilt, they also allow all types of fundraisers and the huge advantage to using them is that anyone with a PayPal account can raise money online.

You have the option to create a timed or ongoing campaign and you can reward your funders with special tokens of appreciation with anything (legal) you like – from simple thank you notes to invitations to your event and so on. Another plus with GoGetFunding is that you get to keep the funds raised, even if you don’t reach your target amount. Some sites will reverse the funds back to your funders should you not hit your target.

GoFundMe

GoFundMe allows users to create fundraising campaigns for any project, gifting included. If you’re looking to just raise money online, for a cause, or even for yourself, GoFundMe is a good fundraising option. GoFundMe has some great sharing features such as their sharing widget. GoFundMe also provides some great metrics and analytics on the donations. GoFundMe operates in the US, Canada, UK and all European countries that use the euro.

GoFundMe is great because it offers donation options that include both online or offline payments. Depending on your preference for the online payments, you could either use WePay or PayPal to process your payment. Donors don’t need an account to donate on GoFundMe. Although GoFundMe does offer the ability to crowdfund gifts for yourself, it mainly focuses on providing funding for medical and educational expenses.

WishBooklet

We saved the best for last! As far as gifting is concerned, WishBooklet is our favorite crowdfunding tool. Anyone with a checking account can start a campaign and it’s the only app specifically designed for gifting. WishBooklet goes a step further by allowing you to add anything from any online store; with the added ability to include pictures and item descriptions.

A Wish It! Button is added to your internet browser and as you shop for your item online, you merely have to click on it to add it to your WishBooklet wish list. It’s that easy! When you’re done, all you do is share it via Facebook, Twitter or email. There’s even a progress bar to let you track your funding goals. It also makes it easy for your friends and family (and you) to purchase the gifts outright and directly from the online retailer.

Conclusion

These platforms truly change how fundraising works. Imagine the possibilities of crowdfunding. In addition to gifting it is also excellent for charity, business startups, college funds, holiday fares – the list never ends. A campaign benefits so much more than just financially. The exposure one gets, serves as a great kick starter, especially for new businesses.

Eric Santos

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