In the past few years, more and more entrepreneurs have turned to alternate funding. One of the big methods of alternate funding is crowdfunding — a process that allows people to raise money through the internet, which allows entrepreneurs to reach much larger audiences than ever before. Its success as a funding method is shown through the stats – according to Forbes, in 2014, approximately $16 billion was crowdfunded!
While this seems promising for future entrepreneurs, a lot of crowdfunding campaigns (the ones least spoken about) end in crushing failure and disappointment. This is because crowdfunding, as a process, is actually quite complex and requires plenty of hard work. Here are some things to note before engaging in a crowdfunding campaign, that will hopefully better prepare you for your entrepreneurial journey to come!
Crowdfunding is a lot of work. Much like anything that yields success, a successful crowdfunding campaign requires months of preparation. However, for those trying to raise simply a small amount of money, these months may not be worth the long drawn out effort.
To have a successful campaign, you will need everything from prototypes and professionally created videos to personalized portable displays, and possibly a large amount of initial expenses.
When a campaign is crowdfunded, the startup is extremely accountable to investors. The investors’ minds have to be kept at ease, even if this means compromising on certain aspects of your ultimate project. Andrew Scharge, co owner of Money Crashers Personal Finance, warns people about this aspect of crowdfunding, as shown in an article on Tech.Co.
Ownership and/or proprietary rights is an often-overlooked aspect of crowdfunding campaigns. A lot of crowdfunding is done through online platforms like Kickstarter, Indiegogo, FundersClub etc. While these platforms are great avenues and have led to many successful campaigns, they are not responsible for the maintaining the ownership rights to your “idea” – you yourself have to be.
Anyone could view the promotional video you have put up, and easily optimize and tweak your idea, putting it into fruition before you could, especially if they have the required funds to do so. Thus, having the necessary copyright and trademark protections in place is essential prior to publicizing your campaign.
Many crowdfunding campaigns are conditional. What this means is that something is promised in return for a certain amount of investment or donation. Often, crowdfunding campaign don’t think their “rewards” policy till after the campaign has almost ended. In a lot of these scenarios, entrepreneurs have promised enticing yet extravagant rewards.
Eventually, due to these commitments, they are only left with enough money to finish production, but not enough to foster capital growth. Make sure to plan out your conditional rewards policy well before you start raising funds, creating an all-encompassing cost-benefit worksheet so as to avoid the unexpected loss of funds later.
Due to the limited funds, a lot of entrepreneurs and startups use their own resources to get moving. In fact, one of the predictions for 2016, is the rise of BYOx (Bring Your Own Everything). While this is a good idea in general, it comes with the risk of your data being compromised. In this situation you might have to consider proper data backup strategies, or invest in encryption. There will be many things such as this that you may have to consider due to limited funding overall – be sure to think of these in advance!
Depending on which country you are basing your production and distribution in, as well as the nature of your business, you will have to consider the various laws and regulations, tax implications and reporting requirements of your startup. For example, in the US, the latest draft of the SEC states that you will have to have your finances audited formally and file a final report with the SEC.
In the EU, there has been a movement to add VAT (Value Added Tax) to crowdfunding rewards. In the scheme of things, this sort of VAT would discourage people from donating, as they would incur additional tax for doing so. Once again, if the campaign is only meant to raise a relatively small amount of money, dealing with the legalities and regulations may not be worth it.
These are just some of the things to be aware of before embarking on a crowdfunding campaign. Let me reiterate, this is not meant to discourage you from pursuing your entrepreneurial dream. Rather, this article is meant to highlight any potential challenges you may face, so that you can prepare for them well in advance and carry our your crowdfunding campaign without any unforeseen hiccups. Armed with this intel, I encourage all you entrepreneurs to make your ideas into realities, whether through alternative funding or not – and wish you the very best of luck!
Have you faced or know anyone who has faced other challenges while crowdfunding? Do you have any questions for me? Let me know in the comments section below!