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Is Crowdfunding Still a Good Way to Gain Investment?

By: SmallBizClub

 

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The rise of crowdfunding was an abrupt and noisy one. The major platforms that allow people to invest small amounts in speculative projects, the likes of Kickstarter and Indiegogo, seemed to pop up overnight, with huge success stories touting it as the future of funding. But with the dust settling and Kickstarter reporting this week that it’s created more than $5bn of ‘economic value’ in seven years, what’s the current outlook for crowdfunding as a tool for small businesses?

As the largest crowdfunding platform, Kickstarter has been graced with some fairytale successes. Oculus Rift is perhaps the current darling. A then 18 year-old entrepreneur named Palmer Luckey raised a little under $2.5m to realize his dream of a true virtual reality headset, and the company was later bought by Facebook at a cost of $2bn.

This highlights what is arguably the biggest boon of a good crowdfunding campaign: finding and demonstrating an audience for your product. $2.5m is not realistically enough to cover research, development and manufacturing of a high-tech device, but it roughly matches the average amount invested by venture capitalists. With a unique concept and a professional pitch, the smallest company can demonstrate a level of consumer demand that will lure in larger investors.

The original backers were not uniformly happy with this takeover, however. One of the benefits of crowdfunding for the consumer is a level of familiarity and contact with the business they’re investing in, with regular progress updates and unique rewards becoming part and parcel of the ‘crowdfunding experience.’ Some backers felt they had been used, and worried that they would lose what had been billed as a gaming device to the social media maelstrom of the corporation.

Gaming the system

Gaming and technology businesses seem to take particularly well to the platform. Half of the fifty most funded Kickstarter projects relate to either video games or board games, and most estimates rank ambitious space sim Star Citizen as the most crowdfunded project of all time, having raised over $100m across several campaigns. While it’s now commonplace to see independent videogame studios, and occasionally large companies, crowdfund their projects, some have complained that a realistic level of funding is now out of reach.

The use of Kickstarter campaigns to seek further investment, it’s argued, has skewed the public’s idea of how much it takes to realize an idea, and made it more difficult for nascent businesses to complete a project without external investment. If an ambitious video game project is funded and finished with a $500,000 crowdfunding campaign, people assume that this is the right amount for everyone working on a similar scale. But many of the most highly funded projects had notable industry veterans working behind the scenes, and as such could rely on their contacts and clout to secure further funding from venture capitalists.

A $2m goal for a relatively modest looking project might be based on realistic calculations, and they may even be thoroughly explained in the pitch. Even so, the gap between expectation and reality can kill a campaign before it can build momentum. The result is that new startups with fewer contacts can struggle to raise what they need to deliver on their idea, and might even adjust their expectations and ambitions accordingly. This can weight particularly heavily when part of the investment goes to fulfilling the many rewards expected with crowdfunding, with incentives from digital art to signed merchandise and even tours of your headquarters, all regularly thrown in to sweeten the deal.

Small scale success

Given the unrealistic expectations around some projects, you might expect a high rate of failure. But as Kickstarter revealed last year in a comprehensive study, only 9% of projects are ranked as failing to deliver on promised rewards, and some 40% of all projects started on the platform are successfully funded. This doesn’t come without a couple of caveats however: this data is largely based on investors surveyed by email, only 10% of whom responded, and does not include people who still expected to receive their rewards in due course. Even so, it’s a notably high rate of success for projects that are often considered too risky for venture capitalists’ liking. One could argue that this stigma is going away too, as the reflective success of crowdfunding’s biggest projects has lent the platforms greater legitimacy.

Given the ease of setting up a crowdfunding campaign and the potential rewards, then, seeking funding for your product or service might seem like a no-brainer. But it’s worth considering that for all the large scale successes, a majority of funded projects on Kickstarter make less than $20,000. Your goal should be realistic to what you’re trying to achieve, and it’s often advisable to keep costs realistically low (without cutting corners) wherever possible when it comes to manufacturing a physical product.

For small businesses looking to start a crowdfunding campaign, it all comes down to scale and self-restraint. You set your own goals and you will have to meet them, and sometimes that’s with an amount that people are willing to pay, rather than what you need. Promotion too can be a pitfall, with many of the largest campaigns having been driven by notable personalities, trusted hands and celebrity backers. Businesses seeking large sums should still err towards venture capital and other sources of investment, but with a well thought out idea and a good pitch, the monetary boost and built-in fan base from crowdfunding could catapult your SME to success.

heather-landauAuthor: As the founder of Accountancy In Europe.com, Heather Landau has honed her skills in service advisory from the pragmatic to the practical. With a total of 25 years combined experience in business development and service provision, Heather is a leading voice on the benefits and tax implications of crowdfunding, and operates business advisory and company formation services across Europe and the US.

Prior to AIE, Heather worked in the IT research industry, selling research solutions to the likes of Hewlett Packard, IBM, Microsoft and Intel, as well as information providers Reuters. On top of her knack for helping SMEs develop around the world, Heather holds a BA (Hons) in Modern Languages (French/Italian), and is conversational in German and Spanish.

Published: September 13, 2016
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