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The Beginner's Guide to Crowdfunding

Statista cites the fallout from the 2008 financial crisis as catalyzing the rise of crowdfunding. It provides small businesses easier ways to access credit without the usual hassle that financial institutions are associated with. In 2017, crowdfunding in America generated 17.2 billion USD, while crowdfunding in Asia generated 10.5 billion.

Due to its rapidly growing popularity and the many “rags to riches” stories often associated with crowdfunding, it has become the epitome of the “ask and you shall receive” narrative. Set up a campaign, get the word out and watch it spread virally like a wildfire while the funding comes pouring in from the community is often how the story goes. But that’s not always the case.

Why does it seem so difficult for some to succeed when newly minted millionaires seem to be popping up everywhere? That’s because it takes a long time to setup all the dominoes for a so called “overnight success” and amidst the hype no one talks about the boring research work that is essential for any successful campaign. There are several things you need to take note of before setting up or supporting a crowdfunding campaign and we have compiled the most important ones here.

What Can Be Crowdfunded?

Believe it or not the answer is:

Everything, as long as people believe you.

This means that you must be convincing, and the two essential components to a convincing campaign are a story and a prototype.

You can even crowdfund to start a new company. The long and short of this is that pretty much anything can be crowdfunded, as long as it resonates with the community in some way. However, the way a project is structured will influence the type of crowdfunding that you need to do.

The Different Types of Crowdfunding

Donation

Crowdfunding campaigns for school fees, or medical expenses typically fall under donation crowdfunding. In donation-based crowdfunding, backers give their money to support a project without expecting anything in return – hence “donation”. For these donors, the only returns they get are non-tangible, such as a sense of satisfaction – and a meaningful change in society.

Donation crowdfunding projects are not limited to the above two examples, however. In Singapore, crowdfunding was used by the LGBT community to raise a constitutional challenge against an anti-gay law. Just last year, the Malaysia government also set up a crowdfunding portal to alleviate the country’s national debt.

Common donation crowdfunding platforms include GoFundMe, Giving.sg, and Give.asia. Social media sites have also dabbled in crowdfunding – Facebook has a Fundraisers section, which serves the same purpose.

Reward

The other commonly-seen model is reward-based crowdfunding. It differs from charity crowdfunding because the backers pooling their money here are expecting to get something material. The “reward” in this case is a material good, such as games, music, a tech gadget, among others.

Reward crowdfunding can be a great way to stay ahead of the technological curve, or an avenue to get the latest creative works. Many crowdfunded projects exist in the mainstream today as testaments that the will of the community can spark great change in society. Oculus VR has its roots in a crowdfunding project. Meanwhile, many Youtubers also engage in crowdfunding activities on sites like Patreon to deliver their viewers content they enjoy. Several computer games such as Undertale, and even card games like Exploding Kittens also began on crowdfunding sites.

However, reward crowdfunding has its fair share of risks – there is no guarantee that the final product will materialize. Throughout crowdfunding history, projects have been delayed or even cancelled, leaving their backers high and dry.

When it comes to reward crowdfunding, the biggest names Kickstarter and Indiegogo come to mind. Patreon also sees niche popularity as an avenue for subscription-based crowdfunding access to creative productions.

Debt (or Loan)

This is a still-uncommon form of crowdfunding where a project borrows money from several individuals. The individuals lending the money receive the company’s legally binding commitment to repay the loan at certain time intervals and at a certain interest rate.

Just last month, Singapore-based startup SolarHome raised S$13.7 million with an annual interest of under 9% a year and an undisclosed tenure – reported by Straits Times as “usually 24 to 36 months”.

Equity

In the abovementioned debt crowdfunding, the backers do not have any stake or ownership in the project they are funding. In equity crowdfunding, it’s a different story. Backers get ownership (and thus equity rights) in the venture that they funded. This makes them shareholders in the project, and allows them to receive dividends, returns and any other incentives.

For startups, equity crowdfunding such as FundedHere in Singapore has emerged as a way around the difficulty in securing traditional funding such as that from highly-coveted VCs and Accredited Investors. Equity crowdfunding is however still highly uncommon and regulated by local laws.

Both debt and equity crowdfunding are much more uncommon than the “traditional” donation and reward crowdfunding. For both loan and equity crowdfunding, the platforms likely need to be registered with the local authorities of the regions they operate in. In Singapore for instance, platforms like FundedHere need to register with the MAS and be compliant with regulations in order to be allowed to operate. However, startups have increasingly turned to these two avenues since the funds available are frequently higher than that of “traditional” crowdfunding and may suit their business models better.

Listing Requirements

The different crowdfunding platforms have different requirements for the projects that they allow. For instance, Giving.sg is a donation crowdfunding site meant for social and charity causes – not for the funding of a tech gadget, revolutionary as it may be. In this case platforms such as Kickstarter and Indiegogo which target creative and tech projects is the place to go.

On the flip side, fundraisers for medical expenses or school fees on sites like Kickstarter will be removed for violating their rules. Sites such as Giving.sg, Give Asia, or GoFundMe would be the better choice here. Different sites have different requirements which users should read up on in order to know what the platform contains.

Other platforms, particularly that of debt and equity crowdfunding, are even more stringent since their crowdfunding mechanisms are technically investment instruments. For instance, equity crowdfunding platform FundedHere requires the startup to be a Singapore-incorporated entity which has operated for at least 3 months and has a minimum paid-up capital of $50,000. At least one of the founders or beneficial owners must be Singaporean.

Incentives and Milestone Achievements

Incentives are frequently used in reward crowdfunding as a way to encourage larger contributions and even foster a sense of ownership in the project. They are more often than not placed in a tiered system, where a larger contribution allows the backer access to special features, or opportunities to contribute directly to the project. In projects such as games, an example would be allowing one backer an opportunity to design a fightable boss monster to be placed in the game.

However, “mainstream” crowdfunding platforms forbid any form of offer for equity rights or similar financial incentives. The crowdfunding is only for the “reward” – the creative work, or the tech gadget for example. Equity and debt crowdfunding are different here since the incentive in question is understood to be financial gain, with the fine details recorded and officiated in legalese.

Some projects, particularly reward crowdfunding ones, also incorporate milestone achievements. These add new or special features and other extras meant to entice backers into funding the project past these thresholds.

Securing Funding?

For project creators, just setting up a campaign is not enough. Labour needs to be put in to the project to promote it. Backers must be kept constantly updated on the project progress, while enquiries must all be replied satisfactorily. Crowdfunding is a two-way process, which means you must be prepared to perform tons of customer service. While crowdfunding has made life easier in some areas, it requires a lot of effort to keep the momentum going to attain the funding target.

On some platforms such as Kickstarter, the project creator only receives the collected funds if the project reaches its target and gets nothing if the target is not reached – an “all-or-nothing” approach. Other platforms allow flexible funding where any amount received goes to the project creators. It is up to creators to see what suits their needs and level of confidence.

Research has found that including certain keywords or elements can psychologically “encourage” contributions.

For creators, it’s a good idea to plan beyond the project’s funding target. How will the project continue to grow and expand after its initial run? For donation crowdfunding, some consideration should be given on any excess funds.

Service Fees

Platforms need to monetise in order to secure revenue, cover their overheads such as server costs and will often (but not always) charge fees. For instance, Kickstarter and Indiegogo take a 5% cut off contributions as a fee.

In recent times, some charity platforms have reduced or even waived their fees. Facebook for example has dropped service fees for contributions to nonprofits, though it still charges a variable service fee for personal fundraisers. The fees differ across regions. Similarly, GoFundMe has waived platform transaction fees for projects in selected regions, allowing users to give an optional “tip” instead.

Note that not all crowdfunding platforms take the service fees from the backer. Singapore-based crowdfunding site Giving.sg does not deduct the service fee from contributors. Instead, charities using the platform are charged 3% of the total donation amount they raised. It’s a good idea to read on the website how fees are deducted – usually crowdfunding sites maintain support pages that detail the fees and provide links to these resources throughout the site.

Credit card payment providers used by these crowdfunding platforms will also levy their own fees in addition to that of the platform’s, which increases the cost for involved parties. Some users have expressed that these fees are not very clear or are buried too deep into the website, stating that crowdfunding platforms can do better in making these resources more accessible.

A Summary of Common Crowdfunding Sites

A comparison of the workings of common sites are listed below:

Platform Service Charge Types of Projects Funding Structure
Kickstarter 5% by platform

Additional 3 – 5% by payment provider Stripe

Creative Projects –

Art, Tech, Software, Food

 

All-or-nothing funding targets – reach the target or receive nothing.
Indiegogo 5% by platform

Additional 3% + 30 cents per transactionby payment provider Stripe

 

$25transaction fee for fund disbursement to a non-US bank account.

Any campaigns for profit or products, or benefitting a non-profit recipient.

NO personal cause campaigns allowed. Users are directed to GoFundMe.

Flexible funding or all-or-nothing funding options.

 

In flexible funding, creators are given the option to keep any amount collected, even if the target was not reached.

 

GoFundMe No fees are imposed by platform. Users may give tips.

 

Payment provider charges a varying percentage dependent on region.

Personal cause campaigns Flexible funding

 

Patreon 5% by platform

 

Undisclosed amount by payment provider Stripe/Paypal

Creative projects, on a membership perks basis Subscription model
Giving.sg 0% collected from backers.

Instead, charities pay3% of the total amount raised.

Charity projects from registered social organisations Flexible funding

Additionally, able to source for manpower (Volunteers) in place of funding.

Give.asia 0% charged by platform. Instead, users can give tips.

 

1.5% charged by payment processor for registered charities; variable feefor non-registered ones e.g. personal causes.

Personal cause campaigns, charity projects. Flexible funding

Staying Safe

Society has demonstrated many times that they has no problem giving their precious funds away as long as they believe in a project. However, a number of bad eggs out there have actively made use of this to defraud unsuspecting, well-meaning backers.

When looking at projects, it’s best to ask:

  • Is there proof that it works?
  • What are other people or the media saying about this project?
  • Who is the money going to?
  • What will it be used for?

Crowdfunding can be a high-risk venture as it’s impossible to truly know who is at the receiving end of the funds. Crowdfunding platforms have intervened on occasion to stop active rogue campaigns. However, these platforms are often powerless once the funds have changed hands, requiring backers to seek recourse from law enforcement or accept the loss.

The best guidelines to go by before contributing to a project is definitely to do your research, and don’t give more than you’re comfortable with.

The power of crowdfunding has brought us some of the greatest creations made by man. It is indeed a great power, not to be underestimated. Yet this power is just a channel, and can be manipulated by its wielder, for good or bad. The crowdfunding market continues to grow and evolve, and we look forward to seeing what the 2019 ahead and beyond has in store for us.

Meanwhile, have you participated in any crowdfunding projects? Share with us how it went for you in the comments!

2 Responses to The Beginner’s Guide to Crowdfunding

  1. Pingback: Crowdfunding in 'Uncommon' Industries – HZ Capital Group

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