Crowdfunding Installment #2: Mechanics & Dynamics of Crowdfunding
Karl R. LaPan, President & CEO, The NIIC
This second blog installment is a continuation of the conversation I have been having with Kathleen Minogue to better understand the mechanics and dynamics of crowdfunding. This week we look closer at types of crowdfunding, platforms, the importance of known network, and the timeframe you need to commit to properly plan for a successful campaign. Kathleen is a thought leader and expert in crowdfunding. Her insights are especially useful as you consider crowdfunding as a potential component of your capital stack. Her background and expertise are noted in a brief bio at the end of this blog.
Karl: Can you distinguish between the major types of crowdfunding (donation, rewards, investment, lending) and share whom you think each type might be appropriate for when raising alternative capital for an idea or business?
Kathleen: The main types of crowdfunding are:
Donation – People donate small amounts of money to causes they believe in. (Donations are often tax-deductible.)
- This type is best suited for: personal causes, nonprofits, social enterprises, civic organizations.
Rewards – People make contributions to businesses/projects in exchange for rewards. (It’s often used for product pre-sales.)
- This type is best suited for: idea stage & start-up businesses, established businesses, nonprofits, and social enterprises.
Lending – People loan money to businesses (rather than banks lending money).
- This type is best suited for: revenue-generating businesses with the ability to cover loan payments.
Investment – People (or other business entities) invest in businesses/nonprofits using federal or state securities rules.
- This type is best suited for: start-ups, established businesses, nonprofits, social enterprises, real estate, local communities.
This is just a brief overview. Crowdfund Better’s “Crowdfunding Cheat Sheet” outlines the types of crowdfunding, who it’s for, reputable platforms and typical fees. You can get your copy by visiting Crowdfund Better’s website and signing up for our newsletter.
Karl: With over 600 active platforms, how do I know which platforms are most effective and for what specific purposes are they a “best” funding vehicle? How do I know if the platform fees are reasonable?
Kathleen: These days crowdfunding platform fees are rather standard depending on the type of crowdfunding. For example, most rewards platforms have a platform fee of 5% of your raise and around 3% in payment processing fees. Platforms are businesses and charge fees in order to maintain their technology and customer support. I would be wary of the security and reliability of a platform if they don’t charge fees or make it transparent how they cover their costs (some are nonprofits and have other sources of funding).
As for which platform is best for what kind of crowdfunding, your best bet is to visit crowdfunding platforms and see what kinds of businesses are having success raising funds on these platforms. What you’re looking for is a platform with campaigns that look like the kind of campaign you hope to launch. You can use Crowdfund Better’s “Cheat Sheet” mentioned above to get started with your research. Your other option is to get the help of a knowledgeable crowdfunding consultant who knows the industry inside out.
Karl: What are the biggest misconceptions about crowdfunding?
Kathleen: One of the biggest misconceptions about crowdfunding is that you can just create a campaign page on a platform and people will fund your campaign. Relying on platforms to find you backers will not lead to success. Statistically, anywhere between 50-90% (depending on the sector) of your backers will be from your “known network.”
Your “known network” includes:
1) people you know personally
2) your customers
3) your business email subscribers
4) your followers on business social media
5) organizations you or your business are part of
To find backers, you will also need to have an effective marketing and communications strategy to bring your campaign to the attention of your known network and to help others discover your campaign.
Karl: What is the biggest mistake entrepreneurs make when embarking on a crowdfunding campaign?
The biggest mistake entrepreneurs make is not giving themselves enough time to prepare their campaign before launching. I have never heard a campaign creator lament waiting until they were ready to launch a campaign, but I have heard many entrepreneurs tell tales of woe about launching too early and realizing halfway through their campaign that they were not prepared to handle the day-to-day work of a 30-45 day campaign.
Successful campaign creators typically leave themselves a runway of at least 60-90 days to prepare for a campaign launch. If you don’t have a large “known network” you may need 6-12 months to expand your network and build a solid marketing foundation under your campaign before you launch. You’ll also want to leave time to warm-up your known network and get them poised to support you BEFORE you launch. In fact, a campaign that raises 30% or more of its goal in the first 3 days has the highest chance of reaching its goal. If you find yourself scrambling to get your communications together the day before your planned campaign launch, delay your launch and get your marketing assets in order. You never get a second chance to make a first impression in crowdfunding.
A valuable resource for you as you might embark on crowdfunding:
Kathleen Minogue is Founder and CEO of Crowdfund Better, a crowdfunding consultancy that guides entrepreneurs, small businesses and social enterprises how to use crowdfunding strategically to unlock the financial and creative support of their networks and to empower individuals and communities with new capital-raising tools to fund projects not supported by traditional finance. She has coached highly successful donation, rewards, and investment campaigns, and is particularly focused on bringing the crowdfunding opportunity to women, minority and rural entrepreneurs.
A thought leader in crowdfunding, Kathleen has been featured in The Wall Street Journal and Forbes, contributed to industry publications Crowdfund Insider and Locavesting, and has presented at venues including the Director’s Guild of America, Association for Women’s Business Centers National Conference, and Global Crowdfunding Convention. She has also contributed to international and local access to capital initiatives including the PwC Women Unbound report, the Milken Institute/SBA Partnership for Lending in Underserved Markets, and The Local Crowd 4SE Incubator funded by the National Science Foundation. Kathleen sits on the board of With Love Market & Cafe, SPC, and is an advisor to the OmniWorks US Incubator.