Crowdfunding: Advantages and Disadvantages

Finding financing is one of the first tasks for any business. No matter how great and ambitious you are, without money your project will remain unrealized. At most, your relatives will listen to your latest world-changing plan in the kitchen. If you don’t want to become another unrecognized genius, take advantage of the achievements of civilization. After all, the internet was invented for a reason. Use it! Now anyone can find support from like-minded people with just a few clicks. Today, we will talk about crowdfunding—a way to raise money for any project while retaining ownership of your creation.

Crowdfunding is the collective collection of money from anyone who wants to participate in the development of an interesting startup. In this case, investors are not partners or co-owners of the business; they simply gain a priority right to a product or service. Essentially, crowdfunding is a form of prepayment that allows something new and interesting to come to life, and some people will become the first happy owners of this novelty.

How Crowdfunding Emerged

It is generally believed that crowdfunding is a new phenomenon, but upon closer examination, we can recall several interesting historical cases that prove this notion is incorrect. For example, the writers Ilf and Petrov in the 1930s, while in the USA, placed an ad in a newspaper asking for financial assistance to open a business. They received a substantial amount, which they mentioned in their novel "One-Story America." So, crowdfunding as a phenomenon has existed for a long time.

Today, internet platforms are used for collective fundraising, which significantly simplifies the process for both startup founders and micro-investors known as "backers" (to avoid confusion with traditional investors, perhaps). Initially, funds were raised for various creative projects: shooting amateur films, theatrical productions, books that publishing houses would not accept but were interesting to readers. In short, any creative person who conceived and successfully presented their project could reach out to an audience and gain the opportunity to realize their idea.

Gradually, crowdfunding has spread to other areas, allowing ambitious inventors and small investors to realize interesting developments. A few examples of gadgets that only came into existence thanks to micro-investments from interested users can easily be mentioned.

Successful Examples of Crowdfunding

• Pebble Smartwatch. This gadget is a multifunctional wrist device that can synchronize with a smartphone. Essentially, it is one of the first "smartwatches" that allows users to receive notifications about incoming calls, texts, and messages from social networks, among other functions. The creators of Pebble asked for one million dollars. The product was so well-received that the required amount was raised in just over a day, and later the project received an additional nine million. This is one of the records in the crowdfunding world. The Pebble watch anticipated the emergence of the Apple Watch.  
• Coolest Cooler – another mega-successful project. This smart cooler works as a blender, a waterproof speaker, a charger, and several other devices. The crazy idea to create such a Frankenstein came to Ryan Grepper, who had already tried to realize several projects. But only the cooler excited investors so much that during the fundraising period, it raised 11 million dollars.
• Sense. Many are currently following the progress of the startup Hello, which is developing the Sense device—a gadget that monitors sleep quality. This device is designed to collect and analyze information about the conditions in which a sleeping person is: air temperature, sleep phases, and reasons for sudden awakening. The project is interesting and promising, so people are actively interested. The company promises to start deliveries in the fall of 2019, which is quite realistic considering the influx of funds the startup has received.

How to Create a Project that Attracts Investors

Although anyone can post a funding request on crowdfunding platforms, not every project receives a response from the public. To attract investors, it is important to meet several requirements:

• Bright and Detailed Presentation. You must explain to the investor what they will receive by investing in your project. Don’t skimp on creating a good website with illustrations, links, and information in proper English. The simpler and more interestingly you present your startup, the higher the likelihood of receiving funds.
• Video Presentation. This should also be in English, preferably with a native speaker who can talk about your project or service without an accent or stumbling. You can get by without a video, but having one will ensure at least 50% more funds.
• Incentive System for Investors. Crowdfunding is attractive because it allows investors to receive not just a product, but something exclusive, often the first in the world. So, think about what special you can offer your backers. Be sure to emphasize your advantages over competitors and point out the "highlights" of your project.
• Advertising Campaign. By adding your project to the platform, you are just joining the queue of similar startups. The probability of being noticed is almost zero. So, if you think that simply being on the platform will make money rain down on you, think again… Therefore, actively engage in PR, promote the project in the media, on other internet platforms, shoot videos, and generally attract attention and traffic by any means. Investors are interested in top projects that look lively and potentially successful.
• Live Communication. On any crowdfunding platform, two-way communication is established so that investors can interact with their favorite startup founders. Be sure to respond to backers' questions promptly, thoroughly, and positively. Even if there are haters (those who criticize and doubt your project, and there will definitely be some, it’s the internet), don’t go to the dark side. It’s better to respond with humor—this will present you in a better light, deter haters, and endear you to potential investors.
• Regular Updates. Show that your project is alive and moving toward success. Talk about how fundraising and project development are progressing, share news, and shoot overview videos. Investors want to feel involved in the creation of a product, so they are more likely to respond to startups that they can follow in real time.
• Establishing an American Company. This might be where to start. The thing is that crowdfunding platform managers will not collect money for projects from Kazakhstan or Ukraine, so it is worth ensuring that your startup appears as "American" as possible.

Before presenting your project to the public, study the most successful ones, analyze the most successful moments, and set your bar no lower than the results achieved.

The Most Popular Crowdfunding Platforms

Given how quickly crowdfunding is gaining popularity, it’s no surprise that there are already many successful crowdfunding platforms. They even exist in Kazakhstan, although this method of financing is still not as active here as in the USA. But there are undeniable leaders where you should register first if you want to attract public attention. 

Kickstarter

This platform is one of the pioneers in this field. Launched in 2009, Kickstarter is famous worldwide. This platform has several important advantages that attract users.

Firstly, every micro-investor is guaranteed a reward: a product, service, or unique experience related to the funded startup. Therefore, the platform works with specific goals: simply raising money to start a business is not possible here.

Secondly, the platform requires justification for the financial goal. You state how much you want to raise and attach a detailed business plan outlining where the funds will go. This is an excellent way to break down the project and show potential investors the transparency of the startup. However, if the specified amount is not raised 100% within the designated time frame, the project does not receive funding, and the collected funds are returned to the investors. This is a good incentive for active work on the project.

What’s the downside? You will have to pay a 5% fee to Kickstarter itself, and then up to another 5% for payment processing.

Additionally, lately, the Kickstarter administration has become overly demanding, and projects can be rejected for quite dubious reasons and may take a long time to be considered. Meanwhile, a "middleman" often appears, offering help with placement for a modest 20% commission. If you find yourself in this situation, don’t pay scammers; it's better to head to another platform since there are plenty of them.

Indiegogo

The platform we recommend as one of the best today. Here you can raise money for both the implementation of a specific project and for starting a business, so there are significantly more opportunities. Although Indiegogo requires setting financial goals, you will still receive funds even if you do not reach your fundraising target. Please note that Indiegogo monitors the proper and targeted use of the funds received. You will need to provide reports.

Indiegogo operates two types of funding: fixed and flexible. Fixed funding is ideal if you simply need to raise a specific amount to start a business, for example, to buy equipment for work.

Flexible funding allows you to stretch the fundraising over an indefinite period. For example, you are working on a game or gadget. During the development process, you receive investments, but the amount is less than necessary for the month. Then you simply relaunch the fundraising, and the funds continue to come in until you reach the required amount.

By the way, Indiegogo can also be used for selling a finished product. This is especially convenient for game and gadget developers. Investors receive their rewards, and then you simply sell your gadget while staying on the platform. This allows you not to open a merchant account and to remain on the site where you already have a reputation and reviews.

However, it's important to understand the commission. The platform monitors the fulfillment of obligations by startups, so you will have to pay a 5% fee for any type of funding, but if you do not reach your goal using flexible funding, you will pay 12%. When working with payment systems, you will lose 3% of the funds, so consider these expenses when drafting your business plan.

GoFundMe

This platform is also well-known among those involved in crowdfunding. But unlike the previous one, it positions itself as a platform for raising funds for personal purposes. That is, you can receive funds for paying for education or medical bills, as well as for starting a new business or developing an existing one.

On GoFundMe, it is also necessary to set a financial goal, indicating the maximum amount you expect to raise. For companies from the USA, there is no fee to use the platform, while projects from other countries pay a 5% commission. Also, withdrawing funds will cost 3-5 percent.

Patreon

This platform is perfect for creative people, as it actively facilitates fundraising for creative projects. Moreover, the funding occurs not in the form of a one-time payment but as regular contributions. The more successful and interesting the startup is, the more backers appear during its development.

Here, game developers, writers, podcasters, and artists can find material (and moral) support – anyone who is involved in creation in any way.

Initially, the advertising fee on the platform was 5%, but recently Patreon has changed its policy. Now the commission and service fees for donors amount to 2.9% + $0.35 for each individual contribution and payment processing. Thus, the platform administration has achieved a system where fundraisers can receive 95% of their investments. The system is quite convenient and, as it turns out, not as costly as it may seem at first glance.

GoGetFunding

This site is relatively young compared to others, existing only since 2011, but it has an excellent reputation and many funded startups. There are no strict requirements for financial goals here, and the fundraising system is quite flexible. You can raise funds for personal goals as well as for implementing business plans.

However, the commission here is higher: the platform takes 6.9%, but this amount includes both the collaboration fee and the cost of payment processing. So overall, it turns out to be even more advantageous.

Other ways to obtain funding

Crowdfunding is not the only option to find funds for your business. You can turn to business angels or post information about your project on platforms like Angel List, find a venture company, or become part of a large corporation operating in your area of interest.

However, only crowdfunding allows you to retain ownership of your business: by raising money on the platform, you reward investors with the results of your work rather than a share in the company, and after that, you continue to develop the business without investor partners. If this is crucial for you, choose a platform and work on your presentation.

Crowdfunding: Is it worth using?

The decision is ultimately yours, but we can say this: if you want to obtain money through crowdfunding, work on foreign platforms. In Kazakhstan, Ukraine, and neighboring countries, this system is still not developed, and the investment amounts are much smaller than in the USA. A large number of startups with Russian and Ukrainian roots have been funded through crowdfunding platforms in the USA.

The projects we worked on for American crowdfunding platforms usually raised the necessary amounts. Of course, the role played by the right presentation, a well-developed business plan, an ideal website in English, and other factors described in the article above. If you want to take advantage of such funding methods, our company's specialists can help create the perfect project, navigate pitfalls, and avoid typical mistakes. Contact us, and we will help make your startup successful.