Finance 9 September 2015

What are the different methods of crowdfunding your project?

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Deciding early which method of crowdfunding will best suit the product is essential

Having worked on crowdfunding campaigns ranging from the arts to zoos and contributed to over £2m worth of crowdfunding activity, Chris Buckingham has learnt a lot about the process and what works. Here, he shares some advice as well as a guide to the various different models you can opt for.

The definition of crowdfunding is expanding, reaching out to encompass all sorts of fundraising models. At a debate in London’s Tech Hub, I even heard people argue that crowdfunding is too generic a term, preferring to talk about “online investment vehicles”. While I agree the term is becoming more widely used as new applications of the process emerge, crowdfunding for a project has, at its core, the same component across all models – that is the granting of consent by the crowd for a vision to be created. I call this “crowdconsent”.

There are five options (or models) available for anyone wanting to crowdfund their project. To help navigate your way around the different models I introduced the acronym DREIM back in 2012. DREIM stands for:

Donation

Reward

Equity

Interest

Mixed

(1) Donation

Of the five models, perhaps the easiest to understand is the donation model. This works on basic philanthropy, where people give money towards a good cause. Their motivation is the warm glow of knowing they have done something positive, normally with some kind of social value.

(2) Reward

This is the model that, by default, most people think of when they think of crowdfunding. The crowd makes a monetary pledge to a project and the project offers them something in return – like a t-shirt. This is the motivational factor for the crowd and I like to think of this model of crowdfunding like shopping. The reward model is represented well on both sides of the Atlantic by Indiegogo and Kickstarter. But there are plenty of home grown sites across Europe.

(3) Equity

In this model, the project’s management offers a share of the company to the crowd. This is a higher risk model but the motivation for the crowd is to gamble on the project becoming a big player in their field. The investor will then get dividends and/or they will be able to sell their shares at some future point.

This is risky as start-ups often fail. Companies like Crowdcube, which specialise in this model, require the crowd (investors) to pass a test before they can invest through their site.

When you offer equity, you will need legal help to ensure everything is structured correctly. This costs money and takes time to organise but the good news is most of the platforms offer this as part of their service.

(4) Interest

In this model you get a loan from the crowd which then gets paid back with interest. The interest levels depend on credit ratings and sometimes the past history of the organisation and the management team. As with the equity model, the crowd like to see a strong potential for growth. This is related to their motivations – to help the economy while making a little money in the transaction.

(5) Mixed

Mixed is just as it sounds: a mix of models. This is useful if you want to get a second bite of the cherry. For example, management may decide to use the reward model in phase one to gauge the public’s response and generate interest in their idea. Phase two would then see them offering the public the opportunity to buy shares in the company.

The advantage for management is that they have been through the system once and gained a following from their first campaign. Likewise the motivation for the crowd could be a deeper connection with the project.

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The biggest mistake Buckingham frequently sees among businesses is a lack of coordinated planning

Decide early

Choosing which model to use is usually dictated to by the product and management’s needs. Deciding early in the planning process which model will best suit the product is essential, as is deciding which platform to use. The platform (the web site that will host your campaign) is important as each one is slightly different. It’s worth taking the time to survey the types of campaigns they host and the success/fail rates you can detect.

Costs are also important – what does the platform take as a fee? Are there additional costs for the legal paperwork (especially with an equity raise)? What about the payment provider – what are their fees? All this can add up quite quickly but if you have done your homework it won’t be a sudden surprise.

Pitfalls

The biggest mistake we still see being made by management is a lack of coordinated planning. I always recommend, as a minimum, six weeks of strategic planning before management go live. Of course readers of Crowdfunding Intelligence will be in a much stronger position as they will be empowered with tools and know-how to succeed with their campaigns. They will also be better prepared and understand the need for social media once they go live.

Working out who the campaign is aimed at and which channel of communication they prefer will help to reinforce the message and create deeper connections with the crowd. This is really important because by its very nature, crowdfunding is a social endeavour.

There are also many similarities in a crowdfunding campaign with traditional marketing campaigns. As with the later crowdfunding is no easy route to get funding. It needs careful and meticulous thought to get it right and even then management may find they are rejected by the platform before they even get in front of the crowd.

There are some 500 campaigns started on Indiegogo and Kickstarter per day. Getting your voice heard in this noisy environment is tough and getting tougher. Management must be as prepared as they can possibly be. Added to this is the fact that crowdfunding is no longer a route to simply getting funded – more and more clients are approaching agencies like minivation not because they need the cash – but because they see crowdfunding as a nifty way to get a message across to the crowds.

In other words, it’s no longer about the money – but the kudos of being on the crowdfunding bandwagon. A sound strategy with well-planned and thought out communication strategies will help – but being prepared will make a huge difference.

Chris Buckingham is the author of Crowdfunding Intelligence and the founder of crowdfunding consultancy minivation.

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