Crowdfunding — The Beginners Guide
By: Nishant Modi
Tags: Crowdfunding, Entrepreneurship, Startup, Funding, Startup Lessons

Crowdfunding — The Beginners Guide

Image: Canva

All startups these days need to show traction before they can secure big funding typically in the tunes of millions.

But the big question is how can you get traction?

In my case the cost of building the minimum product was covered out of my pocket and some help from friends and family. As I am figuring out funding to launch and market, I came to the conclusion that trying crowdfunding would be suitable.

One of the startups I personally know, BRU TEA, a tea machine maker out of Switzerland raised over $1 million and so I as well started exploring how crowdfunding can help my consumer focused startup, Zoob Labs.

So, what exactly is crowdfunding?

Crowdfunding is generally described as the alternative financing practice to fund a venture or project by raising small amounts of money from a large number of people. While subscriptions and events can be used for the same purpose, crowdfunding refers to Internet-based initiatives.

To do such fundraising three types of actors are involved, the project owner (the funded) who proposes the idea or project, individuals or groups of individuals who support the ideas (the funder), and a moderating platform that brings both the funded and the funder together.

What can you get funded with crowdfunding?

They can be used to fund a wide range of for-profit and even non-profit ventures or projects. For this discussion, we will focus on for-profit only and these can be a startup company, a cool new invention, services or even artistic projects.

Most of the crowdfunding platforms are free to use, so they are also used by fraudsters to get free money — advertising quackery or made up ideas.

What are the different types of Crowdfunding?

There are several platforms enabling different types of crowdfunding and it is easy to identify which one to partake in. Let us have a look at the general ones,

Perks-based

They are non-equity crowdfunding, where initiators typically create several tiers of funding amount and when a supporter pays for a tier they in turn may get a free goodies, name listing in the company website or the actual product developed by the initiator in a cheaper price when it is ready.

Platforms — Kickstarter, Indiegogo, GoFundMe

Equity-based

Financing options are defined by the initiator which provides equity or shares of the company to the funders and in this case you can call them investors. These are more stringent and regulated, also requiring formation of a company.

Platforms — Wefunder, Localstake and AngelList

Token-based

This started with the cryptocurrency world where individuals or companies create a new blockchain based token and sell them to raise funding through what is known as Initial coin offering (ICO). Though due to many fraudulent activities most of the platforms have shut their doors already. Read my article The Untold Story of Blockchain to learn more.

Platforms — Coin Factory and Coin Launch

Debt-based

Initiators apply for a loan and gets verified by the platform, then the investors buy securities in a fund used to give the loan. The investors earn from interests and the platform gets the servicing fee. Debt-based crowdfunding is also known as peer to peer, marketplace lending, or crowdlending.

Platforms — Zopa, Lending Club and Prosper

How do crowdfunding platforms work?

Crowdfunding works on the principle of generating enough funding and or interest before the actual work is undertaken. There are 100s of platforms out there that facilitate such fundraising.

Let’s look at a few:

Fundly — Allows fund raising for practically any cause for both individuals and organizations.

Allows fund raising for practically any cause for both individuals and organizations. GoFundMe — Mostly for personal funding used to raise money for emergency medical costs or charities.

Mostly for personal funding used to raise money for emergency medical costs or charities. Kickstarter — Any individual with a creative or venture idea can start their campaign.

Any individual with a creative or venture idea can start their campaign. Indiegogo — Similar to kickstarter, individuals can raise money for a creative project or product.

Both Fundly and GoFundMe cater to raise money for a cause, while, Kickstarter and Indiegogo target creative projects — such as technology, innovation or arts. Such platforms can have all-or-nothing approach which means that the project initiators can only receive the funding when their funding goals are met within the specified time period. For example Kickstarter has all or nothing approach while Indiegogo allows initiators to get whatever is raised within the specified time period.

These platforms makes money by charging fees to the project initiators, usually in the range of 4–5%. On top of it payment processing fee is also applied depending on the payment processor any particular platform works with.

Are crowdfunding platforms secure?

The short answer is yes they work on the same principle as any other cloud based platforms work. They all are SSL secured (there website URLs are https), PCI compliant (third party audited for being a secure enough to store personal and credit card information).

On top of these most top platforms have capabilities to verify the project initiators, teams to identify fraudulent activities and policies for full refund if any misuse is detected.

Are there any tax implications?

Again the answer is yes, any amount you receive may be accessed for tax and similarly, any gains incurred by the backers may be accessed too. You should always talk to a tax consultant and research the local laws to know your liabilities. The tax laws which apply to any conventional investment or financial activity (buying goods or services, shares, or lending money) may apply in the same way to crowdfunding.

So, keep all records of transactions that may relate to tax, as these records must be kept for a certain number of years based on the local country laws.

What is the difference between crowdfunding and other lending options?

Crowdfunding for startups is like starter packs they can only take you to a certain point and if you are successful in your journey you will need to secure more significant financing.

For long-term business financing, one can go to traditional or online investors, VCs or even banks for loans.

How can one start with the crowdfunding journey?

Create a story about your product or service, ideally have a prototype or the minimum viable product ready. Create a well designed marketing campaign, remember what doesn’t attract won’t get funded. Offer pre-sales of the products or rewards worthwhile for the project backers. Setup a funding goal and keep it realistic. After All trust is the most important thing. Promote it aggressively on various social media platforms, reach out to influencers or bloggers and host live webinar events. Keep updating your backers during and after the campaign. Fulfill your promise, the real work starts when the campaign is funded.

When not to start crowdfunding?

If you are worried that your idea can be stolen — but do remember an idea is not worth a dime, execution is. You don’t have time to put effort into it — these campaigns can be stressful and consumes a lot of time and effort. You are worried that your campaign may fail — as this can potentially kill your idea if the campaign fails. You have other sources of funding available — when it comes to funding go to the easiest route available to you.

Now, go and check out the various platforms for crowdfunding, you will learn a lot about the kind of ideas being pursued and what gets funded and what doesn’t.