The Crowdfunding Crowd is Smarter than Ever
Crowdfunding is the fastest-growing venture financing method in the history of fundraising. Technology has made it easier than ever to get your start up idea or charitable cause in front of seemingly countless investors eager to part with their hard-earned greenbacks. But technology has also accelerated competition between crowdfunding platforms. There are dozens of platforms available to launch your proposal, each with their own formula for calculating fees and charges for the privilege of using their service. Given the multiple options, the platform you choose gives the potential investor an important clue into what type of venture manager you are.
Investors have one very clear goal: to maximize their investment. This concept can take on many different meanings in the realm of crowdfunding. Whether the investor purchases equity in the project, supports the social mission of the philanthropic crowd funding effort, or wants to see that Grandma and Grandpa have the best Anniversary vacation ever, the investor wants as much of their investment goes towards the goal, rather than to the platform owner. Investors need to have the impression that they will be rewarded (either financially or spiritually) as a result of their investment. Savvy investors analyze very closely both your vision and all the costs of realizing it.
photo/ Public domain pictures via Pixabay
Crowdfunding has been, at its core, an incubator for innovative ideas. Given this history, it is surprising that there is almost no innovation in the way that platforms arrange their fee structures. The first few platforms decided that a 5% fee was reasonable, and nearly every subsequent platform followed suit. A pushback against this standard has been slow, but two sister sites have completely removed the 5% fee: Plumfund and Honeyfund. The impact of not having this 5% fee stripped from each contribution should not be overlooked. The crowd funding industry was a $5.1 billion industry worldwide in 2013, this 5% fee is worth $255 million.
Maintaining predictable positive cash-flow is one of the greatest challenges that new ventures face. It makes sense to avoid this 5% fee. Choosing a platform without this built-in tax sends a strong signal to potential investors that you are aware of the current fee structure environment that exists in crowdfunding. Not doing so sends a very bad set of signals to potential financial partners: either you are clueless when it comes to the industry or you simply do not care enough to research more economic alternatives. These are both potentially game-ending conclusions that potential investors could come to long before they open their wallets.
There is no excuse for not performing a thorough analysis of the pros and cons of each available crowdfunding platform before starting a fundraising crowd-funded proposal. Treat crowdfunding, no matter what type it is, like you would treat any other business. In other words, have a plan. You are much more likely to gain financial support if you have shown you have taken the endeavour seriously, both from the passion side of the equation and in terms of return-on-investment. Remember, every potential investor can very easily compare the many crowdfunding sites to see for themselves what the rate structures are. An open, easily accessible marketplace for crowdfunding gives the leverage to the investor, and can make you look foolish if you choose a more expensive platform without being able to quickly justify the additional cost. It is likely you will not have the opportunity, they investor may simply move on to a more appealing, cheaper option.
Guest Author: Angie Charda
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