The power of crowdfunding: how to make the most of it

22nd Dec 2013 | 09:01

The power of crowdfunding: how to make the most of it

Get funding with minimum hassle

What's the common link between a customisable smartwatch, an Android-based gaming console and an open source blogging platform and an open world survival videogame?

Besides all them being hugely popular in their respective genres, these compelling hardware and software projects all saw the light of day only thanks to small monetary contributions supplied by complete strangers.

The idea of crowdfunding or reaching out to individual people to raise money isn't new. What is new is the way the money is being raised. Thanks to the internet and social media, it's easier to find and connect with people who share your passions. This leads to more effective and efficient ways of reaching the right people who are willing to open their wallets to fund your projects.

Crowdfunding is nothing short of an economic revolution. According to research firm Massolution, in 2012 individuals on crowdfunding platforms raised $2.7 billion and successfully funded more than 1 million campaigns. By the end of 2013, the firm expects the average Joe investor to take this figure to a whopping $5.1 billion.

But while crowdfunding allows you to swim in money, you shouldn't just dive right in. Don't let the super successful campaigns fool you. Harnessing the power of the crowd is an involved process. There's more to raising money than just putting up your story, offering freebies and waiting for the money to roll into your bank account.

Before you launch a crowdfunding campaign, there are a lot of things you should know. A successful crowdfunding project requires all the attributes of a social and a business campaign. You have to supplement your big idea with research and marketing strategies. In this feature we'll give you the ins and outs of crowdfunding and highlight its advantages over traditional avenues of raising funds.

We'll also share advice from people who have been there and done it to help you plan your project; all the way through launch to successful funding and delivery, while avoiding the potential pitfalls. You'll also learn about the various crowdfunding platforms out there, so that you can make an informed decision when you are selecting the one best suited for your campaign.

Crowd sourcing 101

A crash course in cashing in.

KickStarter

While contributing to someone's crowdsourcing campaign doesn't require much more than a mouse click, setting up your own is a lot more work. Keep these statistics in mind if you're thinking of launching a campaign without doing your homework: only under 50% of all projects on Kickstarter have been successful and 10% of projects that are launched have never received a single pledge!

But once you get the hang of crowdfunding, you can turn those stats on their head. As you'll see it's the best methodology for raising capital and finding a marketplace, whether you are trying to mass produce an innovative hardware device or hack together a piece of software.

What is crowdfunding?

Crowdfunding is a subset of the much broader concept of crowdsourcing, which has come to mean a lot of things, but is the process of connecting with a large group of people via the internet to tap their knowledge, expertise, time or other resources.

Crowdfunding is specifically about raising the cold cash; it's the collective cooperation of people who network and pool their money together to form the financial backing for a project. The crowdfund is an individual or a group that comes forward with a plan for a project they wish to fund, and then look to a group of people coming together to actually provide the money to support the development and actual delivery of the project.

Essentially, crowdfunding is using the internet's access to the masses to raise capital by connecting people who have the talent and ideas with people that would be interested in those ideas and have the funds to invest. There are some key characteristics unique to crowdfunding projects that help distinguish it from other avenues of raising funds and collaborating on projects.

For starters, crowdfunding projects involve microfinance. By inviting small contributions, crowdfunding lowers the barrier for people to participate. People who perhaps never thought of themselves as investors before can do so now.

Crowdfunding projects must also offer some kind of reward even if it is something intangible like the mere association with the project or a feel good factor. Rewards make the project attractive and having a diverse range of rewards, often based on the amount that an individual pledges, makes it attractive to a larger group of people. Also, all projects must have well-defined targets, which is usually a sum that you want to raise within a stipulated time.

Another key aspect of crowdfunding projects is promotion and marketing. The traditional routes for raising money have been through venture capitalists and angel investors that offer private equity or through plain-old monetary loans from your local bank. An eager entrepreneur approaches these entities with a business plan and has to hope that the person scrutinising every detail of their plan can see that there will be a good financial return for any initial investment.

This is in stark contrast to crowdfunding where, using online social media, the entrepreneur can access hundreds of potential investors through crowdfunding websites, who aren't necessarily interested in making a buck off the back of someone else's talent. This is what makes it one of the most popular non-traditional methods of acquiring funds.

The barriers are down

Gunio

Unlike the usual funding methods, where the funds come from a single entity or a tightly knit group, a crowdfunding campaign leverages social media to pitch the project to the mass-market for achieving its financial goal. Here modest cash contributions from a lot of people add up to a substantial amount of money.

The most exciting thing about crowdfunding is seeing it in action: "The thing about crowdfunding is that it totally removes all the barriers between the person with an idea and their customer," believes James Carey, designer at Big Robot, developers of Sir, You Are Being Hunted which was funded using a Kickstarter campaign.

"You don't have to convince anyone other than the end user that this thing is worth having. No banks, no focus groups, no grants councils. Because of that, ideas that would never have been seen as viable by 'experts' in a given industry get the chance to exist. In my opinion that's the best thing the internet has done in years," says Carey.

Depending on the type of campaign you are running, people that contribute to a crowdfunding project don't expect a monetary return, shares or even their money back. Instead of treating it as a traditional form of investment, they invest to support a cause or venture they believe in, with the hopes that it will succeed. Carey is of the opinion that one should look at crowdfunding as purchasing, not investment: "People are speculatively shopping. Buying in advance. Pre-ordering."

Another factor that sets crowdfunding apart from the traditional sources for securing funds is the passion of everyone involved. You are pooling funds from people who are passionate about a project or an idea and want to help bring those ideas to life.

In a webinar, one of the oldest crowdfunding platforms, Indiegogo (www.indiegogo.com) advises people to think of crowdfunding as shared enthusiasm and not pan-handling. The whole idea of a successful crowdfunding campaign should be to share the passion that you have for a specific project in order to get the audience excited about it. You are allowing them to look behind-the-scenes and understand why you are so passionate about the project in order to get them onboard and contribute.

No matter how much funds they may or may not have. If they don't share your enthusiasm, they won't contribute.

The side perks

Cantican

Although raising capital is the most obvious reason for crowdfunding, there are several other ancillary benefits to following this route with your project. Running a successful crowdfunding campaign can give you a fantastic opportunity to gain visibility and build interest in your project. You not only get to gauge the demand for your project, you do so with minimal financial risk in a very short span of time as compared with taking onboard venture capital by offering stakes in your startup.

The Ubuntu Edge campaign on Indiegogo is a classic example of this. Canonical didn't reach its hefty target of $32m (and by reaching over $12.8m the campaign broke crowdfunding records) but that didn't stop the mainstream press covering the fact that an Ubuntu OS was coming to smartphones in 2014. In essence, running a crowdfunding campaign will let you know if you have a good idea and if there's a demand for it in the marketplace.

It isn't surprising then that many successful campaign managers have gone back to the venture capitalists that had initially turned them down to show that there's a demand for their project and that people are willing to pay the price they had set.

Crowdfunding models

IndieGoGo

What you've read up to now is a very broad view of crowdfunding. In practice crowdfunding encompasses several different fundraising models.

To begin with you have the donation model that has been around for years. People donate money to a project or cause they believe has moral and ethical value and is good for the community. They don't expect any return for their financial contribution besides the satisfaction of having made a difference.

Then there's the rewards-based model. This is the model which comes to mind when most people think about crowdfunding. In this model people who are making a financial contribution can pre-buy a product or are rewarded in some way. So the crowd makes a monetary pledge to the project and the project offers them something in return.

This model is further subdivided into two models. The first is the 'all or nothing' model where a project has a specific financial target that it sets and intends to reach. If the campaign doesn't reach that target the project initiators do not receive the funding, and the lenders don't receive their rewards.

The other model is the 'keep it all' model where whatever money is raised in the crowdfunding campaign is retained by the project initiators irrespective of whether they reach the set target or not. Many consider the 'all or nothing' model to be a more compelling choice.

There's also a lesser-known "bounty" model where the accumulative funds collected for a particular task are given to anyone who completes the project.

Another less high profile, yet revolutionary, model is the 'equity-based' model which allows people to invest small amounts towards funding startups. In exchange they can expect to receive dividends based on the profits of the business. This is more popular in the UK and Europe because of there are less legislative hurdles, (see Crowdfunding rules and regs in the UK) but the model may soon be legalised in the US as well.

Running a successful campaign

There are quite a few differences that separate successful campaigns from others that fail to reach their target. Before you launch, prepare every aspect of the campaign in as much detail as you can. You can't fly by the seat of your pants. You need to make sure you have a plan for every week of the campaign.

James Carey says that your preparation also shows that you have already invested some of your own time and money on a project: "We didn't want to go to Kickstarter until we already had a solid prototype, based on around six months of work and the considerable investment of cash that that implies. If you aren't prepared to risk it for your project, why should your backers?"

One of the first things you should work on is your campaign pitch. Browse successful campaigns and check out why they are compelling. Most pitches are very personal and clearly specify who is behind the project and what problems they hope to solve with their project. They also tell backers how they can get involved.

"Pitches succeed if people judge they are going to succeed," says Carey. "Something that looks like it will get its money generally does. It's a perception game." A good engaging pitch introduces the campaign both in writing and in the form of a video. According to stats shared by Indiegogo on its blog, campaigns with pitch videos raise over double the amount of those without one. Also keep in mind that the average campaign video length for successful campaigns is roughly 3 minutes.

It's also imperative that you set an attainable goal. Don't just set an arbitrary figure. Do some serious number crunching and set a conservative goal that'll help you move your project forward and also fulfil the promised rewards. On Indiegogo, 87 per cent of campaigns that reach their goal exceed it by an average of 32 per cent.

While advising projects to have reasonable targets, Carey notes there seems to be a pattern: "An interesting rule of thumb, actually, is that successful Kickstarter projects get 150 per cent of their target, generally. This suggests that if your target is £60k, you should ask for £40k, and be more likely to get it all."

You should also carefully devise your rewards. Make the rewards unique enough to get people excited about them and want to tell their friends, while not breaking the bank. Again, it's best to learn from some of the successful campaigns of the past, many of which offer between five and eight rewards.

It's also best to have a wide range of rewards. Instead of unveiling them all at the same time you can update them during your campaign. Again it's best to browse campaigns and look for perks that have been claimed a lot.

John Nolan, who successfully funded the open source blogging platform Ghost, shares his recipe for success: "A compelling idea, value for money on rewards, and a clear indication that the project creator is able to deliver."

Foster a community

BountyOSS

Once you've worked on these crucial elements also spend time working on your communication plan. Successful campaigners are proactive communicators throughout the life of their campaign and keep their investors engaged and excited. While some treat the crowdfunding platforms as a blog, most have 1 to 2 updates a week. They'll discuss updates, milestones and new rewards as they are unveiled.

James Carey believes that updates are key to the success of a campaign and adds "You've got to foster a good relationship with your backers by letting them know what you're up to behind the scenes. Crowdfunding is patronage, but there's a certain sense of ownership that comes with that patronage. You're in this together with your backers, let them know it."

Finally and most importantly, don't forget to hone your social media skills. What you are looking to achieve is a large number of small donations which are aggregated together to produce a significant sum. To do this you need to be able to reach and pitch your project to a large audience, and social media is the perfect tool for extending the reach of your campaign.

Using social media and the idea of six degrees of separation, you can rely on members of your initial core community to reach out to their respective communities and ultimately create a viral distribution campaign.

Also remember that the initial days of the campaign are very crucial. You are solely responsible for generating the initial momentum. This is why it's important to identify your initial target audience; the ones that will jumpstart your campaign and become early contributors and promoters.

Crowdfunding comes with some potential pitfalls. So before you launch your campaign you will want to learn from the mistakes of crowdfunding failures to avoid turning off investors and customers. According to Tony França, creator of FreedomSponsors, there are two factors for success on a crowdfunding campaign:

"Some projects fail basically because they have no market, and many fail because their marketing is not good enough. Your idea must actually be something that people need or want. Otherwise you have no market and your project will fail. Period. And even if you do have a market, you really need to work on the marketing. The world needs to know about your campaign. This is the hard part. I believe the most successful campaigns are the ones who market their product so well that it makes people want to tell others about it, and then they go viral."

Warren Konkel, CEO of Bountysource, points to another reason for unsuccessful campaigns that haven't done any background work and research: "Generally speaking, fundraisers fail to meet their goal for one of two reasons: people don't want it or people don't understand it."

The bigger problem, however, is projects failing to map their financial strategies. If you haven't done the initial research, don't be surprised if the total cost of the project and rewards end up exceeding the amount you raised. One of the key factors for faltering campaigns, according to Nolan, is pointless rewards that have excessive fulfilment criteria: "You're going to personally sign 10,000 postcards? Really?"

Launching a campaign and setting a goal thinking that you can 'figure out the tax stuff later' is another pitfall that he highlights. Carey agrees that some projects promise too much without properly costing their physical rewards: "I think delivery costs have bankrupted a couple of projects because they didn't put a cap on how many branded mugs they had to deliver."

The Hanfree iPad Accessory is a prime example. The project creator underestimated the real cost of bringing his idea to market and mass produce a product. After successfully meeting the $35,000 goal, he couldn't deliver the product nor the rewards. Eventually one frustrated backer sued the project creator who then declared personal bankruptcy.

Ready to roll?

SelfStarter

By now you must be itching to get started on your precious project. But before you do, here's a quick summary of what's involved in launching and running a good crowdfunding campaign. There are a bunch of things you must decide before you can even begin looking for a platform to run your campaign on.

First, decide the target you want to achieve while keeping in mind the nature, number and diversity of the rewards. Also, spend time researching what duration to give your campaign by looking at similar successful projects. Picking a long duration may seem like the simple answer, but remember you will have to keep the momentum going for its entire duration (See Ideal Timeframe for a Campaign, p39).

When you've worked out these bits, start looking around for a platform. In the last couple of pages of the feature we look at some of the best crowdfunding platforms and tools. Decide on which funding model is ideal for you and your project.

Promotion planning

While you're at it, also think about the different social media tools you'll be using to promote your campaign. Using a wide range of social media tools might seem like a good idea, but only do it if you can manage to keep track of all of them. For instance, an unanswered query from a potential investor can do a lot of harm.

Also make a list of your initial target group. Besides contacts in your network, remember to reach out to the mainstream media and blogs that have audiences with a similar interest. It's also a good idea to inform them a couple of days before you actually launch your campaign, and hit them again once your campaign is live.

Don't forget to keep exploring different avenues for promoting your campaign even after you've launched it. A crowdfunding platform is not eBay. Your campaign won't sell itself. Also remember that you aren't only looking for people who'll back your project monetarily; you are also looking for co-promoters that will introduce your project to their network.

Keep your investors updated during the duration of your campaign. Share your excitement, new ideas, new rewards and even ask for their opinion or advice if there's scope for it. Whatever you do just make sure you keep them involved.

When you are funded make sure you inform your backers about the status of their rewards, and get cracking to bring your project to life.

Crowdfunding open source software

Thanks to the nature of free and open source software, most of the software development is crowdsourced, but will it become crowdfunded too? As it turns out, the most popular crowdsourcing models offer a unique challenge to open source software. Although you can find successful campaigns for open source software on popular crowdfunding platforms such as Kickstarters, they aren't a natural fit.

In an interview with opensource.com, Warren Konkel, CEO of Bountysource, a crowdfunding platform designed specifically for financing open source software, says that free and open source software needs a different treatment than the usual wares on offer at other popular platforms. "Those other platforms work well as a pre-sales model for physical consumer goods and technologies, but we believe open source software needs a better funding model that's more aligned with how software is built."

Talking to LXF, Konkel explains this further by saying that one of the reasons that sets software development apart from hardware is that software development is notoriously hard to estimate. "The Bountysource platform solves this problem by associating fundraisers directly with existing bugs and feature requests."

Another challenge for crowdfunding open source software that decides to use platforms with a reward-based model is selecting the right kind of rewards to tempt pledgers in. A typical proprietary software campaign can offer various versions of the software as a reward.

In contrast, simply because of its open nature, open source software cannot offer product versions with special functions available only to funders. What they can offer are mainly ancillary services like personal support. Some give backers credit on the project's website, some provide exclusive content such as a regular funders-only newsletters, and even physical products, such as exclusive campaign T-shirts. As always, looking at what other open source software campaigns are offering will give you an idea of what to offer.

The Ghost blogging platform offered free accounts on its hosted service, promised backers early access to the platform and offered them a chance to reserve their username on the community website, which was displayed with an emblem to acknowledge their support. Many also see crowdfunding in open source software development as part of a long-term process rather than a one-off investment.

Konkel says that at Bountysource its looking to create long-term relationships between developers and backers: "When somebody backs a fundraiser, chances are they'll back a subsequent fundraiser or create a bounty."

Philip Horger who is an active fundraiser at FreedomSponsors, another crowdfunding platform for open source software, shares an interesting experience of this developer-donor engagement. Horger put up a sponsorship to improve the user interface of LibreOffice. A member of the actual development team for LibreOffice showed up and advised that sponsoring such a wide-scope issue was, while an encouraging sign for the developers, not a realistically useful way of making UI improvements. The developer, instead, advised Horger to sponsor more specific improvements, such as the colour picker, etc. "So I broke up my offer among more specific sponsorships. The total sponsorship was the same in the end, but more usefully distributed."

Better than donation

GitTip

Monetary contributions from users for supporting open source development isn't something new. But crowdfunding is much more gratifying than a simple donation. Horger says that sponsoring on FreedomSponsors is inherently more fine-grained and personal than donations since an offer is tied to a specific and achievable outcome: "You feel that you have stake and a responsibility in that sponsorship's success. It is more gratifying and tangible to be able to point to some distinct feature of some popular program, and say to the person next to you, 'I helped make that happen.'"

Another advantage of platforms, such as FreedomSponsors, according to Horger, that doesn't really make sense for traditional donation is the ability to sponsor one's own projects. It might seem strange at first but as Horger puts it, "there's a method to my madness." "Sponsorships are my way of motivating/rewarding external development, and that includes starting with small stuff. That way, I can foster an active and healthy community of contributors, which not only will take programming and maintenance load off of me in the long run, but also means that my projects can easily live on if I get hit by a bus."

The future of crowdfunding

Like his peers, Tony França of FreedomSponsors is very gungho about the future of crowdfunding and how it will help developers generate funds: "We are witnessing the birth of new businesses powered entirely by the crowd. I believe Crowdfunding will become more and more prevalent as a way to gain access to capital."

Konkel also acknowledges the power of the fundraiser model especially for projects that require upfront capital to achieve economies of scale and where rewards are effectively pre-sales. But he believes that it won't work well for everyone. "We think the future of crowdfunding in open source is a bounty-based model: placing individual bounties on existing bugs and feature requests. Issue trackers can quickly become overwhelming and bounties allow backers to focus development efforts on the issues that matter to them."

Popular crowdfunding platforms

So you've done all the legwork and are ready to approach people for funds. Where do you do it? Do you put up a website and set up the complex infrastructure to process credit cards or Paypal? You could surely do that (see the list of DIY Crowdfunding Platforms), but it's much easier to set up your campaign on an existing platform.

Using a platform offers several advantages. For one, they have the necessary functionality to carry through your campaign. They'll host all your media and give you the right tools to engage with your audience. You'll also have access to various social media tools to help promote your project.

Also a crowdfunding platform puts your project in front of a crowd that's looking to put up money. Bear in mind that they will all also charge you a different fee for using their service, and some might also ask you to pay the processing fee for the mechanism you use to withdraw the money you've raised. Here's our pick of the current crop.

Kickstarter

Kickstarter

Web:www.kickstarter.com
Funding model: All or Nothing
Fees: 5% if you meet your goal, plus payment processing fee.
Payments: Amazon Payments

The 800-pound gorilla in crowdfunding. Only hosts campaigns in particular categories and has an approval process. Also has lots of information to create and run a successful campaign.

IndieGogo

IndieGoGo

Web:www.indiegogo.com
Funding model: Keep it All or All or Nothing
Fees: 4% if goal met, 9% if you don't, plus processing fee.
Payments: Paypal, ACH, Wire Transfer, or FirstGiving

Hosts campaigns worldwide across all categories. It's more expensive if you don't reach your goal. Also has lots of documentation.

Fundable

Fundable

Web:www.fundable.com
Funding model: All or Nothing
Fees: $99 per month during active campaigns plus payment processing fees.
Payments: WePay

A platform especially designed for funding startups that can offer rewards or equity in exchange for funding. According to the website, startups that offer equity typically raise up to $10 million.

BountySource

BountySource

Web:www.bountysource.com
Funding model: Bounty or All or Nothing
Fees: 10% non-refundable fee for placing bounties
Payments: Paypal, cheque, Google Wallet, wire transfer

Designed for crowdfunding open source software. Hosts individual bounties to resolve open issues and feature requests, and also used to raise money for big updates or new projects.

Freedom Sponsors

Freedom Sponsors

Web:http://freedomsponsors.org
Funding model: Bounty
Fees: 3% + payment processing fees
Payments: Paypal and Bitcoin

Enables many users to chip in to a bounty. Bounties are post-paid only after the sponsors have verified the work. Uses Paypal's parallel payment type to split bounties between devs.

Catincan

Cantican

Web:www.catincan.com
Funding model: All or Nothing
Fees: 10% after funding amount has been reached.
Payments: Paypal, Bitcoin, wire transfer

Only allows developers on existing open-source projects to create campaigns. Features are screened and developers have 60 days to reach the funding goal else the backers aren't charged.

BountyOSS

BountyOSS

Web:https://bountyoss.com
Funding model: Bounty
Fees: 5% + payment processing fees
Payments: Credit Card or bank account

Designed to attract funding from businesses and other for-profit entities that use open source software. Only allows developers attached with an open source to create campaigns..

DIY crowdfunding platforms

There are plenty of reasons for projects to not use an existing crowdfunding platform and rather roll out their own. For some it's purely ideological. Can you imagine the FSF running a crowdfunding campaign on a closed-source proprietary platform?

But there are some pragmatic reasons as well. As larger platforms become more crowded with projects, it negatively impacts their visibility and discoverability. As crowdfunding gains acceptance as a legitimate mechanism for raising money, if you can bring your own crowd you can raise money without relying on a well established platform.

One of the most successful examples of a DIY platform campaign is that of Lockitron. The project was rejected by Kickstarter so they set up their own crowdfunding infrastructure and raised over $2 million. They then released their platform as open source software for others to use.

SelfStarter

SelfStarter

Web:http://selfstarter.us/
Licence: MIT License
Fees: Free to use
Payments: Amazon Payments, Stripe, WePay

Developed using Ruby on Rails, the platform can be extended with custom authentication, administration and product management code. The developers suggest deploying it on Heroko application platform.

Catarse

Catarse

Web:https://github.com/catarse
Licence: MIT License
Fees: Free to use
Payments: MoIP, Paypal

Another software built on Ruby on Rails. You can use it to create your own crowdfunding platform to host several campaigns. Powers the Brazailian platform http://catarse.me/en. Has minimal documentation but an active mailing list.

Goteo

Goteo

Web:https://github.com/Goteo
License: GNU AGPL v3
Fees: Free to use
Payments: Paypal

The software is written in PHP and facilitates communication between users and campaign managers as well as the creation of blogs, and static pages. Besides the English installation guide, the other developer docs are in Spanish.

GitTip

GitTip

Web:www.gittip.com
License: CC license
Fees: Free to use
Payments: Bitcoin, credit cards

Gittip is a crowdfunding platform to support people by giving donations weekly. You can use the software to setup your own weekly gift exchange for the various individuals involved in your project or community.

Spot.Us

Spot.Us

Web:https://github.com/spot-us
License: GNU GPL
Fees: Free to use
Payments: Paypal

This Ruby on Rails project lets you setup a crowdfunding website to enable individuals or a group to solicit funds for commissioning freelance journalists. The project has minimal document but you can see it in action on www.spot.us.

CrowdHoster

CrowdHoster

Web:www.crowdhoster.com
License: MIT License
Fees: Free to use
Payments: Credit cards, Bitcoin

About: Proudly calls itself the "Wordpress for crowdfunding", the hosted project is currently invite-only. It's free and pretty straightforward to setup and administer since there's nothing to install. Also includes tools to manage contributors.

Ignition Deck

Ignition Deck

Web:http://ignitiondeck.com/id/
License: Proprietary
Fees: Starts at $79 (£49)
Payments: Paypal, Stripe, WePay

This tool is in fact a Wordpress plugin. It's available in several version starting $79 (£49). You can install the plugin on multiple WordPress installations and buy additional themes and features such as payment gateways and an analytics panel.

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