Your garage band has been dreaming of a national road tour for awhile, but you’re flat broke. You think your new invention will make you the next Mark Zuckerberg, but you have no way of financing it.
Just a few short years ago, projects like these may have seemed impossible. Today, the Internet, social networking and limitations of traditional financing have given way to the crowdfunding phenomenon.
If you haven’t heard, crowdfunding is a financing mechanism that allows people to raise funds for causes, new businesses or pet projects by tapping into the collective efforts of friends, family, and individual investors — typically online.
In 2010, crowdfunding raised an estimated $880 million. It’s more than doubled each year since then, spreading across several types of funding models that include rewards, equity, donation and debt/lending. In 2014, Forbes reported that $16 billion was crowdfunded. If the trend continues, World Bank estimates that figure will exceed $90 billion by 2017.
The term was coined in 2006, but the history of crowdfunding can be traced far back, when Alexander Pope asked the public to fund his poetry book in exchange for acknowledgement. Mozart offered people manuscripts and invitations to those funding his concerts. Even the construction of the Statue of Liberty was partially crowdfunded when Joseph Pulitzer used his newspaper, The New York World, to collect small donations from readers around the world. War bonds, theoretically, are another form of crowdfunding.
It’s the power of social media that has breathed billions of dollars of life into an old concept, however.
The two most common types of crowdfunding are “rewards-based” and “equity.” With rewards-based funding, entrepreneurs pre-sell their product or service in order to launch their business concept without incurring debt or sacrificing equity or shares in the company, usually with a tangible reward rather than a share of the business. One famous example is Scrubs star Zach Braff, who raised around $3 million on funding platform Kickstarter to finance his 2013 film, “Wish I Was Here.” The Veronica Mars movie project also raised over $5 million through crowdfunding, entirely funded by fans, at the time making it the most-backed campaign in Kickstarter history. Both campaigns offered various incentives, T-shirts, shooting scripts, soundtrack/playlists and advanced screenings, depending on your pledge level.
Equity crowdfunding differs from rewards-based crowdfunding in that it allows backers to receive shares of a company, usually in the beginning stages, in exchange for financial pledges.
In Buffalo, social good fuels much of the crowdfunding. The region created more than 7,600 fundraising campaigns in 2016, raising more than $3.7 million with GoFundMe alone, according to an analysis by Buffalo Business First. A campaign for North Tonawanda firefighter Ken Walker raised more than $150,000 since August after his family home was lost to arson. Just 58 hours after friends launched a campaign to help former Buffalo Bills Darryl Talley with medical expenses, the $100,000 goal was hit and the campaign went on to raise a total of $153,000. An ongoing campaign launched by family and friends of Ken Fabozzi, of East Amherst, has raised more than $12,000 so far to help defray the cost of his cancer treatment. Fabozzi says it’s been heartwarming to see the response from people, some of whom he has not seen since elementary school.
Michael Silvestri, a 2013 Penn State graduate with a Masters in accounting, left his CPA job with PricewaterhouseCoopers in New York City after he attended an invention conference in Atlanta. Captivated by the idea of crowdfunding, the Williamsville native left his job several months later to crowdfund full-time.
Since then Silvestri has partnered with professionals to help run reward-based campaigns around the globe. His company, Keys To The Crowd, has run successful campaigns for books, documentaries, products, apps, businesses, nonprofits and more.
“It gives the ordinary person a chance to help kickstart a company,” says Silvestri. “It’s very interesting to hear the ideas people have and their passion behind those ideas.”
His company typically charges an upfront fee and a percentage of the money raised during the campaign, ranging from five to 20 percent, based on the complexity of the campaign.
Although Silvestri and his team have helped many to raise hundreds of thousands of dollars, he warns that success is not guaranteed. Here are a few things Silvestri and crowdfunding experts recommend to make your rewards-based campaign successful:
Limit the length of your campaign.
Keep it to 30-35 days to give the campaign a sense of urgency, but enough time to get the word out.
Have a social media presence.
Be sure to spend two to four months prior to launch collecting email addresses. Grow your following on social media and create a buzz about your upcoming campaign. Keep in mind that Twitter, Facebook, Pinterest, Instagram, and LinkedIn all attract different audiences.
Connect with potential donors.
Be positive and keep potential donors well informed. Do this through social media and videos. Demonstrate how their investment will pay off, and give them a connection. “You can’t convince people to give you money if they don’t care about your cause,” said Silvestri.
Consider the type of business.
Crowdfunding isn’t for every type of business. An exciting new consumer product or new movie is much more appealing to potential investors than an insurance company or accounting firm.
Calculate the cost of rewards.
Rewards are usually the biggest expense of a successful campaign. Ignore their cost plus the shipping and handling expenses and you may find yourself eating up all your capital. Not every project is suitable for intangible rewards, but they should be used whenever possible. Film premieres, concerts and rewards that don’t involve shipping, sales tax, and the possibility of damaged goods will allow for more profit.
Crowdfunding your dream vacation or a new sofa might sound great to you, but like mooching to everyone else.
Forget costs associated with the campaign.
The industry norm for crowdfunding platforms, like GoFundMe or Kickstarter, is to charge a percentage of the amount raised, typically seven to eight percent. Also consider income tax.
Ignore SEC requirements.
Equity crowdfunding can be a complex financing tool. Explore all your options before moving forward, and consult an attorney.
Make unrealistic promises.
Be positive but realistic with timelines and yields. n