Crowdfunding: Pros, Cons, and Everything You Should Know

Crowdfunding platforms have raised $2.7 billion and funded more than 1 million campaigns in 2012 alone; for 2013, this may breach $5.1 billion. Crowdfunding is becoming the foremost choice for grassroot founders like you to find funding for your dream projects.

Before jumping in though, how about we go through the basics of crowdfunding. Since there are so many aspects to consider if crowdfunding is right for you, today we will explore both the advantages and disadvantages of crowdfunding, and share with you tips and discoveries to become the next successful crowdfunding rockstar.

The Cool Side Of Crowdfunding

Here are 4 ways that crowdfunding is the coolest way you can get funding (and more) for your project.

1. You Get Funds Without Too many Sacrifices

If you remove crowdfunding from your funding options, what remains will be bank loans and angel investments. Both options demand you sacrifice something, either an interest rate that costs an arm and a leg, or your company’s equity (not one product, but the entire company) in return for financial "assistance". Both channels are carefully designed to profit from you in the long term, and they are the reason why crowdfunding exists and flourishes.

Image Source: Shyam B

Crowdfunding completely eliminates the "middleman". It puts your idea in front of thousands of potential investors instead of just one investor. Then you try to convince them to part with their money to help make your product a reality. In return, they get what you offer upfront, nothing more. I call that unconditional love.

2. You Receive Tremendous Marketing Effect

Marketing is crucial for every product. The problem is most startups simply do not possess funds to spend on marketing at all. In common practice, marketing is executed to attract potential buyers, but in crowdfunding, the potential buyer is the marketing crew.

All you need to do is to spend your initial funds to produce the most polished prototype, then display it proudly to your potential supporters in the crowdfunding platform. Your supporters, those who have put money into your product will help you to spread your voice and passion in their own social networks. It’s only a matter of time before your product spreads like wildfire.

For the easily excitable online news media, the word ‘crowdfunding’ itself is enough to make them pay attention to your product pitch, and they will feature it if the product is polished enough.

3. You Validate Your Product’s Success

If you’re considering the crowdfunding path, chances are your project requires years to complete, and in the process will slowly devour your time and fund (and house) along the way. It’s a game of all or nothing, and you (understandably) don’t want to lose. Crowdfunding puts your idea in front of everyone, and let your future customers decide if your idea is really worth all the sacrifices, yours and theirs.

Image Source: Rafal Baran

Best of all, most potential backers tend to be less judgmental. They will evaluate your ideas, then provide friendly suggestions to improve the product to the way they hope it would be. Always keep in mind – backers don’t want to profit from you, they want to succeed with you.

4. You Gain An Optimistic Customer Base

When you are executing a crowdfunding campaign, there are actually 2 most important assets you are raising – the fund and the customer base. Unlike non-converted backers, the customer base is a group of your zealous followers, who love your work from their heart, and are even willing to pay or contribute to your future projects.

The magic of crowdfunding is that you gain the customer base even before you have even a product to sell. This awesome phenomenon does not happen with traditional investment scheme, where customers will only be involved with the product, post-release, not pre-production.

Even if you failed to fund your current project, your customer base will be ready to back up your next product like in the Gas Powered Games’ Wildman project.

The Downside of Crowdfunding

Things that are free, still come with a price. Crowdfunding, as cool as it may be, is a double-edged sword. It is not as forgiving especially when you fail to fulfill what was promised.

1. If You Fail, You Are Doomed

Crowdfunding is a holistic way to gather funds quickly, but it does not defy the nature that startups are and always will be a high-risk business. What you planned may not happen as is, particularly when it comes to cost and time.

Take the case of Jim Clark as example, he raised $34,490 from the original $25,000 goal, but later he realized the team had to raise $100,000 to pay for everything promised. Ed Carter, the creator of Glory to Rome project which raised $73,102 over $21,000 goal, had to sell his house in the end to ship the products. Both were late in their initial delivery time.

If in the manufacturing process you realize that the product will not profit in the future, know that it’s too late to call quits. By hook or by crook, you are to complete the project, despite knowing it is going to take a lot out of you than expected. Startup dreams can sometimes turn into nightmares, unexpectedly.

2. You Get Social Panic

While having free marketing is tremendously helpful, crowdfunding does not mean you are free from any social engagement. Since you are funding your project from backers, it is an obligation for you to update the project status and answer doubts raised by backers. This is a tedious process that could consume most of your development time.

In other words, with angel investment you only talk to a handful of investors, but with crowdfunding you could be talking to hundreds and even thousands of investors constantly.

Don’t think that if you cannot live up to your promise, you can choose to remain silent. Alex Peake, the creator of the $170,000 Code Hero project, was working day and night on the project, but he did not keep in contact with his backers for around 5 months. Eventually, some of them got enraged and frustrated; others started requesting refunds, and threatening lawsuits against him.

3. Your Reputation is Crippled

It’s not only the backers who are betting their savings but you as the project creator, are putting your personal reputation or public image, on the line. By leading a project into chaos, you are announcing to both the online and offline world that you are a poor director, and this history will follow you for life.

Seth Quest, the creator of Hanfree iPad Accessory project, said in the Inc’s interview that he moved to Brooklyn after his campaign failed, and he experienced a hard time finding a job in his main field. "Your backers can give you massive support, but they can also tear you down if you fail," he reflected.

4. Your Idea Is Free To Be Copied

By exposing your idea on a crowdfunding platform, you are welcoming (and perhaps challenging) anyone else to copy the idea, and perhaps even enhance it. The more unique your idea is, the more worthy it is to be copied by a corporation. It will be exhaustive to fight them with your financial resources, and your project execution probably won’t top a business behemoth.

The end users? Sorry to say they care little about originality, more about what is worth their money. Windows vs Apple and iOS vs Androids are just some of the examples of what embody this idea.

The only way to fight back is to fully follow the teaching, "prevention is better than cure". Either register a patent for your product, or develop a mature prototype so you own a timely advantage over those lazy copycats.

Tips to Nail a Successful Campaign

Success is all about doing the right thing at the right time, so we will discuss different elements and situations you need to consider when it comes to nailing a successful campaign. Plus, we’ll look into how to not screw things up, after you successfully raised the fund.

1. Choose Right Platform For Your Campaign

Kickstarter is not the absolute option for your project. At the time of writing, there are already more than 30 crowdfunding platforms available, with different types of fees, funding models and terms. You will need to do some research to find the right platform for your campaign.

Image Source: Crowdsourcing.org

Moreover, every crowdfunding platform has its own project preferences. For instance, according to Mashable, through Kickstarter has the most funded tech gadgets in the entire crowdfunding landscape, the platform itself is driven towards art projects. Just look at their Staff Picks. So if you are kickstarting a film project, you are more likely to succeed than if you were running an iOS application.

If you are planning a crowdfunding campaign for your tech gadget, both Kickstarter and Indiegogo are good for you, since they are popular with gadget lovers. You can embrace Crowdrise for public causes and charity projects, and GoFundMe for personal campaigns.

Read Also: 10 Crowdfunding Sites To Fuel Your Dream Project

2. Plan Your Campaign In Extreme Detail

A plan is not just a long list that predicts what could happen; it has to predict what must happen. It is a blueprint that will decide your success and possibly your future. Any mess up will cost you dearly. Thus, it’s best to make your plan as detailed as possible.

Listing execution details and challenges can help greatly, and they could also boost your backers’ confidence. Backers have learned a lot from crowdfunding past projects, in that they are less naive, and more careful of their pledges now. Hence, you need to work doubly hard and even consider building a prototype that works before running a crowdfunding exercise.

This could better persuade your backers and better forecast your manufacturing costs at the same time. As for budgets, never squeeze down the cost. A rule of thumb is to sum together with your living costs (if you’re going full-indie), costs for manufacturing, development, delivery, and the platform’s commission fee, then multiply that cost by 2 or 3 times. Remember that it is far better to let the funding fail than to face debt issues, especially with angry backers who want refunds.

Then again, if you are all-in for your project regardless of whether you get funded or not, just launch a $1 goal campaign like Happion Lab’s Energy Hook, and have fun with it.

3. Setup the Most Attractive Rewards

Lots of people, including me, don’t read all project details at first. We just want to know what your product can do, and what we can get in return. It contradicts the funding nature, but hey, it’s always about what backers can get. Based on this logic, you need to setup more affordable rewards than expensive ones.

Image Source: Tendril Design + Animation Inc.

Remember that you should offer the best reward on the most popular tier of pledge. Indiegogo released a statistic showing most backers prefer $11-25 pledge, with $26-50 as the runner-up. Kickstarter strengthened the statistic result by stating that $25 is the most popular pledge amount, and $10 or less is "always a good idea".

As for the reward content, Kickstarter pretty much nailed it with the question, "just ask yourself, would you back your project?" You are safe as long as you design your rewards based on this question, and the rest depends on your creativity and sales pitch.

4. Market before Anything Starts

Developers don’t do marketing, at least that’s the cliche of things. Developers prefer to forge ahead and produce an epic product that will "sell itself". While that’s true to some extent, every product needs an initial, aggressive marketing push, starting from the product creator himself.

Many successful crowdfunding projects run a marketing event before they launch the campaign. The crowdfunding campaign is more like the period when you are reaping, not when you were sowing the plants. Need more tips? Try having an Internet star; that will skyrocket your marketing effect. Endorsements from a celebrity in your field will greatly enhance your chances.

5. Successful funding is just a start

I would not call a crowdfunding campaign a success until it has fulfilled its final promise: product delivery. Incidentally, that’s the phase where all downfalls start to develop.

Image Source: CNNMoney

CNN reports that 84% of the most-funded projects on Kickstarter missed its delivery date. There are plenty of reasons but chances are you will mostly be part of that 84% as well. So the key point is not how you can deliver on time, but how you manage the delay.

Thankfully a delay is a widely accepted phenomenon within the backer community, and you only need to follow a rule to not make them rebel: don’t promise a second deadline unless you are really, really (really) close to it. A precise report detailing undergoing processes with photos as proof is comfort enough.

Additionally, engagement with backers is an extremely stressful ordeal, so it’s ideal for you to invite a person to be your voice, a community manager. He or she will carry the burden of keeping backers on track, and preventing you from going into an anti-social mode when you’re experiencing overwhelming pressure from the developmental state.

6. If You Really Failed, Quit It Properly

If you have failed to produce or ship a product even with the funds you have collected, please and seriously, quit properly. It’s for the good of your reputation, and any future campaigns you may run.

For Rick Dakan, founder of the game, Haunts: The Manse Macabre, he quit the right way. He explained all the technical problems with utmost honesty, discussed his remaining options, announced his future plans, and finally published the outcome of the project. His backers applauded his efforts in the latest update.

Why? Because he respected his backers. He treated them as part of the project, and he believed that he owed them an explanation, and that’s all that matters to them.

In the End, You Earn Something

Every project creator needs to think beyond just raising fund. Crowdfunding is the perfect lesson to anyone who wants to see their dream come true. Master everything you need to kick-start a profitable company in the long term. That’s also why most successfully crowdfunded companies achieve their venture capital fund on the second round.

So don’t feel bad if you failed, it’s not the end of the world, as long as you quit it appropriately and responsibly. The lesson will eventually serve as a catalyst for building your future funding success. It’s not the end as long as you keep trying.