by Piush Vaish
Crowdfunding is an alternative form of financing a new project. It involves raising many small amounts of money from a large number of people usually facilitated by a means of web platform. In recent years, there is a huge growth in number of websites which are used to raise capital. Apart from raising funds, it is good for engaging with market and market testing. The best performing categories in crowdfunding sites are consumer products in tech space such as video games or products (Schroter, 2014). This blog discusses some popular websites used to raise cash in ICT start-ups. It looks at the various ways a website is used to raise capital, charges various platform charges, legality of crowdfunding and some tips for a successful campaign.
The legal position of crowdfunding in Ireland
According to an information notice issued by Central Bank of Ireland in June 2014, crowdfunding is not a regulated activity. Therefore, Central Bank of Ireland’s codes of conduct and the protections such as Deposit Guarantee Scheme or the Investor Compensation Company doesn’t apply to the consumers .Complaints cannot be made to Financial Services Ombudsman (Ireland, 2014).
As there is a lack of regulatory framework, there is a likelihood of financial abuse or scam. The unprotected risk of failure to deliver the final goods or service presents an issue as to why people are reluctant to invest in certain projects.
Launched by the people who developed websites such as iDonate, iFundraise to raise money for non-profit organisations, icrowdfund is for fundraising proposals. It offers two types of fundraising. All or Nothing, in which money is solely collected from pledgers if predetermined minimum money has been vouched for. The second is “Keep it all” by which funds are awarded to a project regardless of minimum amount pledged. Rewards are submitted by project creator. Contributors receive the rewards in exchange of the amount of money pledged. iCrowdFund also help in finding a mentor to bring experience and credibility to the project. For All or nothing, iCrowdFund charges a commission of 4% on all successful pledges. Whereas for Keep it All, they charge 6% on all processed contributions. Additional 3% plus €0.25 per transaction is deducted from total amount raised(icrowdfund, 2014).
Fund it is a platform for raising money for creative ideas and projects with project creators having a bank account in Ireland and must comply with their guidelines . Funders can be from anywhere in the world. Technology-related products are allowed but not ones where development is subcontracted. Project creators should also demonstrate that they have a contact network so that they can spread the word about the project .Every idea or project must reach or exceed its target amount before the time expires. It is a non-profit organisation and charges a basic fee of 5% for running the website and 3 % for covering the transaction and other costs. There are no extra charges per pledge and no cover charge unless a project reaches its target in allocated time. So in total, successful projects are charged 8% of the total amount raised.(fundit, 2015)
Linked finance is used by creditworthy enterprises to borrow € 5,000 to € 100,000. The loan can only be used to grow their business and is repayable in 36 monthly instalments by direct debit. Lenders can be Irish residents or companies registered in Ireland and should have an Irish bank Account. To ensure lowest interest rates paid on the loan, it holds an online auction. The interest rate paid depends on different factors such as current trading performance, future plans etc. Auction normally lasts 14 days after the request goes live. If the loan is fully funded within 14 days, the auction can be closed early. If the loan is only 90% funded of the requested value, the amount can still be processed by Linked Finance. However, projects receiving less than 90% funding in the competition period are removed from its website. It charges an application fee of €70 plus VAT to register. If a business enters a loan contract, they charge 2.5% of the total loan amount. Fee is deducted from the amount before a loan transfer is being made.(Finance, 2015)
SeedsUps has a matching engine that uses proprietary algorithms and a patent-pending process to match multiple investors with early stage tech Start-ups with great business ideas .Start-ups can raise $ 25,000 to $ 500,000.It has “All or nothing” funding model with the listing period of 6 months. It helps in providing a valuable mechanism of feedback to Start-ups and reduced risk for investors. Project creators have to invite crowd to fund their projects by setting an Opportunity SnapShot™ to ‘Live’. Over listing period, investors can bid between $1,000 and $ 25,000 and compete to get into deals setting the valuation of the start-up. Amount of equity given by start-ups depends on the interest. The greater the interest in the start-up, less equity is given away by start-up to the investors. Once the offer has been received, Seedsup organises legal work to complete the process. There is no charge to join the SeedsUp community but a small amount of matching fees applies for on-boarding, professional and legal services when the deal is completed. Generally fees are consistent with traditional investment banking fees for similar transactions.(seedups, 2015)
Kickstarter is a Benefit Corporation with a global community consisting of creators and backers. Creators have to use “Launch Now” feature or manual review to raise funds. However the lowest acceptance rate for a successful project to launch is in Design, Food and Technology. Creators keep 100% ownership of their work and have complete control over their creativity and creative projects. Projects can be live on the site anywhere between 1-60 days with 30 days or less is the recommended by Kickstarter. It is all or nothing funding with creators offering rewards to their backers to share a piece of their project. No one is charged till the goal is achieved. If a project is successfully funded, the fees include 5% of the total fund raised and 3% + €0.20(Kickstarter, 2015) per pledge of payment processing fees. Pledges under € 10 have a fee of 5% + € 0.05 per pledge(Kickstarter, 2015).
Therefore, Ireland has all three types of crowdfunding available to start-ups to raise capital. Linked finance is debt-based in which borrowers’ application is reviewed and verified and algorithm determines credit risk and interest rate. SeedsUps is equity based with investors receiving equity in return of collectively supporting efforts of an Individual or an organisation. iCrowdFund, FundIt, Kickstarter are all reward based with goals set by creators and from this backers receive rewards based on their pledges.
Furthermore, the variety of products listed is varied. It can be hard to be unique and get a campaign funded. Using same network of supporters multiple times can lead to the network of being exhausted. Choice for a start-up to go for a certain platform can depend on their business model , what kind of backers are available on a platform and choice of founder to sacrifice equity/shares.
Tips for successful Crowdfunding campaign
- Strategic Social Media Campaign
It is helpful to think about backers and pick the network to match the marketing and content strategies to supporters of the project. Customization helps to suit each platform to connect with network and give regular updates.Send out tailored messages and be as personal as possible. According to Kickstarter, it is helpful to reach out to anyone who would be supportive during pre-launch to create a 20% bench mark after launch and follow up individually(Entis, 2014). It is beneficial to create a helpful media page to generate as much press and support the media enquiries.
- Produce a Great Video Clip
70% of successful campaign have a video clip(businessloans, 2015). It gives the visitors of the site a better idea of project. They should be good quality given time, resources and expertise.
- Convey Benefits Before Asking For Money
Tell a compelling story and share enthusiasm to attract people’s support. Building interest before closing the deal conveys the message that the project is fully though out and the creator knows what they are doing. Backers invest in return of something rewarding. As suggested by Kickstarter, offer lots of smaller rewards with most popular pledge amounts to be $25 and average pledge at $70(Entis, 2014). Therefore have rewards to please the backers who cannot afford steeper pledges.
- Proper Business Plan
A realistic plan and goal of the crowdfunding campaign is essential. Do as much research as possible and dedicate a planning period of 3 to 4 months before the launch. Managing budget is as important as raising capital. According to Scott Purcell, author of The Definitive Guide to Equity Debt and Crowd Funding, pre-raising 5% – 35% of your goal prior to launch gives a success of 80% to 100%(ADERS, 2014). This helps to promote the campaign from first day. Big goals projects usually have big marketing budget to make it appear as a project gone viral. Therefore, a creator has to be creative to aim to get 6:1 return on advert spend(ADERS, 2014). To ensure there is enough to fund the project it is helpful to add charges to the required funding goal.
- Work Hard
Success of any campaign is directly related to the amount of hard work which is put in by the creator. Right from prelaunch, creator has to invest time and effort to make a campaign achieve its funding goal. Challenges faced are daunting and must be addressed early on. Also, seeking help from a person who has been through the process is beneficial.
Hopefully these tips can help in increasing the success of a campaign to reach the funding goals of a company. It requires a lot of hard work and planning with clear objectives and an emotional connection with public.
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