Crowd Funding – The Pros and Cons

New year, new business, new way to fund it? Like everything there are pros and cons to be aware of before you dive into crowd funding.  It is a great tactic for funding a project but not a sustainable funding strategy for a business.

Crowd funding is not unprecedented.  It’s another form of subscription funding.  Charles Dickens did it.  As a way for an unknown author without reputation or credentials to get his books published – one chapter at a time – it launched his literary career.

Crowd funding is not just for authors.  Online crowd funding websites are popping up all over. Simply enter ‘crowd funding’ into a search engine and loads will pop up.  You will find many opportunities to develop your ideas. At the same time you’ll be testing the market’s reaction and engage a sub-set of interested customers in giving ‘friendly fire’ feedback.

But there are some limitations and drawbacks that you should be aware of before diving into the first crowd funder you come across.

Projects not Businesses

  1. What is common to all crowd funders is that they manage the process between project proposers and funders (aka subscribers).  NOTE: Crowd funding is for projects not businesses.

If you have a clearly defined project in mind, want to try it out, want to develop it as a pilot and distribute it in modules, then crowd funding may be right for you.  BUT, you will have to have the whole project in mind because you’ll need to prepare a proposal and do a pitch.  That means knowing beforehand exactly the premise of your project; what your vision and goals are; who it is aimed at; where you plan to market it; when it will be phased and completed; why you are doing it (what’s it in for you as well as them); how you will involve your subscribers and funders in the project’s progress.

2.  Subscribers are not investors and so do not (cannot) expect a financial return.  They are in effect providing a grant.  But they will expect something for their ‘gift’.

Be clear about the sum you expect from each type of funder and match that with an appropriate offer in return for the subscription, such as their name prominently in the credits for your books, film or project.  Perhaps for larger funds you can offer a tour of your project’s location, an opportunity to meet with and discuss the project with you and your colleagues.

The Secret Archaeologist can help you prepare.  What out for new workshops and articles or email: info@thesecretarchaeologist.co.uk.

Be choosy

  1. When choosing a crowd funding website do your homework – research them as well as prepare yourself.  Get a recommendation from someone who has successfully used the recommended site.  Some sites have gone bust and you don’t want to end up thinking you’ve got funds when you haven’t or are in the middle of a great project which will never see the light of day.  Go to http://unbound.co.uk/.  Unbound is a good example of a crowd funder for writers and they show the process clearly and simply.  I know John Simmons who has his project 26 Treasures The Book with them.  In fact I am one of his ‘crowd’.
  2. There are legal issues too.  Private Equity Funding is not the same as Crowd Funding and there are different legal requirements and protections.  So be careful about what the site is promising.  If you think you are getting into Equity Funding make sure you have a lawyer check out the small print.  Legislation is changing in the US and may well be changing in the UK and Europe.  It may not be legal.  Check it out.
  3. Be clear about what the funding is for and what it is not for.  Be clear and specific about what you offer and what you will deliver, by when.
  4. If you accept equity crowd funding (not the project based, subscription crowd funding) expect to have difficulty when you approach more sophisticated investors and venture capital firms.  They may become reluctant to lend if they perceive you as having a string of unknown backers who may make claims on you (and them) sometime in the future.  Remember, perception is reality.  It may not be true, but you’ll never be able to prove it.

Innovative and creative

Having shouted the warnings, crowd funding is a pragmatic and innovative way to

  • test your market
  • launch a project
  • raise funds for a charitable or social project
  • gain immediate feedback from knowledgeable and responsible customers who may shape your project.

It is a particularly useful way for creative entrepreneurs to get a book, song, or public work of art funded, developed and launched and it may help to establish a reputation for quality work.  It is a great way to involve your customers in the creative process and engage with them to crystalise your ideas and produce something unique.

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