There are over 3,000 sites on the internet dedicated to raising money through crowdfunding. Kickstarter, Indiegogo, Rockethub, Fundit and other platforms are generating interest and attracting aspiring entrepreneurs. It sounds easy, and even exciting to pitch your idea in the social media universe, sharing your idea and giving other people the opportunity to participate in funding your enterprise and vision. But how easy and how effective is crowdfunding?
As social and people friendly as crowdfunding appears to be, your financial history will be scrutinized. Your creditworthiness will be evaluated along with the strength of your business idea. Any past bankruptcies, unpaid judgements or trailing debt can prevent you from launching the campaign.
Crowdfunding an idea requires a substantial amount of planning followed by sustained follow-through to keep audiences engaged and participating. Success depends on continuous marketing of the idea via social networks and in the physical world. Some entrepreneurs even invest in professional public relations or advertising firms to elevate visibility for the funding campaign. Raising funds through social networking platforms can easily become a full time job.
The average successful crowdfunding campaign lasts 30 days. If the campaign is unsuccessful at the end of that time, you can choose to try another 30 day effort, but in the end, if the overall campaign fails, funds are returned to the donors.
Crowdfunding doesn’t work like traditional financing. There are multiple crowdfunding models. Some offer only rewards and gifts to contributors; others offer an equity stake in your company. Under new legislation passed on May 16, 2016, any individual investing $2,000 or more in a crowdfunding campaign can become a stakeholder in your company.
The average amount raised by successful Kickstarter crowdfunding projects is $5,000.1
Kickstarter and other sites typically ask for 5% of the money raised as a fee for their services. Another 3% to 5% goes to entities such as Amazon Payment for processing the contributions, for an average expense of up to 10%. Thousands more in expenses can be incurred if you hire professional teams or choose to produce videos or other materials to boost your efforts.2
According to Kickstarter, only about 44% of crowdfunding campaigns raise the funds targeted and of the campaigns that fail 67% don’t even reach 20% of their funding goal.3