How Do Money, Innovation, And Democracy Make Rewards Crowdfunding Work?

Posted on by Clive Reffell

Reward-based crowdfunding platforms such as global giants Indiegogo and Kickstarter are wildly popular around the globe. Every year, people use these platforms to transfer billions of pounds/euros/dollars to help artists deliver creative productions and content, and for entrepreneurs to develop new products and services. Though what can explain why and how rewards crowdfunding works, what motivates people to give their money?

The money is not given as charity donations. The backers obtain no financial benefits, there are no legal guarantees that their money will be used as originally described, and there are no reimbursement options. These unfavorable conditions led two American academic authors – Andre F. Maciel (University of Nebraska—Lincoln) and Michelle F. Weinberger (Northwestern University) – to ask why do so many people contribute to crowdfunding. In short, what makes reward-based crowdfunding so successful? The answers are enlightening, and are transferable to equity crowdfunding.

Key findings of why crowdfunding works

The two authors collected qualitative data from crowdfunding consumers, producers, and platforms to reveal the sociocultural underpinnings of this funding model. They found that a major part of why crowdfunding works is that platforms do more than create a technical infrastructure for consumers to transfer money to producers: they also create a mythological foundation.

Through storytelling, platforms cast crowdfunding as a route to create a more democratic society in which ordinary people (rather than banks or wealthy investors) can decide and finance the products that should exist in the market. Consumers then gladly gift their money to entrepreneurs and artists fundraising on these platforms, financing their innovation ideas interest-free. In many instances, they don’t usually receive any tangible return on their investment beyond something like a mug or a T-shirt.

Transactions replaced by social contracts

A second part of why crowdfunding works is that instead of a legal contract, crowdfunding platforms establish with consumers a “social contract” based on noble collective goals and intangible returns.

Backing a crowdfunding project comes with risks, and project backers do not receive the same protections as people buying an item from Amazon, eBay, or anywhere else.

Kickstarter gives a warning to potential project backers: “Unlike sellers on eCommerce sites, creators on Kickstarter do not automatically breach their contract with backers if they do not fulfill their rewards or provide users with a full or partial refund.” Similarly, reward-based crowdfunding backers have no recourse if creators fail to pursue or complete the innovative ideas that were their reason for asking for money.

Intangible rewards

However, in exchange for their financial gifts to support market democratisation, these project backers derive four unique forms of intangible value. 

  1. They get to express their tastes by selecting the innovations that they deem worthy of existing in the market—an opportunity that stands out from their conventional experiences as mass consumers elsewhere. This opportunity is even more significant because their tastes are often niche, patterning the immaterial value of “individualistic democratisation.” 
  2. As producers provide updates on their projects’ progress, consumers relish peeking behind the scenes of the entrepreneurial journey, acquiring the immaterial value of “insider knowledge” in their oft-niche areas of interest. 
  3. Consumers derive excitement from betting some money on the ideas of typically unknown producers. When these producers fulfill their projects and send their supporters some reward -typically symbolic tokens and an early version of the crowdfunded project – these consumers experience a “reciprocity thrill.” 
  4. Finally, crowdfunding consumers derive the immaterial value of “vicarious success”: the experience of getting a flavour of the glow of successful entrepreneurship while taking on little risk.

Reward-based crowdfunding’s main limitation

Beyond the consumer/project backers risks, the academic authors also articulate another important limitation of reward-based crowdfunding. 

For creators, reward-based crowdfunding finances many projects that would not receive bank loans or venture capital for lacking a clear profit potential, a trading history, or due to limited ambition.

Crowdfunding as an alternative means to support the creators tends to attract a specific segment of consumers: well-educated professionals involved in industries focused on producing knowledge, technology, and entertainment. These consumers tend to support projects they deem “cool.” They channel money to innovations that match their tastes, hardly ever picking projects based on the potential to broadly enhance social equality or welfare. 

Campaigns in areas such as music, film, publishing and games are more likely to succeed. Crowdfunding does finance many types of projects, but not as democratically as it first seems. 

Key takeaways

Crowdfunding has become a recognised and accepted branch of the digital economy. It is not used only by upcoming entrepreneurs and artists. Universities, museums, churches, and media organisations (including Wikipedia and The Guardian newspaper) regularly run campaigns to raise money from large numbers of people to create and enhance their market offerings. 

The Guardian newspaper part-funds itself through crowdfunding
The Guardian prefers to use crowdfunding whilst its competitors are behind a paywall

As such, this new research on why crowdfunding works is timely in three main ways: 

  • It sheds light on the consumer appeal of the crowdfunding model; 
  • it brings into relief the role of platforms in shaping the meanings of the digital economy; 
  • and it calls into question these businesses’ egalitarian claims.

Fuller research findings were published in the Journal of Consumer Research, and a version of my article first appeared for Crowdsourcing Week, where I began writing content on aspects of crowd finance in 2016.

I am an independent crowdfunding adviser, with no attachments to any specific platforms. Please contact me with an email to [email protected] to find out if I can help you with any ideas you may have of using crowdfunding. To search my blogs for other content you may find useful use the Search facility at the top right of the page.

Crowdfunding’s popular for food and drink brands and restaurants

Posted on by Clive Reffell
Food and drink crowdfunding examples October 2023

Of the crowdfunding campaigns and related news I noticed in October there was a high proportion that were food related. This includes startup food brands and restaurants. Entrepreneurs and startup founders in these sectors have identified that as well as raising funds to invest in the business, well planned and executed crowdfunding also represents good marketing.

Crowdfunding for food and drinks brands can stimulate trial, prompt consumers to ask for them in their local outlets, and increase brand loyalty among existing users who can become investors. New shareholders can also become valuable customers in a virtuous circle that gives crowdfunding backers a strong motivation to become brand advocates and ambassadors.

Similarly, crowdfunding used by restaurants can bring forward consumer demand and have them pay now for meals they will enjoy at a later date. From burger and coffee chains to Michelin-starred restaurants, it provides customers with a talking point to recommend a favourite place to go to friends and colleagues. Perks such as limited places for cookery lessons, or even meals prepared by chefs in crowdfunding backers’ own homes can deliver a wow-factor to make the backers feel special, and once again give them a talking point.

Crowdfunding backers also have the chance to get to know about the people behind startup food and drink brands, and restaurants, and maybe identify with their broader aims from an increasingly ESG or community asset perspective.

Crowdfunding by Restaurants

Chefs Lewis Dwyer and Andy Aston opened their independent Michelin Star restaurant called Hiraeth in Cowbridge, Wales, last November after raising £30,000 of reward-based donations through crowdfunding. They now need new premises after the landlord unexpectedly decided to sell the property.

Chef Merlin Labron-Johnson had already beaten his £125,000 crowdfunding target with 10 days left to run. He was raising money to relocate his farm-to-table restaurant Osip 2.0 in Somerset. His crowdfunding went on to achieve £166,261 from 464 backers to help bring this project to life. As perks, he offered branded restaurant crockery, chocolate cookie tasting sessions, hampers of mixed goodies, lunch and dinner at the restaurant for groups up to eight people, and home cooked meal for fifteen, and tickets for an exclusive opening night party.

Equity crowdfunding by London-based Honest Burgers’ closed after raising almost £3m. The casual dining restaurant group soundly beat its £1m target, raising £2,905,631 from 3,456 investors. It will now open further restaurants and launch a new quick-service burger.

Founded in Barcelona in 2020, startup coffee chain GoodNews is soon launching a round of equity crowdfunding after three previous seed and Series A funding rounds, which have already raised €15m (£13m). Good crowdfunding can be good marketing and attract loyal customers.

Startup founders Florin Grama and Felix Ortona Coles met while working at St Barts restaurant in London’s Smithfield Market area. In October they began reward-based crowdfunding to raise £20,000 for the final pieces of equipment they needed to open their Tarn Bakery in Highgate. Perks include classes to make croissants, sourdough pastry and pasta. By October 29 they had reached £15,242 with eight days left to run.

Crowdfunding by food and drink startups

With the growing demand for minimally processed and natural plant-based food, Tempeh brand Better Nature has launched another round of equity crowdfunding as part of a £1 million-plus raise to drive retail growth for its meat alternative range across the UK and Europe.

Hertfordshire-based SRSLY Low Carb has signed an agreement with a food distributor that services leading supermarket chains in all 50 US states. To support global growth, SRSLY is embarking on a seven-figure equity investment round which includes a round of equity crowdfunding in November with a minimum target of £500,000.

Earlier this year, craft beer maker Gipsy Hill Brewing in southeast London launched the world’s first carbon-negative beers, achieved without relying on carbon offsets. A new crowdfunding campaign in November will help them accelerate their climate-positive agenda. The brewery ran its first equity investment round in 2022, in which 581 investors joined its community and invested £865,149, 130% above Gipsy Hill’s target.

A former City analyst founded the Cheesegeek food marketplace platform in 2017 to connect artisan cheesemakers with consumers. Edward Hancock now hopes his equity crowdfunding campaign in November 2023 will raise £150,000 so he can start a forum for cheese fans, with investors invited to develop a new variety.

French plant-based food brand La Vie closed its equity crowdfunding in October with 2,691 backers investing €2.1 million. La Vie, whose UK headquarters are in London, used the Crowdcube platform which through its Barcelona office is authorised to run crowdfunding campaigns throughout the EU as well as in the UK. La Vie’s multi-award-winning plant-based alternative to bacon is available in 13 European countries. The brand claims to have so far saved over 90,000 pigs and 2 million tonnes of CO2.

Considering crowdfunding?

If you are thinking about running crowdfunding, and in any sector, not just crowdfunding for food brands, the most common mistake is to not allow enough time for preparatory work. This can include building larger networks of followers, and for those considering equity crowdfunding the platforms will require you to have lead investors prepared to guarantee a minimum of 30% of your target raise.

I am an independent crowdfunding strategist and adviser, unattached to any particular crowdfunding platforms. Please get in touch for objective advice and insights into your plans, and maybe hands-on support if you decide you want it. Send an email to [email protected] to get started.

How do you balance crowdfunding risks and returns?

Posted on by Clive Reffell

Crowdfunding risks and returns follow the same rules as any other investment. Higher returns mean exposing money to more risk. This is certainly true in crowdfunding, whether you want to raise money for your business or on a personal basis. I wrote an article for my client BOLD Awards on this topic, which looks at the risks and returns involved in reward, debt, and equity crowdfunding. I included some examples, plus a little personal experience.

Debt crowdfunding platforms, also known as peer-to-peer lenders, generally experience an average default rate of 1 to 10%. Equity crowdfunding mainly, though not exclusively, involves backing startup businesses. On average, 50% of them fail in their first three years, and only 1 in 10 succeeds beyond ten years. Investors seek higher returns from buying equity than from providing capital for loans.

Reward-based crowdfunding, which does not involve buying equity in or lending to a startup, carries its own risks. It swiftly developed from rewarding backers with a gesture of appreciation for a donation to a project or an appeal. In many instances it has become a quasi-sales channel where the donation is effectively the purchase price of a product, and the product happens to be the reward that is provided. Even though this may sound like a straightforward transactional arrangement, it can carry risks if the product on offer is still in the development stage. It is definitely not the same in timescale or consumer protection as ordering an item from Amazon.

The rest of the article goes through the balance of crowdfunding risk and return for each of reward-based crowdfunding; debt crowdfunding (aka peer-to-peer lending): equity crowdfunding; and crowdfunding to buy fractionalised ownership of tangible assets, such as art, luxury cars and watches, rare whisky, and so on. It is over at the Bold Awards site, please use this link to continue reading: https://bold-awards.com/crowdfunding-risks-and-returns/

How to use reward-based crowdfunding for more than raising business finance

Posted on by Clive Reffell
Reward based crowdfunding does more than raise money

In five years as a strategic crowdfunding adviser, I have seen and heard hundreds of pitches from start-ups that wanted backers to either order their new product or take a stake in their business. It’s given me valuable insights to share with anyone considering using equity or reward based crowdfunding for business purposes. This is an article first published by Enterprise Nation in their ‘Learn Something’ series: https://www.enterprisenation.com/learn-something/how-to-use-crowdfunding/

The simplest form of crowdfunding asks us to make online donations through platforms such as GoFundMe or JustGiving to a worthy cause, or to someone who needs help to get through a personal difficulty. Despite the number of small businesses pleading for help recently to tackle Covid-related problems, this form of crowdfunding is not particularly viable for a start-up business.

In this article I focus on reward-based crowdfunding. Among many other benefits, reward-based crowdfunding can provide proof of concept and generate pre-paid orders for goods that may not yet even exist. A follow-up article will cover equity crowdfunding, in which private companies raise funding through offering  investors an opportunity to become part-owners in the business.

Reward-based crowdfunding

This is the sort of crowdfunding that runs on Kickstarter and Indiegogo (US platforms that operate internationally), and the UK’s Crowdfunder platform, for example. Kickstarter alone has hosted over half a million projects. Just 38% of them were successful, raising over $5.1bn. Over half (54%) of the successful projects raised between $1,000 and $10,000. The overall average amount raised is $2,580.

It may not sound enough to launch a business, and although results can’t be taken for granted, a professional approach can significantly outperform these average figures. It’s not luck that divides the winners from the losers, it is hard work and careful planning. For anyone prepared to do that, it can be truly life changing.

De-risking the first production run 

Project owners create content that compellingly displays and explains the benefits of their new product(s). This information is hosted on reward-based crowdfunding platforms, which also process pre-payment from people who place orders for the item(s). They understand they are not ordering something from Amazon or eBay that will be delivered quickly.

Under a commonly used ‘all-or-nothing’ model, the value of pre-orders needs to reach a minimum financial target, by a set date, before there is an obligation to deliver anything. Given the costs of an initial production run and the volume of goods that would be produced, project owners can set a price per unit and calculate a breakeven point.

If the target is reached, the crowdfunding platform advances the pre-payments and production goes ahead. If the target is not reached the money is returned, and the project owner can return to the drawing board. This real-life research programme saves anyone from being left with production cost debts and a stock of unwanted items.

Projects sometimes fail to hit their target because the marketing effort was inadequate. Perhaps the project owner just didn’t tell a big enough crowd of the right sort of people. The marketing has to be as professional as financial plans and projections.

In a scenario where finished products do already exist, it is also possible to use rewards-based crowdfunding without setting a minimum target. This is the ‘keep-it-all’ model, and all orders must be shipped, regardless of the total number. This model applies to most of the projects on the Indiegogo platform, and that is the major difference between Kickstarter and Indiegogo.

Added benefits beyond raising money

Crowdfunding can test demand and build a customer pipeline

I met a textile designer/market stallholder at Greenwich Market who makes and sells her own clothing range. Niki Pearson was crowdfunding to raise the money to buy fabrics and anything else needed for her next collection of hand-illustrated, ethically made scarves and accessories.

Reward based crowdfunding does more than raise money

The rewards for people who backed her project were priority delivery and product discounts. The crowdfunding was both covering some production costs and lining up some confirmed orders.

If Niki hadn’t gained enough support, she would have been able to create some different designs and try again.

Corporate crowdfunding

Even international corporations use reward-based crowdfunding. Coca-Cola used it to distribute a limited amount of mineral water from Switzerland direct to consumers. This meant it had buyers’ contact details and could ask them for product feedback. It used crowdfunding as a product research exercise.

Crowdfunding to verify ‘proof of concept’ 

Have you seen a recent TV commercial for People’s Energy? It is a relatively new renewable energy supplier, with a stated aim to return 75% of profits to its customers. This could disrupt the energy supply market, though a business model like this hasn’t been attempted before. Who would invest long-term in a business dedicated to giving away 75% of its profits?

In 2017, People’s Energy raised almost £500,000 through a reward-based crowdfunding project. Over 2,000 backers donated the money to help the business meet early set-up costs. It was repaid in 2018, and those early supporters will enjoy discounted energy bills for as long as they remain a customer.

The crowdfunding success provided ’social evidence’ that People’s Energy was based on credible principles, and helped to impress institutional investors. The number of customers before the TV advertising campaign had grown to over 40,000.

Reward-based crowdfunding can generate impact investment

In a recent UK project on Kickstarter, with a £13,000 minimum target, a surfer/marine activist/clothing entrepreneur was offering t-shirts made with seaweed fibre to both highlight his original clothing range and to promote action against ocean pollution. It taught me that an acre of underwater seaweed can absorb 20 times more CO2 than an acre of forest. Good crowdfunding is good marketing.

Crowdfunding to validate a product innovation

In 2016, a reward-based crowdfunding project on Crowdfunder tested demand for toilet tissue made from bamboo rather than paper. Bamboo grows very fast, with three crops a year. Massive volumes in China are simply left to rot, making it a very sustainable product. It is also naturally stronger, softer and more hygienic than paper tissue.

Reward based crowdfunding does more than raise money

After exceeding an initial target of £10,000 of orders, and based on positive user feedback, the founders of this startup had the confidence to order more supplies and it quickly became a top seller on Amazon.

The Cheeky Panda’s products are now available in major supermarkets; it has beaten global, market-leading brands to win international awards; and in June 2020 it broke its £10m monthly sales barrier. The Cheeky Panda has also run three rounds of equity crowdfunding, which is the topic of my next article.

My role as a strategic crowdfunding advisor

If you’ve been using the hyperlinks in the article you’ll have seen what a number of crowdfunding projects looked like online. Many crowdfunding users fail to realise they are seeing just the tip of an iceberg, and that so much preparation work is invisible below the water line.

For regular examples of other crowdfunding projects you can follow me on Twitter, and for insights in to successful crowdfunding techniques there are further articles on my website. When you’re ready, please get in touch to discuss your own project: [email protected].

Vital Steps To Achieve Massive Reward Crowdfunding Success

Posted on by Clive Reffell
Narek Vardanyan, CEO of The Crowdfunding Formula

In five years, Narek Vardanyan, CEO and co-founder of The Crowdfunding Formula, built the world’s largest agency (in Armenia) that specialises in supporting entrepreneurs who want to launch new and innovative products, and generate high level pre-orders through crowdfunding. The TCF agency is far removed from asking friends and family members to support a modest Crowdfunder, Kickstarter or Indiegogo project. In the past three years they have worked on 13 projects that raised over $1 million of product orders, and that’s the level of ambition they want to work with.

There are plenty of lessons to learn from understanding their almost indiustrialised process of preparing for and executing a reward crowdfunding project, many of which also apply to equity crowdfunding.

How to secure The Crowdfunding Formula’s engagement

TCF uses a simple scoring system, and a project has to score at least 4 out of a possible 6 to be considered.

How To Prepare for High Level Reward Crowdfunding Success

To achieve this rating it’s clear a product must be aimed at a B2C mass market for TCF to become involved.

Beyond the scoring system, a project leader should have a core team of around five people to share the workload, an ambition to achieve at least $1 million worth of pre-orders, and a prototype that’s at least 85% complete.

How and what to prepare in a pre-launch period

Thorough preparation in the run up before a reward crowdfunding project goes live is absolutely vital to provide a foundation for success. This work is never seen in the project content finally visible to the public on a crowdfunding platform, and remains a challenge to many who aspire to be an innovative entrepreneur.  

Prototype

TCF’s team of experienced operatives can identify a host of issues to double-check and pressure test, including sourcing materials and components, manufacturing to regulatory standards in different countries, and supply chain and fulfilment reliability. Some projects have started as long as a year later than originally planned in order for the prototype to be acceptable.

Start to build a crowd of backers

Work here focuses on three elements:

  • Growing a base of early-adopter subscribers who are interested enough to sign up through a landing page, or join a Facebook group, and not only back a project but maybe also add their voice to the marketing efforts. Opportunities to earn perks with limited availability can make them feel special and identify strongly with a project’s ultimate success.
  • Creating a network of influencers, bloggers, journalists and editors of off- and online media who will review and rate a product.
  • Building a stockpile of images and video content.

The question of “How many subscribers are needed?” relates to the item unit price. Once a crowdfunding project goes live, potential backers of high ticket items will need more reassurance than for lower price items, and thus need to see an early and convincing level of support.

How To Prepare for High Level Reward Crowdfunding Success

How to reach and motivate subscribers

TCF can set up a chatbot, a VIP Facebook group, and other social media pages such as Instagram and a ‘regular’ Facebook page. They will create subscriber subsets who will respond better to different types of communication content, and devise a raft of bonuses to keep them all involved during the pre-launch period. You need them to place their orders as soon as the crowdfunding project goes live to give it momentum. Asking them to refer friends can also be very effective.

How to collect and communicate with influencers

Manual searches to first establish the identities of relevant influencers, and to then find contact details, are too slow and time consuming for a project that aims to raise $1 million. The TCF team have the skills to use automated services. Whether you’re going to use a marketing agency to support your project, or handle it all yourself, these are some of the list-building tools that are available.

  • Nymeria enables users to quickly find a person’s email address on supported sites like LinkedIn and GitHub.
  • RocketReach finds email, phone and social media details for over 250 million professionals.
  • Prophet is an advanced search tool available from the Chrome Web Store. Has 30,000 users.
  • Email Hunter extracts and auto saves email addresses from website pages as you visit them.
  • Lead IQ, primarily designed as a tool for sales teams, similarly extracts contact data from web pages and LinkedIn.
  • Voila Norbert has built up a massive database of B2B email addresses which they will examine to meet customer requests. 
  • Anymailfinder uses job title search to find your ideal contacts if you don’t even know their name.
  • Leadgibbon can add email addresses to a list of contact names and domains.
  • PhantomBuster is great for finding contact data in social media profiles.

Having created a group of influencers, reminding them about your project and keeping them informed of progress is also handled better through automation. Mailshake is an email outreach software and sales engagement platform that helps you send emails from Gmail and G Suite, and Streak extension is another CRM system for Gmail users. Others are available.

PR tips on what to say

Have product samples available to send to influencers for them to review, and put the most important information in an email in a P.S. Use articles about your product in retargeting ads, and embed tracking pixels in your emails to enable effective follow up.

Let them know you are available if they want to make a video that features you or your product, offer them special perks if they place an order, and ask if they can make any contact lists available to you.

Remember, all this is done in a pre-launch period before your crowdfunding project goes live. Much of it equally applies to equity crowdfunding, where the challenge is to build crowds of influencers and potential retail investors.

How to set a reward crowdfunding target

Narek’s advice is you should set it as low as possible in order to be able to report a fantastic level of overfunding and look to be a sensational success. Nobody else has to know the real aim is at least $1m, or whatever your own target is.

The minimum goal for an “All or Nothing” crowdfunding project should be the breakeven point where pre-orders cover the first minimum production run. It is important to also allow for the following:

  • Any level of profit you feel your team’s efforts deserve.
  • Fees charged by the crowdfunding platform, which will include an element covering transaction costs (credit/debit card, bank transfer fees, PayPal). In total, about 10%.
  • Packaging and delivery costs of the products, plus any applicable tariffs related to countries you are going to ship to.
  • Costs you are going to incur to run the crowdfunding project, such as video production, photography, maybe launch events, product samples, Facebook and other social media advertising, legal services and charges, IP protection, and the  fees charged by a support agency.

Under the terms of “All or Nothing,” if your project fails to meet the minimum goal the backers are not charged the money they pledged, there are no platform fees to pay, and you don’t have to manufacture the product. The manufacturer, however, may still want some level of payment if they had set aside some production time in their schedules. Consider this in your negotiations with them to begin with. Overall though, if you fail to reach the minimum target you can go home to think again without having incurred a great debt.

The Crowdfunding Formula charges 25% of the money raised.  This may seem a lot, though consider what they help each client with, the other benefits of crowdfunding beyond generating sales income. 

How To Prepare for High Level Reward Crowdfunding Success

This article was first published, by me, for Crowdsourcing Work, where my role is Content & Marketing Partner. I am in regular contact with team at The Crowdfunding Formula – what do you want to ask? Email me at [email protected].

International Lessons on Achieving Crowdfunding Success

Posted on by Clive Reffell
  • A typical timing plan for an equity crowdfunding project

My work with Crowdsourcing Week as a content marketing creator and as an independent crowdfunding advisor has brought me in to contact with crowdfunding experts and thought leaders from around the world. We have talked about reward crowdfunding, equity crowdfunding, and crowdfunding being used by major corporates. I’d like to share some recent insights.

Lessons from 10 years of Crowdfunding in Europe

Christin Friedrich, CEO of the Innovestment platform in Berlin, is also Chair of the European Crowdfunding Network.

Top Insights to Successful Equity Crowdfunding

Key lessons learned at the ECN include the realisation that at whatever stage of a company’s growth, in addition to raising money, successful crowdfunding involves, builds and strengthens communities. Though in an increasingly competitive environment this requires expert communication skills.

An equity crowdfunding project should make it clear what it is asking for; what the organisation raising the money hopes to achieve; and who will benefit. Any funder can go on to become a customer, an advocate, or a supplier. So keep communicating after the crowdfunding closes, share news about your progress through achieving milestones or report on KPIs.

As well as improved professionalisation of all aspects of the process, regulations are adapting to crowdfunding being a global practice. Funds need to flow freely to encourage cross-border financing, though authorities have to be aware of laundering. European harmonisation through the ECN will ease cross-border payments from outside the EU – including the UK.

Evolving best practices in Reward Crowdfunding

New Zealander Nathan Rose is a crowdfunding strategist and author, his latest book is about reward crowdfunding. Across several years he has been able to track changes to what used to be, and what are now, the key factors for rewards crowdfunding success.

Crowd-building and effective communication strategies have definitely changed over the years. For example, these days, many more successful projects have used paid-for social media advertising.

Though project owners should not rely on purely virtual contact – he recommends getting out to events and meet influential people in person. Though beware of trade shows where more people are likely to be like yourself, looking for investment, rather than be potential backers.

PR efforts to crowdsource media coverage remain a valid activity, though not for the reasons you might expect. A published article is unlikely to generate much traffic to a crowdfunding project, though a collection of media logos is a strong endorsement of the viability of a project once site visitors see them.

Nathan also warned of a classic error. He still comes across project owners who calculate the production cost of the rewards they will supply, and set a donation value without checking  the fulfilment costs to deliver the items. Seemingly successful projects can then sometimes incur a loss for the project owner, or are simply abandoned leaving many disappointed backers.

  • Nathan Rose’s latest book on crowdfunding

Tips for startup founders on running Equity Crowdfunding

Cheryl Campos, Director of Growth and Partnerships at the US equity crowdfunding platform Republic. Cheryl provided the article’s main image on a general timing plan for an equity crowdfunding project.

Before accepting an investment opportunity to put to its network of half a million investors, Republic uses four important criteria to evaluate startups: “The 4 Ts.”

Team
A startup funder has to have prior career and industry experience that adds up to a set of skills and expertise that can give investors confidence. But few investors will back a one-man (or woman)-band, and want to see a credible management team already in place, a team that has bought in to the founder’s vision of the startup business and have the ability to make a solid contribution.

Traction
Evidence of traction includes a passionate and engaged user base. Perhaps this has been achieved by an earlier round of rewards crowdfunding?

Technology
Is the startup’s product range superior to competitors? Or maybe their technology to make their products is superior, delivering a cost advantage. Are they following the sector’s traditional business model, or have they developed breakthrough innovations to shake up the established incumbents?

Terms
The terms a startup offers investors can vary, based on different methods of estimating a company valuation and with different classes of preference or voting shares, for example. It could make it harder to reach a financial target if crowdfunding backers receive poorer terms than other investors.

Corporate use of Crowdfunding

Esben Bistrup Halvorsen, Co-founder and CEO of Danish platform Lendino, gave a Crowdsourcing Week webinar some examples of major corporations using reward crowdfunding.

Sony has a co-creation and crowdfunding platform called First Flight, which operates within Japan only. It encourages entrepreneurial “Challengers” to propose ideas and suggestions for new products and services and allows them to canvass for input and support among a community of Sony fans and early adopters.

Fleshed-out ideas that have withstood this crowd’s scrutiny can then go on to a reward crowdfunding stage to check for demand to actually acquire the product or use the service. Where response from Sony’s First Flight crowd is strong enough to warrant investment, Sony makes the products and services available. Who knows, someone may come up with the best idea since the Sony Walkman!

Thinking about your own Crowdfunding?

In this most recent stage of my marketing career I’ve immersed myself in crowdfunding for the past six years. The crowdfunding projects you see hosted on any of the crowdfunding platforms are like looking at the 10% of an iceberg that’s visible above the water level. If you want to know the full extent of what has to be prepared to achieve success, let’s have a call. In the first instance please send an email to [email protected].

Crowdfunding does more than raise money

Posted on by Clive Reffell
Crowdfunding does more than raise money

I was recently asked about crowdfunding by the founder of a startup business that makes a range of non-alcoholic wine.  There was nothing confidential in my reply, so I thought I’d share it with you.

You’re absolutely right that crowdfunding can be a more time consuming way to raise money compared to perhaps a VC investment or an angel investor. Yet there are other benefits that go way beyond the money it raises.

For example, VCs were queueing up to invest in Chapel Down (the celebrated English sparkling wine maker) when in 2014 they launched their equity crowdfunding campaign. Beyond raising £3.9m in three weeks, their CEO Frazer Thompson told me that crowdfunding had generated 1,500 brand advocates who would spread positive word-of-mouth, buy Chapel Down products at every gift-giving opportunity, and create sampling opportunities by stocking their wines (now beers as well since they built a brewery with some of the money they raised, and gin too) both at home and in their company drinks cabinets. Priceless!

Crowdfunding creates a virtuous circle whereby customers can become shareholders and shareholders become customers. I’m caught up in it myself as an investor in a craft brewery and a gin maker. If “my brands” are available,  why drink others? Shareholders catapult themselves right up the brand loyalty ladder.

Hop Stuff Brewery started five years ago when it raised £58,000 through offering 34% of equity. It’s now valued at over £25m, with products stocked in Wetherspoons (which encourages lower than regular cost product trial), Tesco and Majestic Wine; it has a growing chain of beer and pizza outlets; and international sales and franchise brewing agreements.  Hundreds of their 1,000+ investors from three rounds of crowdfunding on Crowdcube attended an “Investor Fiesta” event at their new brewery back in August.

A network of investors can be used for research purposes and to ask for ad hoc assistance such as help recruit staff,  recommend suppliers, volunteer their own services, and so on. At the Hop Stuff event I heard a fellow investor volunteer to use his contacts to help sort out supplies of CO2, which if you remember was in short supply in the summer.

Crowdfunding does more than raise moneyEven if it’s not a main aim of the crowdfunding, it could find you an angel investor. This happened to some people I know who started a business making tissues from bamboo. To begin with, all they wanted was an initial £10,000 of orders through rewards crowdfunding to provide validation they weren’t wasting their time. A backer was impressed with what he saw and stepped forward to invest, which allowed the founders to greatly speed up product development and company growth. So do eveything as professionally as possible.

They were a top-seller on Amazon very quickly. Within three years the company founders raised £500,000 in October 2018 for 10% equity on the Seedrs crowdfunding platform  – they had a business valued at £5m!

Their latest news is The Cheeky Panda tissues are now stocked in Tesco and Morrisons; in the summer they signed a £1m corporate investment deal that valued them at £20m; and right now they are running a second round of equity crowdfunding for existing investors in which they are offering 5% for £1m.

Good crowdfunding is also good marketing. I call it an ultimate direct marketing campaign. There’s a start date, an end date, lots to do, and if you fail to hit target you don’t raise any money. Naturally there are risks, though by breaking a crowdfunding campaign down in to component parts each potential risk can be addressed and minimised. I’ve created a Seven Stage Assessment to check if a business is ready to start crowdfunding, and identify areas that need to be addressed before going public.

My approach is more from a marketing angle, since that’s what I’ve always done. I am not a finance expert and not qualified to give financial advice. Though I can provide an experienced layman’s assessment on how appealing any offer may be to the public. I do have a post-grad diploma from the Institute of Direct and Digital Marketing and a Professional Diploma in Management from the Open University Business School.

One vital tip is that crowdfunding should not begin until you have done enough personal pre-selling for 30% of the financial target to fly in to your crowdfunding campaign within the very first few days. This applies whether you’re trying to generate product orders or offering equity. This gives immense confidence to other backers who don’t know and haven’t met you, and creates valuable momentum. So if you have a target of £200,000 your pre-selling should reach a guaranteed support level of £60,000 in the bag before you start crowdfunding in the public eye (ideally more to allow for dropouts).

Early success is newsworthy and hard-working PR will generate media coverage to add to your early momentum.  On the other hand, crowdfunding without pre-selling is like shovelling quicksand – hard work and you get nowhere.

How much it costs and how long it will take depend on:

  • how well your business rates against my Seven Stage Assessment
  • how much work has to be done to become investment-ready
  • of that, what can be done internally and how much has to be outsourced
  • including how enthusiastic and good you are at using social media – and “it’s ok, my kids use Facebook, they can help” isn’t good enough
  • success rate of using PR to secure media coverage
  • how long it takes to drum up support to reach the first 30% of your target.

If you have no social media networks to drive people to your crowdfunding project it may first require months of work to build some. Or months to accumulate impressive media coverage you’ll be able to refer to, or both, ideally.

Outsourcing support and input can even begin with the pitch document. A 30-chart deck may be very thorough but it’s too much for a potential equity investor to wade through with enthusiasm. Most look for the first reason they can give themselves as to why not to invest so they can move on to the next opportunity. Simply having to spend too long to get a feel of an opportunity is a good enough reason to discard it right away.

Don’t forget the taxman. Many retail investors prefer businesses to be registered with HMRC under EIS and SEIS agreements. These Enterprise Investment Schemes allow tax-paying investors to claim valuable rebates of up to 50% of the cost of their investment, and shelter capital gains from CGT. Under SEIS a company founder can invest up to £100,000 in their own business and claim a refund. Make sure you understand and take advantage of these benefits for yourself and your backers.

To close, what you see online when people and organisations run crowfdfunding campaigns is like the tip of an iceberg visible above the waterline.  Invisible under the water is a vast amount of planning and preparation, and a fair amount of stress. It’s not impossible to run a crowdfunding campaign alone if you’re tough and resiliant enough, though most people need some help and support, be it technical or emotional or anything else. This comes either from a team of willing supporters who between them provide all the necessary skills required to achieve your success, or you need a budget. Most times it’s a bit of both. If you want to talk about your ideas that could transform your life please get in touch, [email protected].

10 Tips on Reward Crowdfunding from a Tech Startup

Posted on by Clive Reffell
10 Tips on Reward Crowdfunding from a Tech Startup

Hribarcain is a newly founded UK technology company that was launched on the crowdfunding platform Kickstarter in 2016. After starting in a small design studio in Bristol their first product launch was “Magno, The World’s First Magnetically Controlled Pencil.” They then developed a range of titanium pens and expanded internationally to provide products to thousands of customers worldwide, raising over £250,000 in revenue. As an SME marketing and crowdfunding specialist I was keen to meet the company founders at a recent networking event and hear more of their story.

Co-founders Ashley Hribar-Green and Matthew Aston Cain are British entrepreneurs with a wealth of experience in product design engineering. After working for one of the largest technology companies in the world (Dyson), Ashley and Matthew launched Hribarcain to pursue their dream of designing products that challenge convention as a result of ground breaking innovation. In this case it began with a range of magnetically controlled propelling pencils with a subsequent brand extension in to pens.

10 Tips on Reward Crowdfunding from a Tech Startup

Rewards crowdfunding allowed Hribarcain to promote their products direct to end-user buyers without first needing retail distribution agreements. They also used Indiegogo in 2018 for a campaign with US dollar pricing, whereas their Kickstarter campaigns have been priced in UK pounds.

Matthew already had previous experience from using reward crowdfunding on Kickstarter to generate orders for his range of Astoncain minimalist watches with top quality components and functions at a reasonable price. At a recent networking event in London organised by Masterclass Crowdfunding, he happily shared 10 top tips based on his seven years’ experience of using reward crowdfunding.

1.      Have a clear and concise video that runs under 2 minutes – it’s your business card. This is his advice after sometimes using longer running videos.

2.      Advertising – use some! Let people know you’re crowdfunding

3.      At the close of the project don’t simply just fulfill the reward item orders, up-sell to the buyers. In Magno’s experience it can add a further 15% sales income

4.      Make your pricing attractive, reduce it to create urgency within the limited time period of your crowdfunding project, maybe to 50% of RRP

5.      Possess a clearly defined USP (Unique Selling Proposition) to stand out from competitors

6.      Use quality photography in your crowdfunding project. It will help to enhance the image of your product or service and reassure people you’re serious about what you’re offering them

7.      Only use quality, reliable manufacturers who won’t cut corners and reduce the value of your items

8.      Price in a minimum 50% margin to allow for mistakes and to afford some marketing (see Point 2)

9.      Consider fulfillment delivery costs right at the start of selecting reward items and maybe opt for smaller, lighter ones, or at least smaller packaging to meet postal rate sizes

10.  Find other crowdfunding project owners who have complementary products, such as matching up pen makers and notebook suppliers, or maybe cooler boxes and food and drink providers, and agree to co-promote each other’s products to your respective networks.

10 Tips on Reward Crowdfunding from a Tech StartupAll of these are great pieces of advice, though there’s also a lot more to consider. If you are considering using reward crowdfunding yourself then please get in touch via [email protected] for us to meet, either in person in London or maybe on Skype, and discuss your ideas and how to effectively plan for success. You can also follow me on Twitter, @Cliveref.

UK energy newcomer raised £487,000 through reward crowdfunding

Posted on by Clive Reffell
UK energy newcomer raised £487,000 through reward crowdfunding

The UK consumer energy market is dominated by six companies who between them supply over 90% of the market. Newcomer and disruptive brand People’s Energy raised almost £488,000 last year through reward crowdfunding on Crowdfunder UK, and started trading in August 2017.  They needed startup cash, and offered savings against future bills as rewards. Their eventual aim is to really shake up the market through acquiring a million customers who will all be shareholders, making company decisions and receiving a slice of refunded profits.

Here’s the “gap in the market” they want to exploit. None of the current “Big Six” energy companies are recognisably customer-centric. There is a generally critical public perception that they offer complicated tariff structures making it difficult to find the best prices or to compare different suppliers, and that they deliver similarly uninspiring levels of customer service – no more than 43% of any of the Big Six’s customers would recommend their supplier.

There is also public resentment over their “profits before people” ethos: consumer prices never drop when wholesale energy prices do, and energy prices have risen at three times the rate of general inflation over the past 20 years. Amid unproven accusations of collective price-fixing, in April 2017 the Government put in place a price cap on each suppliers’ top tariffs, possibly remaining in force until 2023.

A relatively uncompetitive market dominated by a few large, unresponsive companies who lack customer trust is a ripe target for disruptive new entrants, which is what People’s Energy aims to be. Karin Sode, People’s Energy’s head of marketing, kindly answered some questions for me.

People’s Energy launched by using donations-for-rewards crowdfunding to raise over £487,000 and generate 2,055 customers. What was the thinking behind this?

We differ from all the other suppliers in that we want to give our customers shares in the company and pay back the profits to them, not to some other faceless shareholders. For that reason, we turned down potential investors who wanted equity in return for their investment.

Equally, equity crowdfunding was not an option because although it would have been easier for us [than reward-based crowdfunding] it would dilute the model and our unique offering of ownership to customers. We knew that it was a tall order but we were determined, worked very hard at it, and are pleased that we succeeded and were able to launch the company on 1 August 2017.

Was it difficult to get an operator’s licence given you will operate very differently from the Big Six?

Ofgem (the UK energy market regulator) has been very welcoming and appreciative of the very different model we offer to help shake up a market that suffers from real trust issues. Getting the initial licence was not the hardest thing, a bigger challenge was one of initial funding to get started, and we resolved that through our crowdfunding campaign.

After receiving the licence, we then went through a probationary period called ‘Controlled Market Entry’. We could take on only a limited number of customers while we proved to Ofgem we had the operational capability to serve them well. We went through that period fast, and successfully, and I’m very pleased to say we are now fully licensed to operate and welcome as many customers as we can.

A stated aim is to put 1 million people in charge of their own energy as shareholders in People’s Energy. Will you need to raise more money to achieve this?

We will operate on a “cost plus model” based on wholesale prices and our fixed costs, plus a small buffer that allows us to be robust. We’re a new business with no legacy costs to have to cover. There will be a single tariff for all customers, with our prices always in the lowest 30% of other tariffs on offer. Right now we’re in the lowest 10%. We are now broadly self-funding.

However, there will be a need for some further funding to realise other ambitions to invest in innovative renewable and energy storage solutions. In the meantime, a key interim aim is to sign up 20,000 customers within 18 months of our launch, which is a deadline of February 2019.

Where will People’s Energy customers come from?

We hope to appeal to younger customers through our sharing economy model. Market research shows that the more innovative companies operate in a more community/membership way, such as Giffgaff (a mobile/cell network) and Monzo (banking services).

We plan to build out the community approach and encourage people to share what we offer through personal endorsement to their contacts. This will help us grow the numbers at pace. In addition, we are currently in talks to establish partnerships with various bodies that will help drive up customer numbers more quickly.

A sharing economy newcomer aims to disrupt the UK consumer energy marketIn terms of offering your customers control, what sort of issues will they have a say in?

A key aim is to rebuild trust between consumers and energy providers. That can’t be done through words and promises but has to grow through the actions we take. Offering customers an element of control is therefore a direct attempt to make people feel heard and valued, really given a voice.

We want customers to have a say in whether or not we use the profits to purchase renewable generation facilities (including wind and solar farms), invest in development of power storage, or if they prefer to have the profits repaid to them.

We also plan to consult customers on whether they want profits shared depending on their energy usage or if every customer should get the same rebate. The latter option would support individuals in lower income households, but may not be considered fair for people with large usage such as small businesses. We believe the customers should have a chance to decide for themselves rather than us deciding on their behalf in a remote boardroom.

People’s Energy will provide electricity only from renewable sources. Will residential prosumers be able to sell back to you energy they produce from renewable sources?

We are not yet able to accommodate this, though it is absolutely something we want to facilitate as soon as we possibly can. For now, after switching over to People’s Energy for their energy supply, people will be able to continue to sell back surplus energy they produce to their current supplier.

If you are considering a crowdfunding project, whether offering equity or providing rewards, please get in touch if you’d like an objective assessment of your ideas from an independent crowdfunding adviser. Please email me at [email protected] or contact me through Twitter, @Cliveref.

Update on 20th March 2018
CrowdFundRES is a European project that contributes to the acceleration of renewable energy growth in Europe by promoting crowdfunding for financing renewable energy projects. It has published a practical guide for crowdfunding platforms, project developers, investors and policy makers on “Crowdfunding Renewable Energy.” You can access it here.

 

Top 10 US Reward and Equity Crowdfunding Platforms

Posted on by Clive Reffell
Top 10 US Reward and Equity Crowdfunding Platforms

Mass digital connectivity has significantly disrupted the business investment market. Online crowdfunding enables company owners to trade equity for funds to invest in growth. Who’d have thought 10 years ago that it would be possible for business owners to raise seven-figure sums from people they didn’t know, or even have as a customer? The vital stepping stone was the sometimes massive sums raised on reward crowdfunding platforms. Except early backers are unable to invest in the companies themselves, only acquire their often innovative products.

Reward crowdfunding

  1. Kickstarter is the world’s largest reward crowdfunding platform. It was launched on April 28 2009 in New York as an alternative way to raise funding for performance arts projects and productions. Its model is to encourage low value donations from a large group of people rather than a lot of money from a few individuals.
    It quickly expanded to cover many other hobby, craft and product categories, and has raised almost $3.05bn through hosting 124,935 successful projects (the figures are updated daily by Kickstarter).
    It has an “all or nothing” policy meaning projects that fail to reach their target don’t receive any funding and the backers who made pledges don’t pay anything. Successful projects pay a 5% commission plus up to 3% transaction charges.
  1. Indiegogo actually launched first in January 2008 in San Francisco, again as an alternative way to raise funds for arts projects. Indiegogo also quickly grew to host projects in many different categories.
    A significant difference is that Indiegogo allows projects to receive the money that’s pledged even if they fail to reach target. When this happens their regular 5% commission rises to 9%, plus there are always transaction fees of approximately 3% on every project.

Top 10 US Crowdfunding Platforms (Reward and Equity)Since 1 January 2014, Indiegogo has hosted slightly more projects than Kickstarter: 231,900 vs 218,896 (as measured by crowdfundingcenter.com on May 17 2017). However,  Kickstarter has hosted significantly more that reached their target – 68,984 vs 26,272.

Based on these figures Kickstarter has an average success rate of 31.5% and Indiegogo achieves 11.3%.

These two broad scale platforms dominate the US reward crowdfunding market and to have a point of difference the next largest platforms focus on specialist business sectors.

  1. PledgeMusic is third placed behind these two giants, as measured by website traffic. It launched in August 2009, aiming to do for the music industry what Indiegogo and Kickstarter were doing at the time for other arts genres. It is used by all types of people from hopeful wannabes to established performers with an existing fanbase.
    It operates like Kickstarter on an “all or nothing” basis for people raising money to complete a project like record an album, and on a “keep what you raise” basis when people use it as a sales channel for any finished content that can be downloaded. It charges a flat and all-inclusive 15% commission on “sales” and fundraising projects that hit or exceed target. This looks expensive though they claim a success rate of over 90% for the average 100 projects they carry per month.
    The platform operates globally by accepting payments through credit cards and Paypal.
  1. Seed&Spark is an industry specific crowdfunding platform for the tv and film industry and is based in Los Angeles. It launched in December 2012 and within an overall aim to build an independent film community it provides filmmakers with a reward-based crowdfunding facility. They claim a 75% success rate.
    Projects must reach a minimum 80% of target to keep the money pledged by backers. Then upon completion of a film, any project that also gathered over 500 backers is automatically eligible for distribution through Seed&Spark and their partners including all major cable and digital platforms such as iTunes, Comcast, Verizon, Netflix, and Hulu.
    Seed&Spark charges a 5% fee on successful projects, though offers project backers the opportunity to add this to their pledge. Many choose to do this and on average the crowdfunding projects themselves pay just 1.9% of funds raised to the platform.
  1. Barnraiser is a platform for artisan food producers, small farmers and exponents of sustainable, healthier living. It encourages its community of over 30,000 like-minded people to crowdsource advice and contacts from each other, and also provides a rewards crowdfunding facility they claim has a 65% success rate.
    It launched in 2014 and 187 projects have been successful. The largest amount raised was $93,190.
    Successful projects are charged a 5% fee based on the amount raised plus payment processing fees of 3-5%. If funding isn’t successful there are no fees.

Equity crowdfunding
Title III of the JOBS Act came in to effect in May 2016 and extended online equity crowdfunding opportunities to Americans earning under $200,000 per year, though included limits on the amounts that could be invested. New platforms were launched to provide a full online equity crowdfunding facility to this wider market, whereas the previous ones serving higher net worth individuals (“accredited investors”) required transactions to be made offline.

The Wefunder platform tracks progress of this new retail equity crowdfunding sector based on mandatory Form CU filings on the SEC’s EDGAR database. Since May 16 2016 to May 23 2017, just over $35.8m has been raised through Regulation Crowdfunding offerings.

Top 10 US Crowdfunding Platforms (Reward and Equity)

  1. Wefunder is the early market leader and it launched in 2012. The minimum investment size is $100, and Wefunder has created internal Investor Clubs in order that part-time investors in its network can access the wisdom and leadership of more experienced and professional investors and combine their investments with them on equal terms.
    Wefunder members have provided 55% of all online equity crowdfunding investments through Regulation Crowdfunding in the first 12 months of online equity investment trading being open to non-accredited investors.
  2. Investments made through StartEngine, which is based in LA and launched in June 2015, represent nearly 22% of the Regulation Crowdfunding total raised so far, according to SEC figures. StartEngine also raised $17m from 6,600 investors under Regulation A+ for its client Elio Motors.
  3. In 2016 Indiegogo ventured into equity crowdfunding in partnership with Microventures to launch a platform called First Democracy VC. To date it has accounted for 9% of the sector’s total $35.5m.
  4. NextSeed is based in Houston and its investor network has invested $2.8m in equities, 8% so far of the combined Regulation Crowdfunding. Investors can put in as little as $100 and NextSeed’s equity crowdfunding projects have ranged from as low as $25,000, typically for personal leisure/entertainment/service providers such as bars, restaurants and hairdressers.
    NextSeed also provides companies with debt facilities which contribute to their claim of having provided their clients with total funding of $3.8m.
  5. Three other platforms in this sector tie for fifth place as they have each raised in the region of $1m for clients from equity investors:
  • Republic (offers Reg CF only and investments can begin at just $10);
  • SeedInvest (which mainly focuses on non-Reg CF raises of over $1m);
  • FlashFunders (where Reg CF investments can start at $50 and they also handle Reg D raises over $1m and Reg A+ raises up to $50m).

Whilst equity crowdfunding is now at least possible to some degree for everyday Americans, and there are some equity crowdfunding platforms that at last provide the single “one stop shop” we are accustomed to in the UK, there are still some built-in restrictions that impede faster growth. These include businesses cannot use Regulation Crowdfunding to raise more than $1m (about £833,000).

If you are based in the UK and considering any form of crowdfunding to raise money for a business startup, to scaleup an existing business, or to use a crowdfunding platform as a sales channel for your products, then please get in touch if you’d like a free and confidential consultation with an independent crowdfunding adviser – which is me! Call 07788 784373 or send an email to [email protected].