7 Important Considerations Before Launching a Crowdfunding Campaign

Before launching a crowdfunding campaign, you'll need to read this.

7 Important Considerations Before Launching a Crowdfunding Campaign

Over the past few years, I've watched, participated in, and even helped market crowdfunding campaigns of various different physical and digital products. While each and every one of them has performed completely differently, they've all shared a few things in common. Both good and bad things.

Today's post from Larry Alton, a digital marketer, professional writer, and researcher, dives into the most common misconceptions about launching a crowdfunding campaign for your business - something that should not be taken lightly or without a fool-proof plan of action.

In this piece, he addresses the importance of understanding the (often complicated) rules of each crowdfunding platform carefully, how much money you'll actually get once the campaign finishes (hint: it's not the total amount you raise), the basics of marketing your crowdfunding campaign, and much more.

Here's Larry:

Crowdfunding first emerged as a fad, but has since stabilized as a reliable means of generating funding for businesses, organizations, and individuals.

In fact, Kickstarter (one of the biggest crowdfunding platforms around) recently celebrated its 100,000th successfully funded project. On the surface, crowdfunding may seem like an easy shortcut for the entrepreneur in need of funding; in theory, as long as you have a good idea, people from all over the world will come together to help you make your idea a reality.

Unfortunately, it’s a bit more complicated than that.

Before you pour your hopes into launching your business with a hugely successful crowdfunding campaign, be sure to bear these seven important considerations in mind.

1. Different platforms have different rules. 

Kickstarter gets the most attention, but have you thought about using GoFundMe or IndieGoGo? There are dozens of legitimate crowdfunding platforms out there, and no two of them have the same rules and regulations. Kickstarter, for example, only releases pledged donations to you if your goal is met by your deadline, whereas GoFundMe has no such regulations.

Different platforms also have different requirements for who can post—for example, Kickstarter only allows companies and individuals who are making tangible goods of unique value.

2. Intellectual property rights.

If you’re posting your idea while it’s still in the early stages of conception, be aware of intellectual property rights. If you don’t file for a patent and you post your idea haphazardly, someone else might improve upon your design, prototype it, and patent it before you ever have a chance to follow up. This isn’t to say that the crowdfunding market is full of idea poachers, but it pays to be extra cautious. Along the same lines, make sure your idea is fully fleshed out before you even consider crowdfunding as an option—know all your costs and have a plan for production early on.

3. You won’t get all the money.

First, recognize that most platforms will take away a percentage of whatever you earn in your campaign immediately as part of their standard fees. After that, you’ll have to worry about taxes. Keep this in mind when setting your initial goals; you’ll have to raise an amount above and beyond what you actually need, and use the rest of the money to pay for the opportunity.

Also consider what you’ll have to spend to initially promote your campaign in the first place, which brings me to my next point.

4. Campaigns don’t sell themselves.

We’ve all been sold the idea that crowdfunding is a kind of natural selection that allows the greatest ideas to thrive and flourish, while weaker ideas work themselves out of the system. The thinking here is that people will naturally stumble upon these good ideas, support them on their own, and the rest will take care of itself. Unfortunately, this almost never happens. The most successful campaigns are the most active campaigns, where funders actively engage with their prospective funders, post new content, and syndicate material that leads new people to view the campaign. In short, you’ll have to advertise your crowdfunding campaign like you would your business in general.

5. Contractual obligations.

Most crowdfunding campaigns offer something in exchange for pledged contributions; for example, if you’re working on a prototype technological device, you might promise a copy of the device to anybody who pledges $100 or more to your campaign. You will be held responsible for delivering on this promise, with few exceptions for circumstances outside of your control. You need to be prepared for these contingencies. For example, what happens if there’s a safety flaw in your prototype that prohibits you from ever completing the first batch? What happens if it costs more than you’ve projected? These are questions you need to research proactively.

6. Equity crowdfunding is a recent (and complicated) development.

Crowdfunding for company equity was illegal until new SEC stipulations were passed recently. Now, such an endeavor is legal, but that doesn’t mean there isn’t red tape. There are many stipulations for how this equity can be distributed, and you’ll need to be familiar with all of them before you jump in. For example, entrepreneurs can only raise a maximum of $1 million in funding per year this way, and the traditional ban on securities-related advertising is still in place (meaning you can’t directly ask people to contribute to your campaign via advertisements).

7. There are many other paths to funding.

Crowdfunding is one of the newest and arguably, “sexiest,” means of generating funding for a business idea, but that doesn’t mean it’s the only effective one. Be sure to look into other options to fund your business, and chart out the pros and cons of each. For example, you might pitch the idea to potential investors in your friends or family, or to angel investors and venture capitalists. You might consider investing your own personal capital, or opening a line of credit with a financial institution. Don’t limit your options unnecessarily; do your research.

None of these considerations are meant to illustrate that crowdfunding isn’t effective, or that you should rule it out as a possibility. On the contrary, crowdfunding is a miracle of modern technology that has allowed thousands of people to achieve greatness in one context or another.

However, It’s hugely important to realize that the system isn’t perfect, and you'll need to address any misconceptions you have about crowdfunding, before you count on it for more than it’s worth.