What is crowdfunding?

This week’s guest post is from Christine Gertz, Library and Information Specialist at CAPS.

For the past few years, Kickstarter has happily taken Canadians’ money to fund projects but not to post projects in need of funding. That changed this summer. Canadian creators can now post projects looking for funds on Kickstarter.

Kickstarter’s announcement overshadows the fact that crowdfunding has been a fundraising tactic creators have used for a long time. For example, last year I took part in a silent auction to raise money for a friend who wanted to participate in a home building project in Mexico. She needed to raise money for airfare, lodgings and project fees. Some of the attendees, like myself, brought baked goods. The organizers also sought donations from professional bakeries in the city. Attendees bidded on the items and the highest bid took the item home. During the bidding, we watched a video about the project and a presentation about what she planned to do with the funds she raised. Most of the bids were small, about $5 to $60, but the amount raised was enough to pay for my friend’s trip and expenses as well as promotions and facility fees for the silent action.

My friend could have used credit to finance her part of the project. However, that would have meant going into debt. Avoiding exorbitant debt is one of the purposes of crowdfunding and microfunding. Microfunding makes crowdfunding possible. When you fundraise you are trying to avoid debt, unlike microfinance which involves a loan with interest.

If you look at traditional funding for entrepreneurs, traditional lenders, such as banks, usually offer loans that are greater than $10,000. But some small projects do not need that much. Instead, they might only need $2,000 – what they need is a microloan.

In the early days of microfinance, lenders such as Grameen Bank offered microloans to people who would not have normally qualified for a loan. The microloans industry has since developed on the Internet. Through crowdfunding platforms lenders can see the person they are providing funds to and can make contributions they can afford. If it all works out, the entrepreneur repays that money and lenders can use it to loan to another person on the platform.

For example, an entrepreneur needs $1,000 but no one in her network has that much money to lend nor is a traditional lender willing to supply such as small amount. Using a crowdfunding service, she can solicit micropayments, usually starting at $25, until she has raised all of or more than the money that she needs or until the term of her campaign ends. She may receive 40 loans of $25 or two loans of $1,000, but at the end of the successful campaign she will have received at least the amount she needs. She can use that money to meet her needs, but she does have to apply anything above the amount to the repayment of the $1,000, with interest. An example of crowdfunded microfinance is Calvin of Crystal Clear Window Washing who used Kiva to pay for a company car.

How it works

This is what the Internet crowdfunding process usually looks like:

· A creator plans a project and writes a proposal.
· The creator prepares a pitch video. Depending on who you talk to, a well done pitch video is more likely to get you money than actually having delivered a successful product in the past. (Note: For the next few days we will be posting pitches from a variety of crowdfunding sites on the CAPS Facebook page. You can post in the comments whether you felt the campaign succeeded based on the video. We will post the answer on the following day.)
· The creator decides what perks they will offer to solicit a larger donation.
· The creator submits the project to the platform.
· The staff at the platform review the project to make sure it meets their guidelines.
· The project is accepted and runs for a specific term, usually between 30 and 120 days depending on the platform.
· The creator promotes the project. Most platforms offer online tools as well as their own reputation to boost the project.
· The campaign either succeeds or fails.
· If the campaign succeeds, the creator receives the funds, less the money the platform and the payment processors have charged for their services.
· The creator uses the funds for their project and to fulfill the promise of the perks the funders selected.
· The funders get their perks.

Why crowdfund?

Why would anyone turn to crowdfunding if they could just get a loan, use their credit card or hold a fundraiser? Most people who use crowdfunding opt to do so for the following reasons:

· Their network is tapped out or they need more money than their network can supply.
· They want to avoid debt.
· Their traditional fund sources may not be interested or available to partake.
· The project does not qualify for a traditional bank loan.

Crowdfunding does not mean free - nor free from effort

Some analysts have said that about two thirds of all crowdfunding projects fail to meet their funding goal and many of those failures make less than $100. There are other issues you need to consider before applying to a crowdfunding platform:

· You may need only a small amount of money. In this case, you might use a crowdfunding event, like Meaet, to raise money for your project.
· Will your project only proceed if you raise all of the money necessary? On Kickstarter, projects receive fixed funding. This means all of the stated goal money must be raised for the project to get funded. On Indiegogo, creators can opt for a flexible funding campaign. This means that if you need $5,000 for the project to be completely funded, but could still go ahead with only $3,500, you opt for flexible funding. Some creators like this option, since they can turn to other sources to cover the shortfall, but some people have criticized this option since it means creators may need to use credit to complete their project.
· Are you eligible? Some crowdfunding may only be available to particular projects or creators, such as Fundweaver, which is for Inuit, Metis and First Nations projects.
· You need to apply. You need to complete the application process, as well as film a pitch video that will attract funders, so you can pass through screening and selection. Your campaign could fail even before posting if you don’t take the application seriously or give yourself enough time to complete it.
· The platform and payment processor will charge fees for their services. Crowdfunding is not free for creators, since most platforms will charge a percentage of the money raised, usually between 3% and 5% depending on the campaign type or platform. The payment processing service will also charge a fee for handling the campaign contributions. How will you pay for these fees, as well as meet the needs of your budget?

You need to consider some of these issues before creating your campaign.

Learn More

Prior to beginning any crowdfunding campaign, you might want to learn about how to crowdfund. Kickstarter offers a Kickstarter school, Indiegogo has a learning centre, and you may be able to find local creators who used a crowdfunding platform to raise money for their projects. Crowdsourcing.org has specific channels for crowdfunding and provides a clearinghouse on crowdfunding news and research. I would also recommend looking for local training and get-togethers offered by Startup Edmonton, Business Link or Edmonton’s Next Gen, since these organizations are on the forefront of entrepreneur education.

As part of StartUp U, CAPS is holding a Crowdfunding Hangout on Tuesday, November 5 at 10:00 a.m. where you can learn more about crowdfunding from experienced creators, as well as from industry experts. A recording of the hangout will be posted on the CAPS website later in the week.