How To Determine If Crowdfunding is the Right Choice

Last updated on August 5, 2021, by Hong Zhuang. Reading Time: 5 min

Why do you think you can finance your startup through crowdfunding?

You may think that finding angel investors or a VC firm is like finding a needle in a haystack. Crowdfunding will let you get away with this headache.

Think again!

The entire purpose of this blog is to dispel the crowdfunding myths and empower you to determine if crowdfunding is the right choice for your startup.

Keep reading to learn more, or use the chapter links below to jump ahead.

Crowdfunding Accessibility

Why do you check accessibility?

Crowdfunding is not available in every country because:

1. crowdfunding is country-specific. a startup can only crowdfund in the country where it is registered. Since each country has its financial regulations, crowdfunding platforms rigorously verify the eligibility for each crowdfunding campaign.
2. only forty countries have crowdfunding platforms. You can check the availability in your country from this article;it gives details on each crowdfunding platform.  To get the latest and acturate info, you should also do a google search to get the latest information for your country.

If a crowdfunding platform is not available in your country, you can crowdfund by registering your startup in a country with crowdfunding platforms. But there are three caveats:

1. it may take a lot of effort and money to register your startup in a foreign country.
2. the currency exchange rate can fluctuate daily. It will be hard for you to set a reasonable funding goal.
3. payment processing fees can eat up your crowdfunding money quickly.

Bonus:

International reward platforms, Kickstarter and Indiegogo, are available in the following countries:

1. US,
2. UK,
3. Canada,
4. Australia,
5. New Zealand,
6. the Netherlands,
7. Denmark,
8. Ireland,
9. Norway,
10. Sweden,
11. Germany,
12. France,
13. Spain,
14. Italy,
15. Austria,
16. Belgium,
17. Switzerland,
18. Luxembourg,
19. Hong Kong,
20. Singapore,
21. Mexico,
22. Japan,
23. Poland,
24. Greece,
25. Slovenia.

Your Network Of Supports

Unlike traditional startup fundraising, your network of supporters(customers and investors) is the foundation of your crowdfunding.

Why is your network a prerequisite?

1. Your campaign visibility to backers or investors is a matter of life and death of your crowdfunding success. Due to the limitation of campaign space, crowdfunding platforms will make your campaign visible only after raising their required funding.
2. “Momentum is king” in crowdfunding. Statistics reveal that Crowdfunding campaigns that raise at least 30% of their goal within their first three days are more likely to reach their goals. Where does momentum come from? Your network of supporters. Thus, you must create an initial momentum from your network before launching your campaign. 
3. If you do equity crowdfunding, the platforms require your sponsor investor to invest at least 5% of your funding goal.  

How do you assess if you will be able to create an initial momentum? 

First, you set your funding goal, your base calculation.

Secondly, you list all possible supporters, including current customers and investors.

Thirdly, calculate the total predicting amount of funding you can raise from your supporters, and check if you can create initial momentum; it is more than 30% of your funding goal. 

Lastly, if you can get enough supporters, keep reading the rest of this blog. 

Bonus: you can save time to create emails for your supporters by using these templates.

Your Funding Goals

Why does your funding goals matter?

Because there are two types of crowdfunding: Reward and Equity.

1. Reward crowdfunding is designed for a product with a minimum of a prototype. Equity crowdfunding is to finance startups with or without a product.
2. You raise much less funding from reward crowdfunding platforms than equity crowdfunding platforms. According to the 2020 crowdfunding stats, most successfully funded projects raised less than $10,000 from reward crowdfunding sites, and successful companies raised an average of $275,000 from equity crowdfunding sites.

Bonus:  

1. Reward crowdfunding is especially suitable for startups with consumer goods, gaming, and wearable products to seek product-market fit. One of the most successful Kickstarter projects, Oculus, raised $2.4 million and acquired $ 2.3 billion by Facebook two years later. 
2. Some startups have a prototype and funding from your friends and family. They want to test the market and decide if it is worth continuing the venture.

Do You Have Money For Crowdfunding

Unfortunately, you have to pay the upfront cost, and a crowdfunding campaign depends on the type of crowdfunding you have.

Reward Crowdfunding Campaign

A reward crowdfunding campaign budget should cover the following charges:

1. Marketing to get more pledges 
2. Project Video & Photo creation for a campaign page
3. Referral Programs helping reach out more pledges 
4. Crowdfunding Platform Fees
5. Manufacture (The fewest number of units required to be purchased at one time, and what can happen to cause delay)
6. Product unit packaging and shipping
7. Taxes because your funding from preselling your product is the revenue and sales taxes for units you sold

The common practice is the total costs should be no more than 67% of a reward campaign funding goal. 

Equity Crowdfunding Campaign

An equity crowdfunding campaign cost depends on government regulations, which can vary from country to country.

But in general, the cost can go up to 15% of an equity campaign funding goal of $1 million, including:

1. Legal fee for regulatory requirements
2. Account fee for creating a formal financial statements
3. Marketing to get more investors
4. Crowdfunding Platform Fees
5. Project Video & Photos for a campaign page

The rule of thumb is that your funding goal should cover your startup’s 12-18 month expense.

Bonus:

1. You can use this template to create your reward budget.
2. This blog shows you how to budget an equity crowdfunding campaign in the US.
3. The best practice is to pay the partial upfront cost such as marketing, legal, accounting initially, and the rest after startups complete their campaign.

Conclusion

Now you have an overall understanding of crowdfunding. As you can see, crowdfunding will be the right choice ONLY IF you meet one of the following criteria:

1. You have a saleable product with enthusiasm customers to do reward crowdfunding.
2. You have backed by a big-packet investor and other investors but want to raise more money.

However, crowdfunding is a double-edged sword. You need to consider the worst that can happen to your startup, and if you can afford them. This blog details all calamities.

Our mission is to match more ambitious tech startup founders and women entrepreneurs to their ideal investors. We hope this blog has helped you make the right decision for crowdfunding. If you have any questions, you could reach out to us via email: info@zettasher.com.