Monday, April 22, 2013

Four things to consider before jumping into the crowdfunding pool

It seems like Crowdfunding is the latest source for raising start-up capital (if its successful).  Zach Braff has made headlines with his Kickstarter Campaign, raising over $2 million for his new project.

Crowdfunding is not new but lately there has been an increase in also donation-type platforms such as GiveForward to help people with medical bills.  Other popular online fundraising sites are Indiegogo, GoFundMe, and Kiva (micro, micro loans).  These are great ways for alternative funding sources to get your project or business off the ground.

Four things to keep in mind before you put your idea on display to generate funds.
  Ready to jump in?
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  1. Delivering on your promises.
  2. Protecting your idea/product/service.
  3. Tax consequences.
  4. Plan B...What if you don't reach your goal?

Delivering on your promises.

One thing to consider going into a funding campaign with awards (prizes, perquisites, swag, stuff) is to make sure you can deliver on said promises.  There was an article last year about a company that was successful in their effort but did not deliver on the product and they ended up getting sued.  Also, keep in mind that many of these programs have some expectations of delivering progress updates, for example with a blog, video update or reporting milestones.  

Protecting your idea/product/service.

This is always one of those areas that is commonly of concern for inventors.  What happens if you put your idea online to ask for money and someone else 'steals it'?  Patents and copyrights can be expensive.  If you have a product or service that needs protection, it is advisable to see an IP attorney.  If it is still in the idea stage, you will need to learn how to describe the idea/product/service without giving away the details.  Focus on the benefits and what it does in a short sentence.   

Tax consequences.

This is often overlooked.  Donations may count as revenue in the eyes of the IRS.  In my personal experience, a client that won a cash prize in a business plan competition was really surprised that 25% of their prize went to taxes.  Just be aware...

Plan B...What if you don't reach your goal?

What happens if your campaign is up and you have not met your goal?  What if it wasn't even close?  Every marketing or fundraising campaign should have an evaluation phase.  Look at what worked, re-evaluate your priorities and adjustments.  One common observation is that entrepreneurs can get so focused and passionate about their idea that they forget about how it appears to others.  You may need to go back to the proverbial drawing board with your business plan to look at other funding options, projections or target market.

Read the fine print.
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Three important tips that can help a campaign be successful:
  • Be sure to read the fine print before you sign up.  Especially how the money comes to you and the expectations are fulfilled.
  • Look at what successful campaigns have done to announce their project. Maybe they did a cool video or offer really unique awards.  Likewise check out others that were not successful and learn from their efforts.
  • Ensure the platform you choose is a good fit.  Some sources are project-driven, others are focused on artistic venues.  Again, looking at what has been funded is important in your due diligence.

Finally, a funding campaign should be part of your overall business plan.  Depending on the success, your campaign may model your marketing or production plans, open new markets and gain a loyal crowd.