In recent years, crowdfunding has become a legitimate way for entrepreneurs to launch new businesses, introduce innovative products to market, and get creative projects off the ground. Crowdfunding has given us everything from the most talked about virtual reality headset in history, toAmerica’s favorite horrible card game, to miniature handheld museums.
But every success story comes with plenty of failures, even when you do meet your original funding goals—just take a look at this spectacular meltdown of mini-drone company Zano, Kickstarter’s top-funded European campaign, as well as the continual series of problems that have plagued Coolest Cooler, Kickstarter’s second most funded campaign.
As with every entrepreneurial endeavor, crowdfunding requires a good amount of planning, strategy, and sound finance to ensure that your campaign not only meets its funding goals, but that it can successfully satisfy the promises you’ve made to backers and supporters. If you’re interested in crowdfunding as a potential avenue of startup investment for your project or business idea, here are some helpful tips and resources to ensure that your campaign can sustain itself even after you’ve raised the funds.
Taking a long hard look at the numbers
One of the biggest problems that befall many crowdfunded projects is a lack of financial planning and proper budgeting. For example, Coolest Cooler, which raised $13 million in its Kickstarter, grossly underestimated production and operation costs, leaving them with an enormous cash flow problem and many unfulfilled orders from backers. With any crowdfunding campaign, it’s important to consider the following fixed and variable costs:
- Campaign production, marketing, and PR — You’ll need to invest in a video, website, and marketing campaign if you want to get the word out successfully. Costs for this can range from a few thousand to tens of thousands, depending on your needs. You might consider also working with a crowdfunding agency to manage the campaign, but carefully factor in their costs as part of the fundraising goals—many agencies charge both a flat fee and a percentage of the final funds raised.
- Labor costs and overhead — Will you need to hire anyone for your project? Rent a studio or office? You’ll need to factor this costs into your fundraising goals. And crucially, don’t forget to consider a salary that covers a minimum of your living expenses while you work on this project. You may need to work full-time on your project, and you don’t want to be living off your savings while you do.
- Production and fulfillment costs — This is especially important, particularly if you’re using crowdfunding as a way to “presell” your product. Getting a quote from a manufacturer isn’t enough to price your reward—you need to consider other back office costs: packaging, shipping, insurance, and fulfillment. You’ll also need to factor for breakage/loss in production (trust us, no one gets it right 100% of the time). And don’t forget about scale: if your campaign is overly successful, will your manufacturer be able to produce the volume you need in a timely manner?
- Sales taxes — It’s well-understood that funds from crowdfunding campaigns are typically subject to income taxes, but did you know that perks you provide could be subject to sales tax? This law is very specific to the location of your business and production facility, so work with your accountant to determine which, if any, of your rewards might be subject to sales tax. Be sure to include these potential costs into the rewards pricing tier. Also be sure to collect the physical address from all your backers that want rewards, even if you are delivering them electronically—one crowdfunder found out the hard way that his state collects sales tax on digitally delivered items like subscriptions and e-books.
- Income tax — Speaking of income tax, plan your campaign so that you receive funds toward the beginning of a calendar year. That way you will have the rest of the year to offset the income with expenses from the project within the same tax year. You don’t want to be stuck paying taxes on crowdfunding income in one year and writing off expenses in another—that could lead to cash flow problems.
- Fees and contingency — You’ll need to budget approximately 10% of your total fundraising goal for fees. Platforms typically take 3-5%, and payment processing fees run between 2-4%. Also plan to factor in a 10-30% contingency to the entirety of the project to account for unexpected costs.
- Stretch goals — Many crowdfunders will add “stretch goals” in the heat of a successful campaign, claiming things like, “If we reach $10,000 more, we’ll add X and X!” Be careful what you promise. Stretch goals will only add more work, time, and intensity to your project, and in many cases, they aren’t properly budgeted for. Even Kickstarter warns against this; they advise that campaigns that hit their goals early focus more on building community than adding stretch goals.
Now that you’ve raised the money…
After all that energy you put into the crowdfunding campaign, you might want to take a day or two to recuperate. But don’t get too comfy, the work is just beginning. A few foresights may make this process easier for you:
- Perks and rewards fulfillment — Both Kickstarter and Indiegogo have resources to help you manage getting your goodies out to backers, including recommended companies that can handle all your fulfillment services (from production to shipping). Unless you’ve promised something very personal as a perk, it is easier to just pass off things like stickers, cards, and t-shirts to these types of companies so you can focus on your main project.
- Community engagement — Your supporters expect to hear from you regularly. They’ve supported your project because they believe in it, so you’ll want to share your journey with them along the way. And don’t be afraid to share the good, bad, and ugly: communicate your progress and developments along with any setbacks and delays. The more transparent and reassuring you are, the more your community will forgive you if you encounter any obstacles along the way. Plus, if you ever turn this into a regular business, these supporters might well become your biggest fans.
- Customer service — Many entrepreneurs and new businesses overlook how important customer service is to this whole process. With crowdfunding it’s no different. If you’re shipping out your own product, there are bound to be complaints. Be prepared to spend time personally addressing these complaints, and be ready with a return/exchange policy for lost or damaged goods.
- Collecting additional pre-sales — If your campaign has ended but you’re still generating lots of interest, you can use channels like Indiegogo’s InDemand to generate pre-sales if you’re not yet set up to sell through your own website or e-commerce platform.
Transitioning from crowdfunded idea to viable business
Crowdfunding can be a great way to test the viability of a project or idea in the marketplace. But after a campaign, many find themselves asking: “Now what?” Do you need to set up a company structure? How do you scale from here? How do you handle cash flow, forecasting, and growth?
Give yourself the time to step back from the short-term intensity of a campaign and plan the long-term goals for you or your company. Surround yourself with experienced advisors and peers who can help you with the big picture. As Shopify so succinctly put it—the crowdfunding campaign is like a wedding: you want it to be spectacular, but what’s more important is what comes after.