14 potential Issues with Crowdfunding and How to Solve Them
Crowdfunding has been around for a while now, facilitated by the many different platforms that have set up shop on the internet. As more people become aware of the benefits of this method of raising capital for ideas and inventions, the more complex the ecosystem is becoming. Navigating this new way of raising funds is rife with its own set of problems big and small. In this article we will look at 1) issue #1 choosing the right platform, 2) other crowdfunding issues (issues #2 – #8), and 3) issues with equity crowdfunding (issues #9 – #14).
ISSUE #1: CHOOSING THE RIGHT PLATFORM
As the world of crowdfunding expands and grows, the choice of which platform is the right fit for a particular idea or product has also become a tough and overwhelming one to make. At first glance, most of the well-known websites can appear almost identical. But on closer study, there are a variety of factors involved that complicate this decision.
Solving the issue
Step 1: Understand the project
The first step to making this decision is to first ensure that the idea being put forward is a strong one that will appeal to the target audience. People tend to give money to projects that:
- Are relatable through the project’s message or cause
- Allow people to connect to the project through the media made available
- Offer an interesting or unusual reward in exchange for the donation
In addition to this, it is important to understand how the money raised is to be spent, what genre the project falls within, is the project such that people unfamiliar with a brand be willing to donate or is the brand completely unknown.
Step 2: Understand Funding Requirements
Once these issues are clear in the minds of those putting the project forward, it is important to consider whether partial funding would be acceptable or does the project require full funding. This seems like a simple answer but is actually more complicated a decision than it appears. Small businesses can set themselves up for failure if they accept partial funding and are then unable to meet the expectations of those who have donated. Orders taken will need to be fulfilled but this will not be possible if the money collected is not enough to cover the costs of production. However, there is a chance of collecting enough funds, just under the target amount, to meet the cost requirements of the project. This is why it is important to understand how well the project may do and make this decision accordingly.
Step 3: Understand the Brand Value of the Potential Platforms
Some crowdfunding platforms are more well-known than others, which could mean a larger target audience to be reached. On the other hand, some are very niche players such as hubbub, which accepts only university and charity related projects. This could mean access to a smaller but more relevant and more likely to donate audience.
Step 4: Understand What You Need From the Audience
Some websites allow you to post your project after meeting a bare minimum of requirements. Others carefully curate and select the projects that can be presented to the audience. Still others coach a project team through the entire process, offering tips and advice. Before choosing a platform, it is vital to be clear on the level of assistance that is required and needed. Some people do not do well with handholding and prefer autonomy, while others may want to benefit from the experience of others to ensure success. A professional in their field may not need an audience telling them how to do what they are trained to do. On the other hand, an entrepreneur may want to use all the help they can get.
A useful infographic to make this decision can be found here.
OTHER CROWDFUNDING ISSUES
Issue #2: Planning a realistic target amount and Time Frame
Enthusiastic project owners may be convinced that their great idea is enough to raise at least the target amount in the specified time. But in reality, it is important to be more pragmatic about both the total amount to be raised and the time frame needed to raise it in. A good place to start is to assess realistically how much money is required to reach the next major stage of the project. Often, project owners take to crowdfunding in phases, choosing to fund one phase and completing that target before asking for the money for the next phase of the project. This helps keep target amounts more achievable and less daunting. It is generally accepted that campaigns with time restraints have better outcomes. This means limiting to a few weeks rather a few months. The balance here is crucial as a campaign that lasts for a few days may not afford enough time to effectively communicate with the target audience without resorting to spamming. A campaign that is a few weeks long will allow a project owner to update donors once or twice a week easily.
Issue #3: Building Interest
Even when a great business idea exists it is not a necessary that the donations will pour in automatically. There needs to be a properly prepared campaign to generate and maintain interest in the project. It is a good idea to spend some time and effort to assess potential interest in the project before officially asking for funds. Through this phase and through the fundraising project time and manpower need to be budgeted to ensure a successful fundraising campaign. Without specific requests, the campaign may get lost in the crowd of other projects or people may forget that it is something they need to do. A personalized outreach is the best way to approach the first degree network which is usually made up of friends, family, acquaintances and coworkers. These people can then help spread the work to their own networks, generating interest in a wider circle of possible donors.
Issue #4: Managing Expectations and Delivering on Promised Rewards
One of the most common problems in crowdfunding is meeting expectations of those who give to the campaign. As soon as the campaign ends, the race to meet reward expectations begins. If a campaign does really well, then there may be more backers that need to be rewarded than was expected. If the campaign was run to receive as much funds as collected, then there may not be enough money to fulfill promises made. Even in the best situations, there may be unforeseen events such as manufacturer or parts issues and unexpected shipping problems or costs. To overcome these problems, it is necessary to first come up with a realistic time frame for delivering rewards and then build a reasonable buffer into this time to allow a more accurate expectation to be set for the campaigns supporters. Some experts suggest tripling the original length of the reward fulfillment time needed.
Issue #5: Managing Copyright Issues
A potential problem when crowdfunding is copyright protection and intellectual property rights. Unscrupulous individuals may troll crowdfunding sites and steal ideas for inventions and projects before the original project owner has a chance to complete their fundraising. Another aspect of this is if the invention under question unwittingly infringes on someone else’s intellectual property. In the latter case, there is a chance that the owners of the intellectual property will hit the project owner with lawsuits that may result in a loss of revenue to handle. For both these reasons, it is a good idea to hire a lawyer to ensure that there is no infringement on existing rights and to better protect an original idea. This may be an expensive proposition however. Other ways to ensure some degree of protection include working with the funding portal of your choice to counter this issue. There are platforms that require investors to sign non-disclosure agreements (NDA) and also provide private data rooms where information can be uploaded but not accessible to the general public. There data rooms should be password protected and allow the campaign owner to see how long the files were viewed and by whom.
Issue #6: Managing Compliance and Accounting Issues
There is generally an uncertainty when it comes to accounting rules for money raised through crowdfunding. Different financial experts will have a different opinion on whether the money raised through these means are to be counted as capital or income. This can lead to accounting and compliance confusions. Some countries or states within the US will have rules for how this money is to be taxed. Others have yet to create laws and regulation to streamline this aspect. Depending on the place where the project owner is based and where the money is being collected there may be rules and regulations that need to be complied with. And since these rules are so loosely defined, it is important to attempt to understand them before setting up a campaign to collect funds.
Issue #7: Managing Privacy Issues
There are several types of privacy and security problems that can arise as a result of a crowdfunding campaign. Since information on the internet seems to live forever, a campaign to raise funds to pay personal bills may affect a job offer many years later if the employer does an internet search. Other problems may exist as well. In an effort to connect with the audience and make them feel invested in the project, campaign owners may get carried away and share too many personal details of their lives. This information could fall into dangerous hands and compromise the safety of the campaign team and their families. Details such as home addresses, locations, photos of license plates, cell phone numbers and names of schools or other such places should never be made public online.
Similarly, for those donating money, it is vital to choose sites that are dedicated to protecting their financial and personal data from possible scammers and con artists.
Issue #8: Risk of Scammers and Lack of Trust
As much as one would like to believe that people are essentially good, there are the requisite bad seeds in every group. Though some websites have rigorous screening processes, a scammer may slip through. Others don’t have this process to begin with, increasing the chances of someone who will either fail to deliver on a project or never intended to do so in the first place. This can become a major problem for those who visit crowdfunding websites to donate. For the rest of the campaign owners, it can also mean a general lack of trust around crowdfunding which can affect the whole community. Whether it is an individual, a team or a charity that asks for a donation, it is up to the donors to do their due diligence in terms of understanding where their money will go and whether they are ready to take a chance on an unknown person. The first source of information is a simple google search. For those looking to give to a cause or a campaign and for those who choose to help spread the word for one, simple steps to gather some information will help stop these scammers before they can get away with swindling innocent people.
ISSUES WITH EQUITY CROWDFUNDING
A major type of crowdfunding is equity crowdfunding. Here, a variety of people can invest in a company in exchange for an equity stake in this company. Websites that facilitate this type of crowdfunding have existed in Europe since 2012. In the United States, this version of crowdfunding is held back by the lack of regulations governing transactions and ownership. Though made possible under the JOBS act of 2012, there is still a lack of a final set of guidelines by the Securities and Exchange Commission. Though there are benefits to this sort of crowdfunding such as the ability of an entrepreneur to raise money where they couldn’t before through traditional venture finance channels, there are some problems that exist simultaneously. These include:
Issue #9: Valuation
A business that is listed on a crowdfunding platform usually has valuation set by the entrepreneurs themselves. But this is not an accurate representation because startups are usually not worth as much as the entrepreneur thinks it is. This means that without a true valuation, investors will not be able to get the promised returns. This problem can be overcome by ensuring that lead investors are experienced angel investors who are able to conduct their own valuations and allow sophisticated crowd investors to get successful return on investments.
Issue #10: Inadequate Due Diligence
In equity crowdfunding, there is very little time for proper and detailed due diligence. This can lead to losses that could be averted by an experienced angel investor and proper due diligence.
Issue #11: Lack of Accountability
In equity crowdfunding, no investor is representing their own interest. This means that there is no accountability on the part of the startup business to ensure that the money is spent wisely or as planned. Experienced investors on the other hand can help steer a company through initial periods of low cash flow and out the other end. A way to overcome this would be for investors to ask for regular updates, financial statements and proof of progress from a company before investing.
Issue #12: Potential Lack of Financial Matters
In traditional equity financing, the investors may make it necessary for themselves to be on the board of a startup. This means that the startup will benefit from the financial and business experience and expertise of the investor. This is an aspect that is not enforced in equity crowdfunding.
Issue #13: Corporate Governance
Again, in a traditional financing situation, investors ensure that a startup has a corporate governance mechanism in place. This helps ensure that management teams are challenged constructively by experienced investors, genuinely interested in the success of the company. This important aspect is missing in equity crowdfunding and is at the discretion of the entrepreneur.
Issue #14: Lack of Structured Communication Channels and Mechanisms
This is an issue that is slowly being addressed by equity crowdfunding websites. There are post-raise areas where communication can continue after a campaign closes. It is important for an entrepreneur to keep an open channel of communication with investors throughout the process to ensure that there is no key point in time where the management team has to spend time placating concerned stakeholders. An open channel will ensure that stakeholders are there to support through difficult times rather than blaming the team.
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