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Crowdfunding – From small idea to big project

21 Feb 2014

By Vidéotron Affaires
Videotron Business

The crowdfunding phenomenon truly has the wind in its sails. Its most important platform, a site called Kickstarter, is now officially open to Canadian projects since September 9. Crowdfunding, which consists in submitting a project on the Web to garner funds from the public, has seen incredible growth in the last few years. Could it be an emerging way to finance a new business or a new project?

The basic principle is indeed attractive: project proponents determine the terms of the fundraising. They establish the amount required to go forward with the project, as well as its timeframe. Promoters/entrepreneurs also keep full ownership of the rights for their project or product.

One of the most interesting aspects of this funding model is how it makes it possible to validate a concept. It enables entrepreneurs to assess the interest for a product before investing in its production. Moreover, for many projects, investments are in the form of pre-orders. Promoters can thus count on a concrete order list before going into production.

Investors, which often only pledge a few dollars at a time, do not seek profit from their gesture, but rather want to help entrepreneurs and creators achieve their goal and go forth with their vision. A certain sense of community therefore often develops around the most interesting projects.

Kickstarter, crowdfunding leader

On Kickstarter, there isn’t much of a risk for investors, since funding is only granted if the minimum amount is reached. If a project does not meet its monetary goal, investors do not actually have to pay the amount pledged. When funding is successful, investors receive a reward for their contribution. They even get to choose this reward, which is proportional to the amount of their investment -for instance, the final product once it is manufactured.

Since Kickstarter was launched in 2009, more than 4.8 million people pledged money to support a project, for a total of $782 million.

Up until now, 44% of all Kickstarter projects have been successful, which equals to no less than 48,000 projects. If the funding goals are met, the site takes care of collecting the money, keeping a 5% fee.

Too good to be true? It’s worth noting that the site guidelines are very strict, for instance stipulating that it is not possible to garner funds for beauty products, nutritional supplements, charities, or social networking apps. Kickstarter projects have to go through a rigorous selection process that evaluates the diversity, quality, and seriousness of the approach.

Indiegogo is another popular crowdfunding site. Unlike Kickstarter, it does not come with an “all-or-nothing” clause: project promoters can choose to receive the money they raised, even if their goal was not met. In this case, however, they still have to distribute rewards to the investors who believed in them. Maybe because projects are not filtered at the beginning of the process, the Indiegogo success rate is a lot lower than the one boasted by its rival: 9.3% of its rojects achieved their financing goal*, and 80% of projects don’t even garner one-fourth of the desired amount.

After the US and the UK, Canada becomes the third country whose entrepreneurs are allowed to submit Kickstarter projects, while Indiegogo is global.

Entrepreneurs with an idea and a strong plan; will you dare try?

*Source : The Verge

About the author(s)

Videotron Business