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How to run a crowdfunded Community Share issue

If you want to know how to run a crowdfunded Community Share issue what better way than to hear from someone who has done it?

In this episode we speak to Jamie Veitch who was an important participant in the Sheffield Live crowdfunding campaign. This project raised £165,000 through a Community Share issue which is a specific and increasingly popular type of crowdfunding.

Jamie tells us why they chose this approach and some of the challenges and benefits with running this type of campaign.

The campaign was to raise funds for the existing community radio station to move into the TV realm.

You can find out more about Sheffield Live here and you can find out more about Jamie Veitch here.

The incidental music used in the podcast is
“Beach Bum” Kevin MacLeod (incompetech.com)
Licensed under Creative Commons: By Attribution 3.0
http://creativecommons.org/licenses/by/3.0/

Costing a Crowdfunding Campaign

Costing a Crowdfunding Campaign

One of the most common errors in a crowdfunding campaign plan is to miscalculate the cost involved. Getting this wrong can be a major problem because even a successful campaign may not provide you with the funds you need.

There is a reason why our crowdfunding preparation, due diligence and audit process – commonly referred to as TAMP – begins with Targets. One of the key Targets we want to know is “How much do you want to raise?” This is hardly surprising but in our experience the number stated is often either vague or even wrong. Vague is not a crime or even bad as long as you know its vague and not settled yet. Being wrong and discovering it early enough is also not a problem as this can be rectified.

But being wrong and not realising it and running a campaign on a false premise can be a real problem because you might run a successful campaign and then discover all that hard work has not provided you with enough cash to do what it is you have said you are going to do or to pay all the bills associated with your campaign. Don’t fall into the trap of overlooking costs.

Of course the purpose of the TAMP process is to resolve these types of challenges  but we can’t be with all of you helping out, much as we would like to,  so here is a quick guide to the things which often get forgotten.

The purpose of the TAMP process is to resolve these types of challenges

Depending on the type of crowdfunding methodology you are planning to use from donation to equity, each may have greater or lesser relevance to you – but at least you can prompt yourself as you go down the list.I have grouped them very roughly to help you think about some of the key areas costs are incurred.

Rewards
Producing rewards can be costly especially if they are physical items. Materials and time can actually knock a hole in any money raised if this hasn’t been costed in. The piece that is often forgotten over an above the cost of hand embroidering someone’s name into a tee shirt or something similar, is the fulfillment cost. Package and posting can be ruinously costly – do not forget this.

If your campaign is to launch a new product to the market and the reward IS the product but you have yet to take it to manufacture DO NOT assume Alibaba and a Chinese manufacturer will “just be able to do it”. Think  again. Manufacture can be extremely complex, particularly for an innovation. It can take time and several tries to get it right. Specialist tooling is incredibly expensive in the short term. Knowing this is one thing but getting a proper professional assessment of this is very important. there are many really good providers out there that will fabricate a mock up for you and look at the wrinkles in the process. Get that supply chain and the costs associated with it nailed.

Transaction Costs
Platform costs are generally reasonably well understood with most people figuring this out even if there is considerable variation out there amongst the many hundreds of platforms. But watch out for small print and unexpected costs. As Tom Waits would have it – “The large print giveth, the small print taketh away.”

Settlement and payment can be costly depending on who you use and who you bank with. Currency fluctuation issues can also be tricky if you are operating across several countries.

TAX – the recent VAT changes on digital product is Europe DO APPLY to crowdfunding and to digital rewards even if you are NOT VAT registered. This can turn into a big overhead. Also – in the UK – the taxman says your crowdfunding campaign is part of your revenue – they can, and will, tax it.

If you are planning a DIY campaign – it might lower some platform costs but it is rarely free or costless. What extra software might you need to integrate and display a campaign, process your transaction and keep your website safe from hackers?

Professional Services
Some folks do need professional services, so don’t know that they do, and some don’t need them. Recognising you might need some of these more specialist things done is the first step. Then ask “Who will or can do it?” If not you or part of your team it is likely to cost you.

Here are a few examples of what you might face:

  • Who is your lawyer? If you are planning an equity campaign DO NOT leave home without one.
  • Due diligence – getting all those contracts verified and checked to reassure nervous and suspicious  investors can take a lot of time, and specialist review. So “What terms do you have with your suppliers?” for example or “Who does own that property you have?”
  • Intellectual Property – should you protect it and if so how? Are your breaching anyone the IP of someone else? This type of specialist service is not free, and when it comes to protecting IP it can be VERY expensive.
  • Who shoots and edits that fabulous video? Maybe you, maybe not?
  • Who does the photography of your superb new product mock up, and of you and for all the other PR and marketing type activity you will do?
  • Who checks or even writes that compelling copy and PR and who runs that A&B testing campaign to check your messaging?
  • Who will tidy up your books to a level that you can convince a lender or investor to splash the cash? Who will write that business plan?
  • Do you need a better team? Do you need a new Business Development Manager for example to convince the investors? Recruiters and headhunters, in large part, don’t work for free.

Opportunity costs
Whilst you are running this campaign who is running your business?

Who does the day job? How much will it cost in staff time and what is the potential knock on on your business? Will you still be earning money whilst you prosecute your crowdfunding campaign? If not then what will that do to your cash flow?

Now this is not an exhaustive list . Nor is this intended to say “Don’t Do It!!!” Far from it. It is intended to make you think about what might have slipped your mind till now and it says do it well, do it properly, and do it with your eyes open.

Reassess your crowdfunding target now and ask yourself – is it accurate and is it enough?

 

Why not tell us what unexpected costs you encountered in your campaign?

 

 

The Principles of Crowdfunding

The Principles of Crowdfunding

Understanding the key principles that lie behind crowdfunding is important. This series of posts introduces some of the key ones beginning with The Long Tail and Atomisation

In recent weeks we have made a number of comments about how the principles and underpinning foundations of crowdfunding are often poorly understood. These have largely been in the context of how this unsophisticated understanding of the sector can lead to poor regulation which actually increases risk rather than decreases it, or how people inadvertently expose themselves to risk by participating in crowdfunding in an ill informed way, or alternatively where people sometimes  set unreasonable or misinformed expectation of what crowdfunding entails.

We have also seen comments made that crowdfunding is being held back through misunderstanding. A final motivation for bemoaning the lack of understanding of what we believe makes crowdfunding so distinctive are the increasing number of online finance platforms presenting themselves as “crowdfunding” platforms but which would be unlikely to pass a test of true crowdfunding authenticity!

It seems to me then that I should set out some of the key things that make crowdfunding different and distinctive from traditional investment models, and how these are underpinned by a foundation of interlinked, mutually supportive set of characteristics and philosophical principles that must be defended for the effective safe and sustainable operation of crowdfunding.

To that end we will publish a linked set of blogs under the heading The Principles of Crowdfunding, not unlike our ongoing series on the Components of a good crowdfunding campaign beginning with this post which deals with two key elements at the heart of crowdfunding, the principle of The Long Tail and what we refer to as Atomisation.

The Long Tail

The Long Tail is a concept popularised by Chris Anderson in his book of the same name. The tail in question is the tapering tail of a statistical distribution plotted on a graph. The distribution plot in the graph shown below can be divided using a typical and widely used 80/20 rule giving two distinct sections. Section B – to the right of the divide is referred to as The Long Tail.

The Long Tail

The Long Tail – Chris Anderson

The premise is that much of our traditional business thinking is founded in the idea that we focus our instinctive thinking for a range of activity in section A, the 20 of the 80/20. This is where conventional business thinking would typically identify the greatest opportunity for creating value or profit. To illustrate this with an example we can use the popular analogy of a book seller. If we plot a graph that lists all the books available on a horizontal axis against the anticipated sales for each one on the vertical axis, we end up with a plot with the big sellers forming section A on the left of the plot and declining line to the right as we enter the realm of the many many books published that will sell ever decreasing number – this is the Long Tail. Traditionally a book shop will tend to stock a limited number of titles from A or 20 sector in the belief that they will sell well and so this is where the majority of their revenue will come from. It makes perfect economic and logistical sense to do this, maximising the returns on finite shelf space, and reducing delivery and transaction costs by storing only this type of live valuable asset. The Long Tail theory however shows that under that diminishing Long Tail of the graph which would include the myriad of book titles that might only sell very occasionally, there are actually a comparable number of transactions as with the popular titles. When we aggregate all these small individual transactions together then we have a significant total, just as significant as the popular. So if we are able to tap into that mass of tiny incremental transactions we have a valuable resource. And this is exactly what large online book sellers have unlocked by stocking a massive inventory of books, many of which will sell only very rarely but, when brought together, become an economically sustainable total.

This is key to the idea of crowdfunding. It is the idea that instead of relying on funding from a small number of large funders we can reasonably find what we need by gathering together a crowd full of small contributions.

This may not seem revolutionary to you now but just 20 years ago it was. What changed was the arrival of the internet, the web and ecommerce. This has enabled reach and exposure that would once have been impossible and it is the Long Tail which exemplifies the disruptive models which have transformed the notion of the possible though online empowerment.

The distribution of this Long Tail is much more marked in some forms of crowdfunding than others and is perhaps least noticeable in the equity based crowdfunding models. This is in part because typical regulatory frameworks (generally put in place by poorly informed regulators) push against the idea of low barriers to entry and still artificially gate participants from getting involved. That said the Long Tail is the model all crowdfunds should look to tap into. The reason for this is that a wider exposure to greater skills, insight, expertise and diversity of contributors will yield greater benefits for a project as well as a large chunk of funds. If you doubt this then ask yourself what is best, a crowd of experts and advocates to draw on or just a handful?

 

Atomisation

The second of our key principles is what we refer to as atomisation.It captures the idea that most investments made in crowdfunding should be  small ones. This idea is closely allied to the concept of the Long Tail, something we will refer back to in a future post.

Atomisation manifests itself in a serial investor theoretically developing a wide portfolio of small investments which spreads and balances the exposure to risk. The failure of any one investment will not therefore have catastrophic results on the overarching portfolio. This idea has been advanced from the early days of crowdfunding as part of its inherent resilience and risk mitigation approaches. It has not been accepted without question, the more cynical believing this was an extremely unlikely behaviour trait where the profit motive would out. Interestingly evidence would suggest, drawn for some of the leading P2P platforms, that this is in fact the way portfolios are naturally evolving without the need to regulate or mandate it. Overarching loans on these platforms are being formed by atomised parts and the average investor is indeed segmenting their investments into much smaller parts than might happen in other investment circumstances.

By doing this not only is the underlying strength of the Long Tail principle being demonstrated as both viable and sustainable, but it provides a framework for the widest levels of participation that underlie so many of the other crowdfunding principles. The crowd must be able to take part, and to do so it is necessary to both permit and encourage the smallest of contributions as both possible, valid and welcome.

Of course for this to work well we need the other thing that can come with online transactions and another fundamental principle of crowdfunding – low incremental transaction costs. Our next principle covered in the next blog in this series.

An interview with Marketlend CEO – Leo Tyndall

Marketlend is a new Australian lending platform founded and led by Leo Tyndall.

Launched in the same week that the Financial System Inquiry (FSI) of Australia released its “blueprint” for the Australian financial system for the next ten years, this new platform shows how innovation in financial products is  global.

We were lucky enough to get a chance to speak to Leo in the week of his launch.

Leo provides us with an interesting insight as to how Marketlend is a necessary addition to the Australian business finance marketplace and what makes its offer so distinctive.

The FSI report is generally encouraging towards crowdfunding and new and novel approaches to finance and we can be sure that where Leo’s team lead others will certainly follow.

You can stream the interview from here, our Podbean account or download it for later listening

 

 

More information on Marketlend can be found here

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