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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.

Misguided, Risk Creating Regulations

One of the great challenges with the pace of development in technology and the innovations that emerge from it allowing us to do things differently, faster and cheaper is that the regulations that have traditionally governed these transactions lag far behind. This is largely because the processes that create these rules, laws and standards have not accelerated or become more inclusive.

The result? Industrial age laws irrelevant, ill suited or obsolete in the digital world.

In many respects this should not be a problem. It may not be necessary to change, add or amend rules. At the same time where they are needed a bit of extra time to get the “rules right” should be a help. But generally it is a problem not least because any suggestion that new rules are unnecessary is generally perceived as a threat by those who set the rules. They feel they have been by passed, or just that they are perhaps being made redundant or obsolete.

Maybe it is this sense of siege that really compounds the problem with regulators creating poorly informed regulations through no, or faux, consultation, founded in industrial age closed mindsets, or simply trying to squeeze new development into old models.

Responses to collaborative economy models and companies like AirBnB are cases in point as cities look to “approve” people using their own resources to the benefit of the city.

Similarly in the UK we can see the FCA introducing unnecessary additional regulations in the crowdfunding sector.

This might all be just an irritant but unfortunately it can be worse than that. By failing to understand changed models regulators run the risk of creating poorly conceived rules that may strangle new innovations and make the new models inherently less safe – the opposite of what the rule makers would tell us they are seeking to do.

Consider for example the FCA regulations on equity crowdfunding. The so called “unsophisticated investor” is constrained in how much of their investable portfolio they can invest without having their hands held by those “masters of the universe” that did such a fine job of managing the financial markets a few years back. The motivation to mitigate the risk is perfectly fine. the problem is that the process put in place is founded in old world thinking and has no understanding of how crowdfunding mitigates risk – through atomisation.

If the rules had said no individual investment could be more than 1% of an investable pot this would have forced a spread of investment – atomisation – that would both make sense and would be fitting in to the philosophy and principles of crowdfunding.

Another example is the misconceived notion of the “Right to be forgotten” regulations from the European courts. This is both ridiculously difficult to enforce, very easy to by-pass if you can be bothered to put in the effort but at the same time opens up huge risk. The transparency and scrutiny of the crowd is a key self regulating aspect of many crowd based novel innovation online, not least in the crowdfunding world and by permitting individuals to hide aspects of the past, or making it more difficult to check, you expose all of us to risk.

The problems persist now and you need to act. The current consultation by the FCA on the use of social media in crowdfunding intends to constrain and clamp down on what you and I can say online. This will almost certainly increase risk in crowdfunding. The widest reach and greatest scrutiny is driven by awareness is reliant on social media. To constrain it is bad for all of us. So, its very important that you respond to the consultation process.

As it happens I have little faith in the validity and effectiveness of the consultation given the FCAs record. But you must have your say in an effort to get them to wake up to the reality of how the crowd empowered works supports itself, but to defend your own safety when crowdfunding.

Respond here

http://www.fca.org.uk/your-fca/documents/guidance-consultations/gc14-06

Shorter is Generally Better – Components of a Good Crowdfunding Campaign 6

alarmIt might seem that a longer campaign is a better idea as it gives more opportunity for funding but this is very rarely the case. A sense of urgency and time pressure is generally helpful for all concerned. The principle of “the burning platform” works well in a campaign where you will experience a lull and a drop in momentum.

You also need to bear in mind that running a crowdfunding campaign is tremendously demanding so how long can you keep up that level of focus and commitment? That is carried through in the amount of good quality material you will need to have to maintain the sense of freshness and urgency of a communication campaign. People can rapidly become bored unless new and vibrant updates are available. Trotting out the same message repeatedly over a long period will certainly begin to seem thin, dull and potentially annoying.

Many platforms only actually offer set time frames fro campaigns to remain live. Not all by any means, and if you are running a DIY campaign it is up to you. Typically equity campaigns can take longer. This can be for a number of reasons: the sums raised can be larger, the process of registering as an investor often takes longer, the evaluation process in deciding to purchase can be a longer cycle, and the scope for “advertising” an offer is more regulated and constrained.  But even here momentum, awareness and freshness is still important and it hard to sustain these over a longer period.

As we have said in a previous post, you should run your own campaign, so how long can you be away from your day job? You cannot afford to neglect your key role in the organisation. Maybe for a short period and maybe with good reason, but you cant extend that too far without having an impact on your role. When you factor in the amount of time required to prepare for a campaign as well as the time running the campaign you begin to see that crowdfunding is by no means “easy money”. It takes effort and commitment so you need to balance that effort effectively.

So, don’t lose the urgency and imperative of a campaign by making it unnecessarily long. Use your focus and energy effectively by channeling it to a shorter campaign to keep the energy and enthusiasm high.

This post is one of a series called Components of a Good Crowdfunding Campaign. Other posts in the series can be found here

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