What is it?
Crowdfunding, is where a business or enterprise, offers various incentives to a group of potential investors who donate funds in return for various rewards. Rather than having a nervous trip to the bank manager whereby you ask one source for a large amount of money, here you are effectively asking multiple people – a literal crowd – to each chip in a much smaller amount.
How does it work?
There are three main models of crowdfunding for inventions:
Reward based – perhaps the most commonly thought of when ‘crowdfunding’ is mentioned, this is where the crowd are each offered a reward for chipping in their cash. This often takes the form of early access to the product itself and frequently a tiered approach is adopted where the earlier you back a project the better deal you get.
Equity based – Raise investment capital and contributors receive equity in the resulting business. Many countries have strict regulation; Please refer to the Financial Conduct Authority (FCA) for the latest information.
Lending based – finally we have lending based borrowing which is akin to the more traditional methods of raising finance to fund an invention. Here, money is given on the condition that it is repaid after a set period, most typically with interest on top. The difference with doing this via the crowdfunded method is multiple people will give smaller individual amounts (although depending on the funding platform chosen, this may be presented to you as a single transaction, in order to streamline the process for all parties).
Ups and downs
There are definitely some real plus points for raising money for your invention through crowdfunding. As well as access to cash with minimal upfront costs or hoops to jump through, it has some other positives, like using the process to assess interest in your idea and also as a way of promoting your product by giving it exposure (especially if your campaign gets traction in the media or even goes viral).
However, some of these benefits can also be risks within themselves. For example, by its very nature, this type of campaign involves revealing your idea to the world.You should make sure you have adequate protection in place before putting it into the public domain. Innovate can help if you wish to apply for a patent.
Another consideration is that some sites will require you to deliver your promised rewards, regardless of whether you meet your funding goal or not. This means that despite our usual instinct to be repulsed by the multiple pages of terms and conditions that flash up every time we enter into an agreement online, this time around it really is essential to read and understand them. You need to be fully aware of what you are obliged to deliver and by when.
Some of the main players
Kickstarter – this has arguably become the synonymous site when crowdfunding is mentioned. Most people have heard of it and trust it as a way of supporting projects they are interested in. It can be used to cover a wide range of projects, so long as it has a clear goal (i.e., raise x amount of money to fund the creation of product y). They take a 5% commission of the money generated by each product, but if your funding goal is not met, you pay no fees (and alas, receive none of the pledged monies).
Indiegogo – another large player in this field, they approach things differently as you receive whatever money you raise during your campaign (less their 5% commission), which seems attractive compared to Kickstarter’s all-or-nothing approach. As such, they tend to attract projects which some may regard as riskier or more speculative compared to Kickstarter and their overall success rate of actual launched projects is much less.
GoFundMe – another familiar name in the ever-expanding field of investment for startups, many people associate this site with charitable giving. And whilst it is great for that, it can in fact be used for any purpose and is particularly focussed on supporting individuals in any endeavour of their choosing (including funding for invention development). Over nine billion dollars have been raised via the site since launching in 2010.
WeFunder – Operating on a similar principle to Kickstarter, except that instead of receiving the physical reward typically offered on that platform, you receive a small stake in the company of your choosing. Designed to raise money from investors who want to have a say in how your business progresses.
Important to remember
Whatever platform you choose to go with, one commonality between them all is the need for a well thought through, quality presentation to persuade backers to part with their money and fund your project.
For more information, download our free guide:
Remember that here at Innovate, we can help you at every stage of your project to maximise your chances of creating a successful, well-funded product. Whether it be patent research and protection, design services, prototyping, or business contacts and promotion, we can help support and guide you each step of the way.