Pebble SmartWatch raised over $10million. Indie recording artist Amanda Palmer set out to raise $100,000 to record a new album and went on to raise $1.2million.
These crowd-funding stories have become legendary and there is little doubt that crowd funding can be a viable alternative to venture capital, angel investors or bank financing. However, the landscape is also littered with campaigns that miscalculated their offering and/or their budgets.
When you apply for a grant or a loan then basically the money you apply for is the amount you will receive. With a crowd funding campaign you need to account for the cost to set up and manage the campaign.
Let’s look at an example. Say you are a recording artist wanting to raise $20,000 to record your next album. For the sake of simplicity you will offer a t-shirt to anyone who contributes $50 (although best practice would suggest you have multiple different types and levels of rewards).
If you think that you would only need 400 people to invest $50 in order to collect your $20,000 you’d be wrong. That’s because there is a long list of costs that need to be deducted before the cash actually hits your bank account.
Set up costs. These may be negligible but it’s important to consider whether you will need to invest in setting up the campaign. For example, do you need help from a designer or videographer? Let’s say you’re going to pay $500 for a professional video.
Reward costs. You must account for the cost of any merchandise or services plus delivery, in this case the t-shirts and postage. Let’s say your t-shirts cost $10 including postage.
Publicity costs. Crowd funding campaigns don’t take off by themselves. Aggressive publicity is usually the secret to campaign success. You may get lucky and one Twitter post takes you viral. But chances are you are going to need to invest in posters or Facebook advertising or direct mail campaigns to fire-up your campaign. Let’s say you are going to spend $500 on posters to be placed in local cafes and clubs.
Taxes. When offering rewards in return for cash, chances are that you will be liable for GST and income tax, and the production costs for all rewards will be tax deductible.
Crowdfunding fees. Most crowdfunding providers charge a fee. Kickstarter and Pozible charge 5% of the total funds raised.
PayPal and Credit Card fees. Financial fees vary depending on the crowdfunding site. Kickstarter charges 3% + 20¢ per transaction. Pozible charges 2.4% + 30¢ per transaction for Australian cards and 3.4% + 30¢ per transaction for international cards.
So once you take account of all the costs you are actually going to need to get 653 people to invest $50 (raising $32,650) if you want to actually put $20,000 in the bank. If you don’t believe us take a look at the calculations below.
Reward Cost $10.00
Crowdfunding Fee $ 2.50
Finance Fee $ 1.70
GST $ 3.63
Total Cost $17.83
Net Return $32.17
Fixed Costs $ 1,000
Investors Needed 653
Before you embark on a crowd-funding campaign it is critical that you establish a realistic budget. Please contact us if you would like assistance in planning for this type of financing.