Crowdfunding for startups and products

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    James Martini

    James Martini UKBF Ace Staff Member

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    How many of you have been involved with crowdfunding? I was rather late to the party and had my first experience of it last autumn when I donated a nominal fee to help with the development of a dual-sided cycling power meter aiming to break Garmin’s monopoly on the cycling technology market.

    For those unfamiliar with Garmin, the American company operates in the production of GPS units - initially in the form of SatNavs for motorists, before branching out to gain a hold on the cycling market. 

    While Garmin deserves a huge pat on the back for helping cyclists make paper maps a thing of the past, in my humble opinion they are also guilty of resting on their laurels in recent years, having released pieces of software riddled with bugs. 

    Ambitious startup iQsquare clocked on to this, perhaps inspired by how companies like Wahoo continue to challenge Garmin’s dominance, to try and muscle in on the power meter market. 

    The Netherlands-based innovator used Kickstarter, the world’s biggest crowdfunding platform, to reach its target in just eight hours. At that time, 3,536 equally optimistic cyclists pledged €932,732 (around £820,000) to help iQsquare exceed its target by an impressive 237%. 

    Crowdfunding regulations

    As crowdfunding platforms are relatively new in the UK – they've only become mainstream in the last 10 or so years – only certain crowdfunding activities are regulated by the Financial Conduct Authority (FCA).

    Broadly speaking, the FCA only regulates two types of crowdfunding: peer-to-peer lending and investment-based crowdfunding, the latter being where consumers buy shares or debentures in new or existing businesses.

    Donations, such as those charitable ones made to help a self-employed individual get an operation that prevents them from working, and rewards-based crowdfunding - like the pledge I made to hopefully get my power meter - are not regulated. 

    So for businesses like iQsquare, there is no protection for those 3,536 backers should the Dutch firm fail to deliver on its promise. As it stands, that product looks like it will be delivered in August 2019 - almost a year later than planned - after undergoing a substantial redesign.

    Fingers crossed on that. 

    Misleading the public

    Some opportunists may think “Blimey, I can set up a business, claim to have a cure for cancer, take millions of pounds in donations, and do a runner”. In theory you could try - but you would almost certainly fail. 

    One business created a device that claimed it was able to extract breathable air from water. It attracted more than $900,000 US dollars in donations, but was forced to come clean when held to account by Digital Trends. 

    As the company actually used liquid oxygen cylinders to ‘enable people to breathe underwater’, they were not reusable and consumers would be required to buy more of the cylinders. It refunded most of the dollars back to the backers. 

    Being held to account

    Before 2014, business owners stood a far better chance of being able to cut and run with backers’ cash if they were happy to be publicly named and shamed. Thick skin would be required, as would lacking any form of conscience. 

    After backers of an espresso machine almost brought Kickstarter to its knees, the crowdfunding platform changed its terms of use regarding failed projects. Creators who use Kickstarter to raise funds can either refund or explain the collapse of a product if they fail to ship it. 

    The term explain forces the creators by way of a full audit - financial or narrative - to demonstrate how they have made “every reasonable effort” to deliver the product or to reach a satisfactory outcome for backers.  

    Kickstarter compels creators of gadgets like the power meter to show functioning prototypes to their backers, with a realistic sense of what stage of development the product is at, while a production plan and schedule needs to be produced before they can start receiving donations. 

    Most backers believe the potential benefit of paying a nominal fee for a product that could not be purchased for the same price elsewhere - in my case, it costs £850 to buy an equivalent from Garmin - far outweighs the risks involved. 

    For business owners looking to source finance, tapping into that risk-free consumer mentality within niche markets, like cycling - where demand for innovative, cheaper products is high in the UK - could be the way forward. Just go into it with your eyes wide open. 

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  2. Mark T Jones

    Mark T Jones UKBF Big Shot Full Member

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    The concept of crowdfunding is as old as the hills - arguably the oldest form of business funding. What is new are platforms and regulation.

    The challenge is that crowdfunding is often suggested as some kind of 'lender of last resort' - in reality the vast majority of projects are unfunded and get lost in the noise.

    Most of the major successes you see (and there are some spectacular ones) are a result of sustained promotions bringing a loyal and strong crowd.

    Take Brewdog - far more a brand than a brewery, they have now reached the stage where they can crowdfund pretty much anything, offering pitiful returns, and it will get snapped up.

    Expect significant changes in the debt arena over the coming year!
     
    Last edited by a moderator: Jun 12, 2019
    Posted: Jun 6, 2019 By: Mark T Jones Member since: Nov 4, 2015
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