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Crowdfunding Terms You Should Know, Part 1

Published By Janet Gershen-Siegel at November 16th, 2017

Do You Know These Crowdfunding Terms?

Crowdfunding can seem to be a bit of a mystery. Why are people willing to part with their cash in this particular manner? There are a lot of crowdfunding terms thrown around all the time and they can sometimes get confusing. So consider this your primer on some basic crowdfunding terminology.

Because even if you do not think you will use this method of fundraising, you will probably encounter it all the same.

But before going any further, does crowdfunding ever actually, you know, work?

Crowdfunding Success, in a Nutshell

For some companies which crowdfund, the rewards are great. According to Crowdfunding Blog, the single most successful crowdfunding campaign was for the Pebble Time Smartwatch. And that was as of November of 2018. But before you run out and buy one, note that they are now a  part of FitBit.

As in, they went out of business in July of 2018. And this is a business which raised over $20 million in 2015. That is no typo. And in point of fact, Pebble holds three of the top six spots in the biggest crowdfunding successes of all time. Together, these three crowdfunding campaigns took in a staggering $43.39 million. This is about $8 million more than the town of Huntington, New York (population 203,264) budgeted for highways in 2018.

Hence there is one thing that should be clear to all. Runaway crowdfunding success is no guarantee whatsoever of actual success.

But now it is time to get to the crowdfunding terms themselves.

Important Crowdfunding Terms: Project

A project is what you are asking for money for. Projects can take a few months or even years. The more complex your project, then (usually) the longer it will take. The person starting the project is generally called the project runner or the project creator.

Projects can be for goods or for services.

Crowdfunding Terms Credit Suite

What frustrates you the most about funding your business? Tell us in the comments.

Important Crowdfunding Terms: Donors

The people who donate to the project are called donors. Or sometimes they are referred to as contributors or backers.

On rare occasions, they may even be called investors. However, such a word connotes a far different relationship. Many crowdfunding platforms shy away from such a term. And this is for good reason. It is because investors and investments may come under the purview of the SEC. The Securities and Exchange Commission exists in order to protect investors. This is in ways not current available to donors 0r other contributors to the success of businesses.

Hence, unless the crowdfunding platform is specifically for investing in companies, more like angel investing, you are not too terribly likely to see the investor.

Important Crowdfunding Terms: Campaign

The act of requesting money on a crowdfunding platform is called a campaign. This is the soup to nuts of crowdfunding. So it covers everything from the first pitch to the final collection or perk distribution.

Important Crowdfunding Terms: Donor Levels

In general, donor levels refer to the amount of rewards which are on offer for a particular size donation. Note: I will get to rewards in a moment. Your donor levels might look something like this:

  • $10 fountain pen (100 available)
  • $20 includes $10 level plus a tee shirt (50 available)
  • $50 includes $20 level plus a framed picture (30 available)
  • $100 includes $50 level plus dinner with the project runner (10 available)
  • $500 includes all other perk levels plus a new car (2 available)

Donor levels are limited by your imagination and your capacity for handling complexity. After all, five separate donor levels mean you are keeping five separate lists. If you are well-organized, then this is possible. But it is not easy. Five separate donor levels are plenty, particularly for people running their first campaigns.

Truthfully, you will be a far happier person if you cut the number of donor levels to no more than three.

Of course, time and budget should be considerations for anyone. But that is not just the case for crowdfunding.

Crowdfunding Terms Credit Suite

What frustrates you the most about funding your business? Tell us in the comments.

Important Crowdfunding Terms: Rewards (Also Known as Perks)

One basic about crowdfunding for creative projects is that you will need to provide incentives for your donors to open up their wallet. Crowdfunding to help someone with their medical expenses is a different animal. So let us get back to crowdfunding for business funds.

This is where perks come in.

Your rewards can be nearly anything. But it can quite literally pay to have them relate directly to your project.

For example, if you are crowdfunding to get enough money to back your new smartphone invention, then your rewards probably should not be your grandmother’s blueberry muffin recipe. And this is no matter how wonderful it may be. Instead, you could base your rewards around your invention. So this could be everything from offering a case to an extra battery or charger. Or you might even offer an app which only your donors can download.

A Word to the Wise about RewardsCrowdfunding Terms Credit Suite

Rewards are a very real part of crowdfunding and they can often be a part which project creators do not take into consideration. Sometimes, we think a product will go to market in, say, a year. But circumstances change, and now one year turns into two. So be it – this sort of thing happens all the time.

But it is an issue if your perks are dependent on your product going out the door. So if you need to fulfill perk promises to 10,000 people, you will likely find you need to do one of any of these things:

  • Delay your product launch
  • Hire someone to do fulfillment for you
  • Offer alternative perks (if you can)

Reneging is not an option, and it can get you on the wrong end of a lawsuit if you are not careful.

A fourth option is delaying perk fulfillment. Not every donor will go for that.

A For-Instance on Perk Level Complexity

Sending out so many perks is a major task. It can take months to get everything out the door.

Why does it take so long? Consider the degree of complexity. Let’s go with an easy number: 100. So let’s say you have 10 separate perk levels and they each have 10 slots. Once an eleventh person wants a certain perk level, they just plain can’t have it, as it’s gone. Are you with me so far?

Your ten separate perk styles may be of differing weights. So this means they will have different shipping costs. If any of your 100 donors are outside of the United States, then you will have to pay more to ship to them as well. Plus of course you have to make sure all of the addresses are complete and correct.

It becomes even more complex when your perks do not fit into such neat little buckets. This is where you have, say, eight perks. And you might have anywhere from 12 to 1,000 people who are supposed to be getting them. Plus some people may have donated twice and are waiting for two separate perks. Or maybe even more.

See how ugly and difficult this can get – fast?

Crowdfunding Credit Suite

What frustrates you the most about funding your business? Tell us in the comments.

Getting Around This Problem

The easiest way to get around these issues is to offer intangible perks. In our smart phone example, the exclusive app would fit the bill nicely. Your best bet is to make the intangible perk good for the largest number of donors possible.

Hence if your lowest level is $10, and you have 100 of those slots, then you could just give 100 people a download code. This is a lot faster than figuring out postage for all of those donors. Plus, with an intangible perk, technically the number of perks is effectively infinite. But scarcity gets people interested, so you might not want to make the downloads never-ending.

For the more tangible perks, leave them for far smaller groups, such as the 25 people who are at your two top donor levels. Mailing to 25 people is far easier than it is to mail to 10,000 people. And this is so even if the mailings are difficult.

But I Don’t Have Intangible Perks!

No? Then what do you call a coupon sent in email? See, there are ways to offer intangible perks even when the entire business operation is very, very tangible. Coupons have been around, seemingly, forever. People will gladly print them off or carry them in their smartphones for scanning.

Or there can be discount codes, which are virtually the same thing, except with no designing of a coupon to cut out or scan. Amazon, for example, gives these out all the time. And the vast majority of backers will know exactly how to use them.

Important Crowdfunding Terms: Takeaways

There is, of course, more to crowdfunding terms than this. But these should at the very least get you going. And as always, if you have any questions, please feel free to ask them in the comments section of this blog post.

In Part 2, we will talk about types of crowdfunding and types of platforms.

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