February 15

The Crowd Funding Phenomena

Crowdfunding

It’s hard to not stumble across an article, Facebook post, or news story discussing the latest crowd-funding campaign. Whether it’s a cool ice-chest that does it all; a new video game console; or even turning a television character into a motion picture, crowd-funding is a way for entrepreneurs, designers, inventors, and artists to get their idea or work from concept/prototype to market.

The process is quite simple: you have a great idea and maybe even a prototype, a plan of what you need to make it a reality including the financial needs, and then launch an often timed (1-60 days maximum) fund-raising campaign aimed at people who share your vision. No equity is exchanged with venture capitalists, no costly loans or paperwork to fill out with a bank, it’s a pretty straightforward concept to raise money for a project of almost any type. Offer reward levels to encourage funding that generally include (with the higher dollar amounts sought) the product you’re raising funds for, and if others share your idea and you’re not seeking an unreachable goal, your project could be funded.  Its no-strings attached angel funding, but with the expectation that products offered in the rewards category are in fact delivered.

There are a multitude of crowd-sourced funding sites worldwide, with Kickstarter and Indiegogo being two of the largest in the U.S., and new sites coming online as well. Some of these new sites will actually connect investors to entrepreneurs where equity for cash is exchanged. But for now, this article is focused specifically on crowd funding, and Kickstarter in general as one of the most popular sites with budding entrepreneurs.

As a backer of a couple of projects, not to mention someone who also initiated a Kickstarter project of my own (it wasn’t successful), Kickstarter has certainly morphed from people who back projects they believe in and are helping to come to fruition, to more of a virtual “pre-order” store. But wait, Kickstarter doesn’t sell items. Correct as that may be, Kickstarter has grown and so have the clientele who aren’t approaching Kickstarter for what it was originally conceived for: a way for people to back projects they believe in. Whether it was the creation of an album by an unknown band, to someone who just professes to create the greatest potato salad ever, there’s a myriad of projects on Kickstarter as well as other crowd-funding websites. And the backers are pledging money with 100% expectation that the project will deliver in the end.

Kickstarter has grown considerably over the six years since its inception.  To date, it has connected over 7 million backers and raised over $1billion in financial pledges. Kickstarter receives 5% of the pledges from each successful project backed (over $50m to date), and Amazon takes another 3-5% as well for processing payments from supporters. This is clearly a new way to connect the little guy with like-minded individuals that wish to support a variety of projects as a result.

But funding campaigns on crowd-funding websites aren’t always successful. Often times campaigns fail to generate the target amount set by the creator. A project either hits the target and is funded 100% (even beyond the original amount specified), or it doesn’t fund at all. That’s right, it’s an all-or-nothing deal. The second way projects aren’t always successful is when they do fund, but then fail to deliver for a variety of reasons. It’s often overambitious projects or broad inexperience with the necessary process to bring a project to fruition, even after funding. And what you have is a large (and usually growing) group of angry and vocal supporters.

Crowd funding sites aren’t going away, and in fact are growing substantially every year. It has become a new business model for the reasons cited above, but it’s also bringing in more people who don’t fully understand that crowd funding sites are neither a store nor a guarantee for successful completion of the projects money is being raised for. And projects relating to coffee have been increasing yearly, with 2014 being one of the largest years for coffee related projects.

These projects range from offering coffee from farm directly to consumer, to raising money to open coffee shops, as well as new ways to brew coffee. It’s the last category that has seen the most funding across crowd-funded websites raising nearly $3m USD over the past 2 years just for coffee related machines/brewers/grinders, with $2.4m being raised by one coffee company alone (Bonaverde). This is how far coffee enthusiasts will go in the quest for the perfect cup of java, funding projects that are often invented by entrepreneurs with little to no experience in the coffee industry, let alone any kind of manufacturing experience.

What isn’t included in that number is the number of other coffee related projects that don’t achieve funding goals, projects such as starting a coffee shop (both mobile and brick-and-mortar) or some form of coffee product. But that isn’t to say only coffee brewers can be successful. One successful project raised $22,000 to give a variety of tours (pending funding level) and teach coffee enthusiasts how to harvest, grind and brew coffee properly at a Brazilian coffee farm. And supporters still had to pay for their flights to Brazil (the funds were ultimately used to open up a café in Brazil connected to the farm of the same owners).

Coffee is one of the hottest categories in which to raise crowd funded capital, with the most successful projects being brewing related, and least successful being traditional brick-and-mortar shops. Do you have a coffee related venture that needs funding? Is crowd funding for you? The next part of this article will focus on Bonaverde and their foray into crowd funding, and where they’re at currently. The final part of this article will be advice on how to run a successful crowd funding project, and avoid angering your backers, especially financial backers who haven’t had their coffee.

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