Crowdfunding Your Start-up? Be Wary.

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Crowdfunding has been all the rage for years now. Take Ouya or the Pebble Watch, for example, which raised millions of dollars within a matter of weeks. The product-based platforms of Kickstarter or IndieGoGo aren’t even the only ones out there—equity crowdfunding is also becoming a popular method of raising funds among newer startups, even those that already have Series A funding. But it’s important to know crowdfunding isn’t without its drawbacks. Start-ups, especially less established ones, need to be careful before turning to the world wide web for what seems like free money. It isn’t.

Money off the Top
While companies like Kickstarter might “help bring creative projects to life,” they definitely aren’t doing it for free. Assuming a product or a firm gets successfully funded, a “platform fee” is instantly deducted from the money raised. Kickstarter and IndieGoGo both put down a five percent charge, not including a two to three percent “payment processing fee” on every contribution, but some sites charge up to 10 or even 15 percent, according to Investopedia. The fee structures for equity crowdfunding aren’t any less daunting: some platforms sell dauntingly expensive packages that cost thousands of dollars, while others charge for mandatory legal expense reimbursements or demand warrant coverage and equity, like SeedInvest. Always check the fee structure of a crowdfunding site before use and plan your investment goals accordingly.

Success Not Guaranteed
One potential risk with crowdfunding is that on some platforms if you don’t reach your minimum funding target, you receive nothing. Kickstarter’s raised 3.51 billion dollars in successful funding, according to its website. But that number loses its luster when you look at the number of successfully funded projects—152,423 out of 422,292 launched, a 36.45 percent success rate—and the number of projects that have raised over 100,000 dollars: only 3.5 percent of the total number of successfully funded projects, and 1.2 percent of all projects launched. WeFunder, one of the earliest SEC approved equity crowdfunding platforms, shows a higher success rate of 73 percent on its stats page, and with 233 successful offerings hitting minimum targets over 50 thousand dollars. But start-ups looking at using crowdfunding should understand it’s definitely not a sure shot, and the average amount of money raised isn’t substantial.

Copyright Caveats
As soon as your product goes up on the internet, there will be competitors who will try to beat you to selling it. Be aware that posting for funding can be a public disclosure and potentially make the product ineligible for patent protection; the patent rules vary from country. For example, filing a non-provisional or provisional patent application in the U.S. may be a good idea. This is one of the biggest threats of putting your product up for crowdfunding—if you’re making a consumer product that could be copied, it might well be. App developers working in hot fields like healthcare, for example, should be prudent in the information they disclose to their “crowd” of investors and take care to protect their ideas using the relevant copyright laws. Otherwise, they might find a very familiar looking icon on the App Store before they’re even done compiling the code.

Crowdfunding is a tool that can be very powerful, especially for small companies looking to fund their ideas without giving away equity—but it’s important that hopeful teams don’t fall for these common traps.