Crowdfunding: Benefits and pitfalls

Article By : Paul Dillien

Crowdfunding comes along with some tangible benefits in addition to funding novel projects, but it must be managed carefully to achieve its goals.

During my career, I have worked for several companies, all of which developed products either using internal financing or under defence contracts. So when I wrote about a new Software Defined Radio development called LimeSDR using crowdfunding, it made me think more deeply about this approach to raising funds.

Let's just back up for a moment and set the scene for this particular project. First off, the concepts of crowdsourcing and crowdfunding are significantly different. Crowdsourcing is where the community is asked for money and/or help to design or create something, such as software; by comparison, crowdfunding is an open call for money in return for incentives, such as discounted product.

Lime Microsystems has defined the SDR product and brought it to the prototype stage. This has allowed lead customers and software engineers to explore the possibilities opened up by the hardware. Lime has also embraced an open source philosophy for years, and has built a following of software and hardware developers interested in exploring the many facets of wireless. This is now showing tangible benefits. As an example, Telcos can download an LTE stack onto a computer and plug in the LimeSDR to realize a fully functional small cell. Furthermore, because this is open source, it is also easier to integrate with Software Defined Networking software.

Crowdfunding "pros"
One advantage of crowdfunding is that backers of the campaign provide the funding to take the concept through to production status. In this case, funding mostly involves the costs of logistics, manufacturing liaison, and testing. The solution also avoids the company incurring ongoing finance charges, which would be the case for a conventional bank loan, and avoids the dilution of equity for an advance by a venture capitalist organization.

Lime has, of course, already invested significant time and money into LimeSDR, and will use its existing sales channels to promote and sell the products. So what is the incentive for backers and a company such as Lime to promote their product through Crowd Supply?

The significant benefit here is that early adopters are rewarded with the Lime product at a reduced price. This "pump priming" ensures that all parties in the manufacturing chain know that there will be genuine demand for the product, and so can plan accordingly.

I have been in marketing long enough to know that product definition is a vital stage in the process. Historically, companies discussed plans and road maps with their key customers in order to fine-tune their product definitions. Clearly, this is tempered by the need to meet the target specification at a defined unit cost; too often, however, products fail because they are either over-engineered or fall short of market needs. The crowdfunding route gives a further insight, as it exposes the design to multiple potential customers who vote with their money. In this case, the feedback has led to the introduction of an additional product variant; some customers requested a different option than a USB3 plug, so a new alternative equipped with a micro USB 3.0 socket is now in the plans.

It is normal to set different Backer Reward Tiers and stretch goals that can be achieved should the funding exceed the target. Early supporters of LimeSDR were incentivized with a $100 discount; now, backers get the SDR board for $249, which is $50 off (no stretch goals have been disclosed thus far).

The potential of the product to revolutionize cost-effective small cell deployment has been recognized by Telcos. As a result, a limited number of special "pledge-level" 100-unit bundles have been released, where the pledge includes product, software, a set of accessories, and direct support from Lime.

Crowdfunding "cons"
As with most things, there are also downsides to the crowdfunding scheme. Failure to meet the target funding within the selected time frame is clearly the biggest risk. The advice that I found in all my research is to set a realistic goal. This should be based on careful consideration of the minimum requirement coupled with your best estimate of what pledges can be expected (then add a percentage for contingencies). Typically, if the target is missed, then the campaign is closed and the pledges returned to the backers.

Setting up a crowdfunding campaign will involve the company committing time (and energy) to create the materials, including the text, diagrams, and video for the portal. It's also necessary to sort out any legal aspects associated with this approach.

Not surprisingly, the moderating organization — Crowd Supply in this case — charges a fee for its services. This typically starts at five percent, which still leaves 95% for the company to complete its pledges. In return, the client benefits from the reach and expertise of the moderating organization, as well as the logistics of collecting the money.

A further possible risk comes from bad Public Relations following the release of a poor product. Crowdfunding is common in the world of gaming, and there are several examples where disgruntled investors lambast a substandard game on social media.

Crowdfunding is a very interesting and fruitful 21st century approach to a perennial problem. However, during my research into the subject, one of the common themes I found was that success is the result of preparation and there are no short cuts. I think that crowdfunding brings along some tangible benefits in addition to funding novel projects, but it must be managed carefully in order to achieve its goals.

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