The High Cost of Crowdfunding
You’ve probably seen a crowdfunding campaign in one of your social media feeds or in the news. Crowdfunding is a way to bypass traditional lenders and funders and raise money from the public – through the collective efforts of friends, family, customers, investors and people who just want to help.
There are dozens of crowdfunding platforms today. Some, such as Kickstarter and Indiegogo, are geared towards funding creative and business ventures; others, including GoFundMe and YouCaring, are intended for personal fundraising causes – to help cover medical expenses, for example.
Fees, Funding Models
While crowdfunding is a proven method of raising funds for a variety of reasons, it’s important to research the platforms before you choose one for your campaign. One thing to consider is what it will cost you. In most cases, you’ll pay a platform fee (what you pay the platform for hosting your campaign), plus a processing fee for accepting payments. A common fee structure is 5% for the platform and 3 to 5% for payment processing. For every $100 you raise, you’ll have to give up between $8 and $10 in fees (be sure to factor in the fees when determining your funding request). It really adds up across the industry: In 2015, crowdfunding sites raised more than $1.9 billion, which amounts to somewhere between $152 and $190 million in fees.
Also consider the platform’s fundraising model. Some let you keep whatever funds you raise – whether you reach your funding target or not. Under other models, you don’t see a penny unless your campaign is successful in reaching its goal. It’s worth noting that this “all-or-nothing” approach actually works well: It motivates people to spread the word.
Statistics from crowdfunding giant Kickstarter show that of the projects that reached 20% of their funding goal, 78% were eventually successfully funded (meaning, they met their goals).
Popular Platforms
Here is a closer look at three of today’s popular crowdfunding websites.
Campaign categories – 13 main ones, including Business, Charity, Competitions, Events, Family, Newlyweds and Travel, plus a “Most Common” list, including Emergencies, Medical and Volunteer
Platform fee – 5% fee on all funds raised
Payment processing fee – 2.9%, plus 30 cents per transaction
Started in 2010, GoFundMe has become the world’s top fundraising site for personal causes and life events. Users raise $4 million each day, adding up to $2 billion in the last year. Most people use GoFundMe to raise money for themselves, a friend or a loved one for things like medical expenses, education costs, volunteer programs, youth sports, pet needs and memorials.
Campaign categories – 24, including Animals, Art, Dance, Education, Environment, Gaming, Health, Politics, Religion, Small Business, Sports and Technology
Platform fee – 5% fee on all funds raised
Payment processing fee – 3%, plus 30 cents per transaction for credit cards; 3-5% for PayPal
Projects on Indiegogo have raised more than $800 million from a community of more than 9 million backers. It offers two funding models: Flexible Funding, in which you keep all the money you raise, and Fixed Funding, which requires you to meet a specific target before you receive any of the pledged funds. Nonprofits can raise money for free through Indiegogo’s no-fee Generosity platform.
Campaign categories – 15, including Art, Dance, Fashion, Film & Video, Food, Music, Photography and Technology
Platform fee – 5% for successfully funded projects
Payment processing fee – 3% to 5% of each contribution
Kickstarter was launched in 2009 and is the largest crowdfunding site. More than 100,000 projects have been successfully funded, totaling $1.95 billion. Funding on Kickstarter follows an all-or-nothing model: If you don’t reach your funding target, you don’t get any of the pledged funds (and no money is charged to pledgers’ accounts). Projects can’t raise money for charity, offer financial incentives or involve prohibited items.
Donor Beware
While the vast majority of crowdfunding campaigns are legitimate, it’s important to note that the sites have little control over whether any money raised actually gets to the people it was supposedly raised for – or that it will be used in the manner advertised. In one recent news story, for example, a woman started a campaign on behalf of a neighbor whose son had been killed by a drunk driver. The woman collected nearly $3,000, but ended up stealing more than $1,000 of the funds she raised (she later pleaded guilty to telecommunications fraud). In another incident, the Federal Trade Commission (FTC) settled a case involving a man on Kickstarter who used his backers’ funds for personal expenses, instead of making the board game he had promised.
The Bottom Line
While a number of crowdfunding sites charge a 5% fee, some charge fees as high as 10% or 15%. Read the proverbial fine print before starting any campaign to make sure you understand your options. And if you are thinking about donating to a campaign, but are concerned about its legitimacy, consider giving only to people you know and trust.
This article was originally posted at Investopedia.com.