Whether for the manufacturing of a hardware product, the development and distribution of a new animation tool or the production of a laptop accessory, a crowdfunding campaign – if, of course, successful – promises to bring in enough money to help lift a new business off the ground.
To illustrate, Kickstarter – currently one of the most popular crowdfunding platforms out of the U.S., has helped fund over 78,000 projects since its inception in 2009, which, in turn, has translated into more than 1.5 billion dollars pledged by Kickstarter backers.
Without a doubt, the figures speak for themselves.
A successful crowdfunding campaign, however, is just the beginning. What follows is a lot of hard work to make sure that the newly acquired funding is put to good use. Therefore, it is important to be prepared for, what we’d like to call, “life after a crowdfunding campaign”.
A Slovenian startup and a Kickstarter campaign
ONDU’s wooden pinhole cameras won over thousands of Kickstarter supporters. Photo credit: Elvis Halilović
A bit over a year ago, in mid-2013, the team of Slovenian startupONDU went on Kickstarter with the modest goal of raising $10,000 to help make the manufacturing of their wooden pinhole cameras faster, more sustainable, and more efficient (read more here). What happened next exceeded any of the founders’ expectations: The money was raised within a mere 48 hours, allowing the team to end the campaign almost a month later with a total of $109,391.
“[…] before the campaign, we didn’t even dare think that such big support is even possible,” co-founder Nejc Matjaž told inventures.eu. After the campaign, they knew that they had found an audience for their niche product. “One very good aspect of crowdfunding is that is a live market-testing tool,” Matjaž said.
Be prepared for any outcome
We had to take a step back, and did quite a lot of innovations so that the cameras looked the same.
Raising more than ten-fold your original crowdfunding target is, by all means, an achievement – and it has its obvious advantages. “The money raised helped us establish a solid company, which has [already] created a couple of jobs in the local environment,” Matjaž said.
Yet, as it turns out, the achievement was somewhat bittersweet. “[The campaign’s success] meant that we had to deliver a really big order, almost 1,300 cameras in a relatively short time frame,” Matjaž explained.
As the scale of production was ten times bigger than originally planned, the prototypes that the team had already created were not ready for mass production. “We had to take a step back, and did quite a lot of innovations so that the cameras looked the same,” Matjaž said. Thus, “in the process of production, we had still a lot of learning to do.”
One of the main challenges following a successful a crowdfunding campaign is delivering the rewards to backers within the promised time span. The batch of early-bird deliveries was scheduled to go out during the summer, while the rest of the cameras were planned to ship several months later, in October 2013.
Although friends pitched in helping, some backers received their cameras with a delay. Photo credit: Elvis Halilović
“We shipped the early birds in August, as promised,” Matjaž said. “Most of the other backers received the cameras just before Christmas, but unfortunately, some of them had to wait till January.” The unexpectedly large number of orders was one reason for the delays. Another had to do with the materials that the team ordered for the production of the pinhole cameras, as not all of them were of sufficient quality.
In fact, to speed up the production and delivery processes, “many of our friends came and helped us finish the cameras,” Matjaž remembered. “There were 10 to 15 people working in the workshops at least two weeks before Christmas.” An important element of the experience was the feedback that the team received from the early-bird recipients of the pinhole cameras, which allowed them to make improvements before the next batch was shipped.
Money ‘raised’ vs. money ‘collected’
Kickstarter and similar crowdfunding platforms can be an easy way for budding entrepreneurs to raise capital, yet it is not all “free money”. As Kickstarter provides the platform and Amazon Payments handles the transactions for each project, they both take a certain percentage of the total amount raised. In ONDU’s case, that amounted to 9 per cent, according to Matjaž.
In addition, “some transactions of the backers didn’t get through at the end of campaign, so that was another 2 per cent [of the total amount],” Matjaž said. This is, however, something that happens to almost every crowdfunding campaign, he added.
What often comes as a shock to entrepreneurs is the fact that the funds they raise through crowdfunding are, for the most part, considered taxable income in the U.S., according to Kickstarter. There are, however, some intricacies that need to be highlighted. Kickstarter’s page offers a guide to the way taxes work on the platform:
ONDU’s founders started with an idea but quickly had to learn all about running a business too. Photo credit: Matej Nahtigal
“In general, a creator can offset the income from their Kickstarter project with deductible expenses that are related to the project and accounted for in the same tax year. For example, if a creator receives $1,000 in funding and spends $1,000 on their project in the same tax year, then their expenses could fully offset their Kickstarter funding for federal income tax purposes.”
Also, certain funds raised on the platform can be classified non-taxable gifts, and not income. Such scenarios should, however, be treated with a grain of salt, as they are case-specific and often call for the expert opinion of an accountant or other financial professional. In addition, the statement above applies to U.S.-based project creators; creators from other countries need to check with their local tax authority.
In the case of ONDU, the team entered Kickstarter through a U.S. company and shortly after the end of the campaign, established their own legal entity in Slovenia. Thus, “the costs for establishing production exceeded the funding, so we didn’t pay any additional tax on profit in our country,” Matjaž said.
A learning curve
Last autumn, we signed a contract with Lomography to become our exclusive reseller. That helps us […] because we can plan the production in advance.
At the end of the day, ONDU’s crowdfunding campaign seems to have been a learning experience in many respects. “Neither [my co-founder] Elvis Halilović nor I had run a business before,” Matjaž said. “We had never had the experience of running the mass production, [so] we had to learn a lot about how to manage people and how to negotiate with sub-contractors and resellers.”
Today, ONDU employs two people, and has outsourced production to several local sub-contractors, said Matjaž. That way, he and his co-founder would have more time to focus on developing new products. But that’s not all. “Last autumn, we signed a contract withLomography to become our exclusive reseller. That helps us […] because we can plan the production in advance, and Lomo also takes care of our marketing” Matjaž said.
If there were one big piece of advice that he would give to other startups, it would be to not try to do everything by themselves. “Do the things you are expert in and find trustworthy experts to support you in the areas that you are not familiar with.”