How much does crowdfunding cost

How much does crowdfunding cost

How much it costs to do crowdfunding is one of the most difficult pieces of information for a company approaching online capital raising. First because it is a cost made up of many items, not all of which can be standardized, then because no one likes to talk about money, even when talking about... money! It is a paradox that we will try to begin to remedy with this article.

Before starting a crowdfunding campaign, in fact, it is essential to "do the math." First of all, you must establish the business goal to be achieved and the related economic objective, which cannot be totally thwarted by the costs required to achieve it. These costs, therefore, must be calculated in advance or at least estimated fairly accurately, although there can certainly be adjustments along the way. The game must always be worth the candle.

First of all, it's useful to clear up a misunderstanding that often arises in this field: crowdfunding is not free. The capital raised in a campaign is never fully available in the company's pockets. To avoid disappointment, it's best to forget the myth of the "collection" that allows anyone to fulfill a dream thanks to the online buzz and grassroots participation. Except for the donation mode, which almost never concerns businesses, crowdfunding is a financial operation that requires an investment of resources in order to yield the expected economic return.

This is not to say that the higher the initial investment, the more guaranteed the success of a crowdfunding campaign is: resources alone are not sufficient; one must know how to use them with the right strategy, regardless of their magnitude. Studies on this matter have not shown a direct correlation between the initial financial investment and the final success rate. However, undoubtedly, it's important to calibrate your expectations based on the resources you are capable of mobilizing.

This is why strategy and tactics are so important: to make resources efficient and avoid wasting money where it is not needed, focusing on quantity rather than quality.

Let's see, in detail, what are the main cost items that a company must take into account to engage in crowdfunding.

Fees

Crowdfunding platforms retain fees from the capital raised on their portals, in exchange for the service they offer (project analysis, campaign hosting, document management, bureaucratic support, any extras).

Sometimes these fees are a flat fee, but for the most part they are a percentage of the capital raised that can range from 4 percent to 10 percent, with the average being 6 percent. The platform fee is paid only if the campaign is successful; otherwise, you owe nothing: it is a success fee.

Paperwork costs

While the procedures to launch a crowdfunding campaign might be faster compared to banking processes, they still require a series of documents and fulfillments. Some are fixed and mandatory, while others vary based on the preferences and characteristics of the company and the type of crowdfunding.

The capital increase and offering document, for example, are mandatory documents that must be prepared at a notary public, so they represent an unavoidable cost that averages between €1,000 and €5,000.

To submit one's project to a crowdfunding platform, furthermore, it's necessary to prepare the corresponding business plan, to which additional financial analysis documents can be added to demonstrate the proposal's sustainability. The proposing companies can handle the creation of these documents internally or opt for external consultancy: the cost varies depending on the chosen option.

Making the business plan and any other documents independently is not free, because it requires the use of time taken away from normal staff duties. The cost, however, is certainly less than that required by outside consultants. In both cases, these are costs amortized over the long term, because writing a business plan is useful regardless of the crowdfunding campaign to lay the foundation for business development.

In some cases among the preliminary documentation for a crowdfunding campaign it may be useful to include appraisals, patents, due diligence and other such assessments, each with its own cost.

Marketing and communication costs

When calculating how much it costs to do crowdfunding, it is most important to reserve a large portion of the budget for marketing. Often underestimated, it is the main lever of a campaign's success. "Ordinary" marketing that is structured for the company brand or product is not enough: massive ad hoc activities must be prepared for the crowdfunding campaign.

Marketing and communication costs are many and various:

  • informational and promotional materials;
  • social media content production;
  • CRM software implementation;
  • social media and search engine sponsorship;
  • dedicated website creation;
  • KPI analysis.

This is a non-exhaustive list that includes the main essential activities to reach potential investors and engage them in the campaign. Sometimes not all of them are necessary, and sometimes more are needed. They often require a dedicated team to take care of them full time, which is an additional cost. However, there are examples of companies that have integrated these activities into the day-to-day activities carried out by their marketing team, where present: just be aware that crowdfunding marketing activities cannot be relegated to the scraps of time.

Even considering a complete internalization of marketing and communication operations, surveys on this topic conducted by EdiBeez, among others, have highlighted a minimum expenditure of around 3000€. These are estimates that do not take sponsorship costs into account and are by their nature quite generic, as every type of project and every kind of goal has different needs.

Interests

The main types of crowdfunding involve the payment of interest or other forms of capital compensation to investors participating in the campaign. For instance, lending crowdfunding entails a predetermined interest rate to be paid to investors in addition to the repayment of the loaned capital. The same applies to debt securities involved in debt crowdfunding, which need to be repaid along with the accrued interest.

Equity crowdfunding, on the other hand, does not involve the payment of interest in the immediate term but the remuneration of capital in the long term with the distribution of any profits among the partners. It can be regarded as an indirect cost and cannot be precisely defined in advance.

So how much does it cost to run a crowdfunding campaign?

The answer is, as is often the case, "it depends." It depends on the type of crowdfunding: reward crowdfunding tends to be less expensive than equity, lending, and debt, but they are different categories that address different needs.

It also depends, secondly, on the choice of relying on external consultancy, outsourcing certain parts of the work, or doing everything oneself. The first option is naturally more expensive, but data shows that it also translates into a higher success rate.

As a guideline, it is good to put a cost of doing crowdfunding equal to 10% of the capital you want to raise. Of this 10%, about half should be allocated to marketing.

Sometimes, these percentages translate into rather substantial figures for the company. Therefore, efficiency in the use of these resources is crucial to ensure they become truly productive investments. The significant advantage of relying on professional consultants is the efficiency of processes, ensured by those who specialize in crowdfunding and know where to invest to achieve tangible returns and avoid wasting resources.

Turbo Crowd was founded for just that: it is the first crowdfunding marketing consultancy in Italy, producing free resources to guide entrepreneurs through the world of crowdfunding and providing professional support before and during a crowdfunding campaign. 

To find out what we can do for you, book a free call with us!

Crowdfounders Italia

Log in to the private Italian Facebook group

Subscribe to Newsletter

Latest news about the Crowdfunding world

Related Articles

Crowdfunding to improve your credit rating

It can be difficult for a startup or SME in Italy to gain access to bank credit because the parameters required to have a good credit rating are often unattainable and the conditions to be met following any financing are onerous for these types of companies.

Read more