Author: Erikas Saukalas, Associated Partner, Attorney-at-Law, Head of the International Relations Division at METIDA.
Crowdfunding is a fundraising model where project initiators seek the financial support for their ideas from the entrepreneurs and other individuals who believe in them and wish to donate money for their ideas to be implemented. The term ‘crowdfunding‘ was firstly used in 2006 and in 2013 the donated sum reached 13bn litas. Crowdfunding embraces creativity, yet, to take advantage of it, you should know the terms and conditions of the crowdfunding platform.
Although the term ‘crowdfunding’ was firstly used by Michael Sullivan in 2006 in his fudavlog project, this fundraising model had been practised much earlier. Specifically, the roots of this fundraising practise could be found in the 17th century, when individuals supported book printing and in return their names appeared on the books’ first pages. Perhaps the most well-known and similar to the crowdfunding event happened in 1884 when the U.S did not have sufficient funds to back the construction of the pedestal of the statue of liberty.
In 2010 crowdfundig raised 225m litas, and in 2013 the number reached 13bn litas. This shows that the popularity of the crowdfunding is increasing, attracting more and more investors. This fundraising model is unique, as it allows individuals to back any project, idea and startup they want. The donation could be of a various size: from several to millions of litas. The raised money does not need to be sent back to its donators as they receive thank-you gifts or the first products of the projects they backed. Nonetheless, there are fundraising models which give opportunity to get company shares in return or support financially under the loan principle.
The most popular crowdfunding platforms are Kickstarter, Indiegogo ir GoFundMe. They are probably one of the most attractive ways to get the financial support for the development and the launch of an invention or another IP object. The most successful projects, for example, a computer game Star Citizen or a cooler Coolest Cooler received over 149m litas and 35m litas respectively (for more, see http://en.wikipedia.org/wiki/List_of_highest_funded_crowdfunding_projects). Hence, no one can doubt the benefits of this fundraising model.
As for the successful Lithuanian projects in these platforms, an electric drive Rubbee received 282 000 litas through the platform Kickstarter, an electronic nose Peres collected 71 000 litas within the help of the Indiegogo platform and a sonar Deeper– over 60 000 litas. We also have a Lithuanian crowdfunding platform, Investuok su Burėmis, which helped to successfully fund several projects. Hence, even Lithuanians take the opportunities to successfully use the crowdfunding.
To get the support, you firstly have to present your project or idea in full detail. Prototype pictures and visuals that might interest the investors are recommended. You will also be required to specify the sum you wish to collect and the date until when you want to collect the whole sum. After this information is entered, the project becomes visible to many potential investors. Signing-up to these platforms is free.
In all cases, you have to pay a 3-6% fee from the whole collected sum to the crowdfunding platform. In addition, some platforms require you to pay the transfer fee (2-4%). However, not all the platforms allow you take the raised money without reaching your goal. Kickstarter, for example, transfers the raised money to you only if you have collected the whole aimed sum. As for Indiegogo, it gives you the opportunity to get the raised money without reaching this goal.
In these platforms investors and project initiators do not directly meet each other. Project initiators have to agree with the terms and conditions of the platform in order for their project to be posted online. These terms and conditions oblige the project initiators to use the raised money only for the project’s purposes. If the money is not spent for the project, it must be returned to the investors. This allows to take up the legal means to ensure the raised money is spent as promised or returned to the investor.
Crowdfunding platforms are not responsible for the implementation of the projects. Therefore, only the investors take risks which directly depend on the project initiators. Thus, before investing, you should pay attention to the project, check if it is described in full detail and whether the project initiators provide enough information about themselves to eliminate any doubt about their identities.