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Crowdfunding: “All or Nothing” VS “Flexible”

DIGITAL VENTURES X FAUNGLADA March 27, 2017 11:54 AM

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Crowdfunding is becoming a popular digital trend, have you heard about it?

For those who have not, allow me briefly explain. Crowdfunding is online fund sourcing from individuals, not investors. If you have ideas or dreams that you wish to materialize, you can be the Creator. Just describe your project in host websites so that the supporters or Backers can pitch in to make your ideas come true. Afterward, Backers will be rewarded with whatever was initially specified by the Creator such as ownership of the product’s first batch or discounted price.

Crowdfunding can be divided into 2 models, All or Nothing and Flexible.

With All or Nothing, the Creator will only acquire the funds when it reaches the indicated amount (the host website retains the fund during the process). If the funding does not reach the specified amount, the Creator will gain nothing and the project fails.

With Flexible, Backers can freely choose to specify a time and amount or to open for unlimited funding. A sample of the All or Nothing model is Kickstarter and Indiegogo is an example of the Flexible model.

At a glance, All or Nothing may seem to have less success opportunity and have high risk. However, psychology research reveals that the risk to fail, in fact, attracts Backers. Although each single amount from the Backers may be small and will not indicate whether the project will fail or succeed, yet from the Backers’ point of view, the possibility that the project may fail is their motivation to support. Thus, the reinforcement that the project may fail stimulates interested individuals to support the projects.

Moreover, All or Nothing underlines social proof or that the majority consensus is correct and shall be followed. Social proof kindles the urge to fund as Backers will only pay the actual money if the project succeeds or when there are enough Backers funding the same project. Also, within the time span before the project reaches the specified amount, Backers can always change their minds, hence, Backers in All or Nothing can feel that their decision coincides with the crowd.

On the contrary, with the Flexible model, despite unlimited time, the funds will immediately be deducted after the decision to back the project. If the project fails, the Backers can request for a refund.

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Moreover, there are concerns regarding the fees collected by the crowdfunding websites. Kickstarter which is the All or Nothing model collects 5% when the amount reaches the goal. If it fails, the Creators will not pay any sum of money but, instead, will gain experience. Indiegogo, which is the Flexible model, collects 4% if the project succeeds and 9% if it fails. Indiegogo states that as the website offers the Flexible model for Creators to freely identify their goal, higher fees for failed projects encourages the Creators to design realistic goals and avoid impractical targets that will infinitely remain on the website.

The disadvantage of the Flexible model is that as funds are partially provided in advance, Creators may fail to reward early Backers at the appropriate timing. For instance, if the project accomplishes its goal later than expected, the production will also be later than expected, therefore, early Backers will have longer waiting time. This can also cause anxiety as Backers can feel insecure from not knowing whether they will receive the product. In crowdfunding, transparency is a concern as well as the precise and timely rewards to the Backers. This can build trustworthiness and, in this aspect, the All or Nothing model has more credibility.

However, the Flexible concept suits funding for social projects where goals are not to reach the specified amount but are to source some funding to solve social issues. Some crowdfunding websites with the Flexible model support social projects such as Indiegogo who waives fees for social projects. They have a separate spin-off website called Generosity by Indiegogo.

Aside from the funding model, other aspects shall also be considered such as the suitability of the website to the projects. Kickstarter categorized their products under games, books, or movies and do not source funds for personal businesses. For Indiegogo, Creators do not need to have products or services, they can also source funds for charity or personal businesses. Most importantly, bear in mind that in crowdfunding, the Creator’s obligations do not end upon the recipient of funds but rather after successful rewards to the dedicated Backers.

If you have creative ideas or want to invest, visit these websites and enjoy. They are pleasurable and, who knows, you may uncover your favorite item. Thailand also houses several crowdfunding websites such as Asiola, Dreamaker, Meefund etc. However, frankly speaking, crowdfunding is prospering around the world, yet in Thailand, it has not quite reached its full capacity. I think we should all pitch in!

Enjoy more useful tech facts and information especially about Fintech from our blogs at Digital Ventures. See you again soon.