Posted on November 27, 2013 By iPledg With 0 comments

Crowd Funding – Underwriting the MOQ

iPledg - Logo - Low-ResolutionWith business start-ups or small business transformations, there is always a considerable amount of risk associated with taking the leap of faith with initial stocks or committing to an event which, if not presold or if sufficiently subscribed, can spell the death knell very early in the life of the idea. These types of speculative ventures can now be de-risked, and market proof validated before the project creator starts to “cut wood”. Crowd funding offers a way in which innovators and entrepreneurs can seek commercial validation and pre-commitment before they need to commit to spending a single cent themselves.

China is widely recognised as the workshop of the world, manufacturing consumer durables, components and just about every tangible item that one could imagine. Their success has been achieved by being able to produce en masse and thus, the production costs are driven down. The upside to the consumer is product being made available at a reasonably inexpensive price. The downside to the innovator is the requirement to take a complete production run, especially if it involves the factory tooling up to produce something new. This requires the innovator to back their gut instinct with a commitment to purchase and fund the minimum order quantity, usually without having made the presales to cover the costs associated with taking this initial step. If they get it right, there is the need for pre-funding as the manufacturers will not start production without a deposit, and certainly won’t ship product without full payment. And if the innovator gets it wrong, they will surely be sitting with a lounge room full of unsold product, as well as a sizable hole in their cash flow, often enough to stop the entire venture at that point. The dilemma is how does the entrepreneur fund the initial costs, and get comfort that they will sell enough product to at least cover the minimum order quantity (MOQ) required by the manufacturer. The answer is found in crowd funding.

Startup company, Mech Tech, experienced these dilemmas in their initial venture to make customizable android tablets available in the Australian market. To achieve any sort of economies of scale, they needed to commit to the MOQ of the factory. Due to the CEO and founder of the startup being just 14 years old, seed funding was nonexistent. There was also the risk that if a financial backer could be found, what guarantee could Mech Tech give their financier that the stock would be sold and a return realised in a reasonable amount of time. The solution lay in their crowd funding campaign on iPledg.

It costs nothing for a project creator to list a project on a crowd funding platform. Apart from the effort and time required to run the campaign, there are no further costs to the innovator until the funding target is reached or exceeded, making the process self funding. A successfully funded campaign assures that a result is delivered before any costs are incurred. With the “all-or-nothing” model, project creators are able to set the target to align with the costs of their minimum order or outlay – e.g. achieve the funding target and be covered to meet the manufacturer’s requirement for minimum orders, fall short and the project creator does not need to proceed. On some platforms there is also a tipping point which allows the project creator to cover costs or requirements for the minimum viable product.  If the project creator doesn’t reach the tipping point as a minimum, nothing goes ahead. In the case of a successful campaign, market validation is received and presales are made before commitment is required on the part of the project creator.

A similar scenario exists for promoters of events. They can sell tickets via crowd funding campaigns, and mitigate the risk of under-selling the required number of tickets to profitably run a show, an exhibition, or any particular affair. They can set the funding target to match the minimum ticket sales required to cover costs, knowing that if the funding target is not met, the campaign will not transact, the tickets do not need to be issued, and the cost of running the event do not need to be incurred because the event need not proceed. The minimum funds required to run the event are under-written by the success of the crowd funding campaign, and falling short costs them nothing should the target not be achieved.

Crowd funding is known to offer project creators exposure, social proof, market validation, a loyal customer following, as well as funding. But used strategically, crowd funding can offer innovators and entrepreneurs a way of mitigating risk when the requirement is there to reach minimum order quantities or subscriptions. The “all-or-nothing” model is the perfect environment to test and trial, and help fund innovation and creativity in a protected environment.

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