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2024-01-15 8:26 AM

Understanding Fees on Crowdfunding Platforms

By Lethabo Ntsoane

In the vibrant landscape of South African entrepreneurship, crowdfunding has emerged as a powerful avenue for innovators to bring their ideas to life. Whether you’re dreaming of launching a groundbreaking product or kickstarting a new venture, crowdfunding platforms like Kickstarter and Indiegogo offer a bridge between vision and reality. However, the journey isn’t without its hurdles, and understanding the fees associated with these platforms is crucial for a successful crowdfunding campaign.

The Crowdfunding Business Model: A Gateway to Innovation

Crowdfunding, particularly rewards-based crowdfunding, has become a popular means for South African entrepreneurs to raise capital and cultivate a community of early supporters. Unlike traditional funding methods, crowdfunding platforms don’t charge the contributors; instead, they derive revenue by taking a percentage of the funds raised during a project. This model aligns the interests of creators and backers, fostering a collaborative ecosystem.

Key Takeaways for South African Entrepreneurs

Before embarking on a crowdfunding journey, it’s essential for South African entrepreneurs to grasp the fee structures of the major platforms, Kickstarter and Indiegogo. Here are key takeaways:

  1. Know Your Goals: Clearly define your fundraising goals and set a realistic budget that incorporates platform fees and other potential expenses.
  2. Communication is Key: Transparently communicate the costs associated with crowdfunding to your backers, ensuring they understand how their contributions will be utilized.
  3. Budgeting Matters: Factor in not only platform fees but also credit card processing fees and other potential expenses when setting your fundraising goal.

Kickstarter’s Fee Breakdown: Navigating the Dominant Player

Kickstarter stands as a dominant player in the crowdfunding space, hosting billions in pledges since its 2009 inception. For South African entrepreneurs considering this platform, it’s crucial to comprehend the fee structure:

Fee TypePercentage/Amount
Kickstarter’s fee5% of total funds raised
Credit card processing fee3% + R0.20 per pledge

Numerical Example for Clarity

Let’s illustrate with a hypothetical scenario. Imagine you’re aiming to raise R100,000 for your innovative product. Here’s the breakdown:

  • Kickstarter fee: R5,000 (5% of R100,000).
  • Credit card processing fee: R3,000 (3% of R100,000, excluding the per pledge fee of R0.20).

Factoring in the R0.20 per pledge fee for 1,000 backers adds another R200 to the total. Ultimately, a campaign that raises R100,000 on Kickstarter would result in less than R91,800 in the creator’s pocket.

Indiegogo’s Versatility: Fixed vs. Flexible Crowdfunding

Indiegogo, a pioneer in rewards crowdfunding, offers South African entrepreneurs versatility with two campaign types: Fixed and Flexible. Understanding the fee structure for each is vital:

Fixed Crowdfunding (All or None)

Fee TypePercentage/Amount
Indiegogo’s fee5% of total funds raised
Credit card processing fee2.9% + R0.30 per pledge

Flexible Crowdfunding

Fee TypePercentage/Amount
Indiegogo’s fee5% of total funds raised (if goal reached), 5% (if goal not reached)
Credit card processing fee2.9% + R0.30 per pledge

Comparing this to the Kickstarter example above, a campaign raising R100,000 from 1,000 backers on Indiegogo would entail:

  • R5,000 to Indiegogo.
  • R2,900 + R300 to the credit card processor.

Despite slight differences in credit card transaction fees, the creator’s take would also be R91,800.

The Bottom Line

Crowdfunding provides South African entrepreneurs with an efficient means of raising capital while cultivating a community of early adopters. However, success goes beyond raising funds; it hinges on proper planning and budgeting, considering the fees associated with platforms like Kickstarter and Indiegogo.

Additional Considerations for South African Entrepreneurs

  1. Marketing and Promotion: Allocate budget for effective marketing to reach a broader audience and attract more backers.
  2. Early Bird Rewards: Encourage early contributions by offering enticing early bird rewards, creating momentum for your campaign.
  3. Stretch Goals: Plan for stretch goals to maintain momentum and keep backers engaged even after reaching your initial funding goal.
  4. Legal Compliance: Be aware of South African legal and regulatory requirements, ensuring compliance with tax, consumer protection, and product safety regulations.
  5. Diversification: Explore additional funding channels such as pre-sales on your website to reduce reliance on a single crowdfunding platform.

As South African entrepreneurs embark on crowdfunding endeavours, navigating these considerations and understanding the intricacies of fees is paramount. By doing so, innovators can not only raise capital efficiently but also bring their groundbreaking ideas to life. The crowdfunding journey is not just about financial support; it’s about building a community that believes in the potential of South African innovation.

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Lethabo Ntsoane

Lethabo Ntsoane holds a Bachelors Degree in Accounting from the University of South Africa. He is a Financial Product commentator at Rateweb. He is an expect financial product analyst with years of experience in reviewing products and offering commentary. Lethabo majors in financial news, reviews and financial tips. He can be contacted: Email: lethabo@rateweb.co.za Twitter: @NtsoaneLethabo