Pros and Cons of Manufacturing Your Kickstarter Products in China
Crowdfunding is a concept based on crowdsourcing and microfinance. The practice assumes that enterprising people or businesses finance new projects or businesses through contributions from large groups of people. While most of these projects are conducted through online sites and mobile apps, crowdfunding can also take the form of postal orders, subscriptions, preferential events, and other methods.
Below are the four most common types of crowdfunding:
- Equity crowdfunding
- Crowdfunding-based rewards
- Long-term reverse investment (peer-to-peer lending)
- Crowdfunding donation
Comparison of China’s crowdfunding market with other markets
The crowdfunding market in China is still relatively underdeveloped, e.g. compared to more mature markets in the U.S. However, this is changing rapidly. According to Crowdfund Insider, in 2017, Chinese companies raised more than $101 billion for their businesses online. Different indicators in China and the U.S. can be explained by different rules and investment cultures. In the U.S., for example, there are laws designed to facilitate new capital formation for startups by simplifying the rules of securities transactions that show and protect equity-based crowdfunding and securities issuance. In fact, there are no regulatory or supervisory agencies in China that review crowdfunding campaigns. In addition, compared to Western countries, China has weaker intellectual property laws, but every year the situation is improving and more investors decide to contribute to modern new business.
The USA is filled with experienced individual investors working in a more developed industry. However, the methods that are most effective there are not always the best solutions for China. New channels, such as equity crowdfunding, promise uncertainty about investment and are perceived as a high risk, especially for Chinese investors. As a result, crowdfunding rewards were easier to accept in China. Unlike other methods, the above offers a tangible product or other forms of collateral for their investment, as well as early access to new products.
- Country: USA/China
- Process: Definition, Design, Development, and Delivery / Preview of the Finished Concept, Pretail (pre-sales), Delivery
- Biggest players: Kickstarter, Indiegogo, Gofindme / Demohour, AngelCrunch, Dreamore
- Key investment promises: Share Privileges / Practical, Tangible Goods Preferences
In general, the Chinese crowdfunding industry is developing a structure that has established itself so well in the U.S. and other Western countries. In December 2014, the Securities Association of China (SAC) published its first preliminary projects and documents related to crowdfunding. In particular, SAC aims to clarify who can be attracted as an investor, what platforms are permitted, financial constraints, and other applicable issues for the emerging industry, according to the Chinese briefing. For investors, this means a much higher threshold for “reputable individuals.” SAC rules may need at least one of the following requirements of a potential investor:
- Investments of at least 1 million yuan for the project;
- Net assets exceed 10 million yuan;
- Financial assets of 3 million yuan and an annual income of at least 500,000 yuan over the past 5 years.
These standards will be suitable for many industries, but different sectors may have different ranges for their enterprises. For example, websites specializing in the entertainment industry, such as Yu Le Bao and MusiKid, usually focus on much lower individual investments. According to statistics, donations of 100 and 1000 RMB are the most common. After fundraising is completed, these campaigns regularly earn tens of millions of yuan. As for the duration of the fundraising, it does not last more than a year in most companies. This time will be enough to collect the necessary funds and create the promised product.
The dawn of the Crowdfunding Giants
Initially, the U.S. led the crowdsourcing industry in easy-to-use apps for financing. Top players such as Kickstarter, Indiegogo, and GoFundMe helped raise huge fund. However, these crowdfunding titans have stumbled upon some problems with international donors, such as the inability to fulfill their orders. Consequently, China and other Asian countries have begun to build their platforms. JD.com (Jingdong) has created one of the first and largest exclusive crowdfunding platforms in China. Since then, it has evolved into an online marketplace, with profits and the number of goods competing with Alibaba’s Tmall. However, its initial and main goal was to represent China on large Western platforms, which was eventually done. According to TechCrunch, JD.com successfully brought in more than $1 billion last year. However, it would not have been enough to simply call JD.com the equivalent of platforms such as Kickstarter. Just as Alibaba is much more than just “Chinese Amazon,” JD.com operations integrate users with a much deeper system. According to Forbes, being now an expansive and complex online marketplace, JD.com users can combine crowdfunding with the many other online purchases they make, as well as financing other startups.
Crowdfunding potential in China
According to World Bank research, as of 2018, 62% of Chinese citizens were permanent, active Internet users (around 700 million people). According to the International Monetary Fund (IMF), China’s total national savings amounted to 48% of GDP in 2018, which is just over $5 trillion. Crowdfunding platforms effectively act as an innovative financial intermediary, while providing easy access to the Internet and smartphone apps. Another advantage is that a simple, easily accessible type of app allows small businesses to raise funds internationally.
“A bag company has raised $1 million in China, $800,000 in Europe and $1 million in the United States. In fact, they successfully raised $2.8 million before production began,” said Mattie David-Expeton, CEO of Daxue Consulting.
Potential investors can invest in projects based on their risk tolerance, investment ability, and consumer preferences on a crowdfunding platform. Investors then have the opportunity to participate indirectly in individual business units, providing feedback on product design or other offers.
Pros and Cons of Crowdfunding in China
One of the biggest challenges for small businesses and entrepreneurs is to reduce short-term costs and increase the profitability of their businesses. Through crowdfunding, these businesses can easily interact with their donors and supporters, receiving feedback and helping develop their products with a customer-centric perspective. The very fact that an idea is supported can also reveal interest and demand for the product. Even before the launch, crowdfunding can draw attention to a new product. Many Chinese consumers first perceive any new enterprises in an extremely negative way. They do not want to cooperate until they receive reliable positive feedback. Crowdfunding gives a much clearer picture of how investor money will be spent and what the final product is. By adding an element of credibility to the equation, companies are getting the result: more Chinese consumers are turning to them again.
Launching a company in China can be a very risky and complex venture. Insufficient financing, inability to predict costs and obstacles, and low consumer and investor confidence deter many small investors. With this tool, we expect to see simplification on many issues and stimulation of growth for both domestic and foreign businesses.
Since project appraisal remains important for attracting and supporting investors, many of them, who are not prone to risk, will seek short-term profits rather than seeking potential long-term opportunities. This culture of uncertainty often limits investors who lack the skills or resources to test their contributions.
Crowdfunding offers new businesses more opportunities to connect with their markets and partners, but it also has some potential drawbacks. Investors pledge their products or services to finance a project, the same applies to their reputation. As a result, the firm’s launch success (or failure) is ultimately reflected in the founders and those who helped them.
Eurasia Development Ltd and Crowdfunding
Eurasia Development experts from China will tell you how to start, launch, and promote successful campaigns in the Chinese market. The experience of ED in social media and digital strategy in China has helped us to understand the crowdfunding platform, including advocacy methods, and effective orientation of media and donors depending on the industry.
Thanks to the benefits of crowdfunding, entrepreneurs will have the opportunity to raise their financial fees through online crowdfunding platforms. Chinese platforms should encourage attractive businesses for investors to bridge the gap between demand for finance and supply. This allows businesses to negotiate directly with investors with maximum transparency. Since the main idea of this business is to give people the opportunity to become innovators, encouragement to do so should be a priority for the development of the country’s economy. The Chinese government needs to recognize the importance of this development and continue its efforts to introduce rules that enhance benefits and reduce the risk of alternative financing. Such measures would provide a full range of services to support local small businesses and entrepreneurs.
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Floship is Asia’s leading Crowdfunding order fulfillment provider. We fulfilled more crowdfunding campaigns than any other player in the market. If you need a partner to handle the storage, order picking and shipping of your kickstarter rewards, Floship is the right fit for you. As no company or product is the same, we really want to provide our clients with a custom solution. For more information, feel free to reach out by filling out our custom solution form. It is free and no strings attached.Get Custom Solution
Roy is a literary enthusiast, a loving father of twins, a programmer in a custom software company, editor in chief of thehomedweller.com, greedy reader, and a gardener.