Crowdfunding can be a great way to get an idea off the ground. It can also lead to a real startup: in my survey with Venkat Kuppuswamy of successful crowdfunders (among technology, video games, and design projects) a very high percentage (over 90%) of successful projects remained ongoing ventures, and that 32% of all these reported yearly revenues of over $100,000 a year since the Kickstarter campaign and added an average of 2.2 employees per successful project. On the other hand, the majority of projects are late and 37% went over budget.
Below are some hints and tips from my research on crowdfunding. My work so far has mainly looked into reward-based or donation-based crowdfunding (Kickstarter, Indiegogo, etc.), but many will apply to equity crowdfunding as well. You can also check out my research on the topic.
Before the campaign
- One path to successful crowdfunding is seeking to fund ideas where you have deep knowledge of both a community and its needs. Think about what communities you are part of, and what expertise you can bring to bear. For example, lets say you are are passionate about pickling vegetables, and have been posting on pickling forums, been part of the Twitter pickling scene (I assume there is one), and know the products available on the market. If you come up with a new idea for an improved pickle jar that would appeal to you and to your friends, that would make a good crowdfunding effort: you already understand the market, know who the competition is, and have easy access to a group of customers that will help get your campaign off to the right start! This is backed up by lots of evidence that the best innovations come from people who use products, not large companies.
- Know what you hope to get out of the campaign, money is not necessarily the most important goal. In my survey with Venkat Kuppuswamy of successful crowdfunders, the most common reason to seek funding was “To see if there was demand for the project,” followed by “As a way of marketing my project,” and “To connect directly with a community of my fans or supporters.” The answer “The project could not have been funded without raising the goal” was actually the 4th most popular answer, at 54% of respondents agreeing.
- Start work on the project before your seek funding! Not only is it important to show progress in advance (see below), but the large majority of successful projects had design specifications, financial plans, and teams figured out BEFORE they started their campaign.
During the campaign
- The crowd is pretty wise, and they look for signals that you are going to deliver on your promises. Some factors are associated with successful campaigns:
- Having a high-quality pitch (spelling errors decrease the chance of success by 13%)
- Showing that you are endorsed by experts (press mentions, etc.)
- Showing that you have a clear plan with prototypes
- Having a team with the right background to deliver on your promises
- Having realistic goals. The higher your goal, the less likely you are to succeed. At the same time, genuine hits are rare – most projects raise very close to their goal. So pick a number that is realistic!
- Updating your followers frequently
- Having a large social network
- For those campaigns did not succeed, our survey found that people felt that market size and marketing were the largest causes. I don’t have clear data to support these points, however.
Getting the most out of the campaign results
- Some projects raised additional funds beyond crowdfunding. Most common was additional self-funding (in over 20% of successful projects) or friends and family funding (in over 15% of successful projects), but outside risk capital in the forms of loans, venture capital, or angel investing occurred as well. Projects with larger goals that were funded, and projects that were overfunded the most, were most likely to achieve outside funding. Additionally, having a substantially complete business plan before fundraising also seemed to predict outside funding. Finally, projects where the creators had specific industry experience were three times as likely to get outside funding as those that did not have similar backgrounds. Again, projects that succeed in their campaigns are more likely to gain outside funding than those that don’t.
- Many projects found that their campaign directly helped them get access to funding, employees, press, or helped them build a robust customer base. A number of factors helped predict these benefits, though different factors predicted different aspects. Generally, higher goals, more funding, and more developed business plans were particularly helpful. Outside endorsements and having an appropriate backgrounds were also helpful in gaining benefits from the campaign beyond money. Successful campaigns also had more benefits.
- Lots of projects are late – over 75%. And plenty of others go over budget. The larger the project, the worse the delays.
- The best ways to reduce delays was to have a detailed schedule before starting the project. The most frequently mentioned causes of delays were problems working with partners (especially Chinese manufacturers), either because project creators underestimated partner delivery times (and forgot about Chinese New Year or other issues), or because there were quality issues. Others had issues with over-scoping projects.
- The biggest factors leading to going over budget were: unexpected costs of shipping, the problem of paying salaries/rent/etc for longer than expected when projects were delayed, and not leaving a cushion to deal with unexpected defects and problems