Greetje den Holder — February 10, 2017 Follow @GdenHolderSome people seem to believe that crowdfunding is an easy way to get funding for your business idea. However, more crowdfunding campaigns fail than succeed. As Nermin Hajdarbegovic says: “For every Oculus Rift, there are literally hundreds of utterly asinine ideas vying for crowd-cash. Unfortunately, people tend to focus on positive examples and overlook everything else. The sad truth is that Oculus Rift is a bad example of crowdfunding because it is essentially an exception to the rule. The majority of crowdfunding drives do not succeed.”
In this blog, you will learn more about why some campaigns fail or succeed, what questions you should ask yourself before starting a crowdfunding campaign, and why crowdfunding might not be right for your company.
Current crowdfunding campaigns
Hajdarbegovic is quite negative about the current attitude towards crowdfunding, even though he believes the basic principle behind it is sound, and, in a perfect world, it would boost innovation and provide talented, creative people with an opportunity to turn their dreams into reality. He thinks crowdfunding is a great way of tapping a broad community in all corners of the world, allowing niche products and services to get funded, and that it is all about expanding niche markets, increasing the viability of projects with limited mainstream appeal.
He asks himself how a sound, altruistic concept of democratizing entrepreneurship has become synonymous with failure, and he lists a few factors:
- Unprofessional media coverage
- Social network hype
- Lack of responsibility and accountability
- Lack of regulation and oversight
He even believes that something is very wrong with crowdfunding today:
- The idea behind crowdfunding was to help people raise money for small projects.
- Crowdfunding platforms were not supposed to help entrepreneurs raise millions of dollars.
- Most Kickstarter campaigns never get fully funded, and successful ones usually do not raise much money. One fifth of submitted campaigns are rejected by Kickstarter, while one in ten fully-funded campaigns never deliver on their promises.
- Even if all goes well, crowdfunded products still have to survive the ultimate test: The Market.
To him, it all boils down to this: Everyone wants a sweet slice of the crowdfunded pie, but nobody wants a single crumb of responsibility. I do not like to stay in negativity, so I want to dig deeper into why crowdfunding campaigns fail. This way, we can learn from our mistakes and move forward.
Reasons why crowdfunding campaigns fail
In this section, you will find 13 reasons why campaigns fail. These reasons are given by several experts. YEC has asked a few experts for their opinion and Zack Miller lists some additional reasons why crowdfunding campaigns do not hit their targets.
1. Your product does not solve a problem
The number 1 reason why crowdfunding campaigns succeed is that the product solves a problem. If your product does not solve a problem, you likely will not succeed. Before you post your product, test it out on people who will give you honest feedback. If you are leveraging crowdfunding to build a prototype, make sure to outline the product as much as possible and seek as much feedback as possible.
2. There is not enough buzz
When it comes to a crowdfunding campaign, you have to hustle to create the buzz around it, convincing others that people are really “hot” on your idea. Once investors start rolling in, the momentum can take over, although you still need to leverage social platforms, influencers, and all types of channels continually to remind people of your campaign.
3. There is not enough incentive
No matter what your crowdfunding campaign focuses on, those contributing need some kind of incentive to give their money. They need to know that they will get something out of the deal.
Therefore, do not make the assumption your backers are putting money into your campaign out of the goodness of their hearts. It is essential to create an amazing reward program for your backers.
Good campaigns have a variety of rewards around $ 1, $ 5, and $ 10 to get casual supporters involved. Get a few thousands of these smaller backers and you can really create momentum. Another option is stretch goals: goals everyone can participate in when a campaign hits a certain goal, such as unlocking a new color of your product.
4. You are not understanding your target audience
Companies often feel they have a great idea but then they fail to test it out before creating a crowdfunding campaign. It is important to put in the research first and understand who your target audience is. Create value, educate people, and be sure your product or service is something people are really interested in. Subsequently, market to them the right way.
5. You have no proof of concept
Not having a concise pitch can kill a campaign. A poor proof of concept can kill a campaign too. Before you ask for money, make sure you can demonstrate the value of your creation. Do not just talk; demonstrate its viability in the marketplace by drumming up demand and presenting evidence as a part of the pitch.
6. You are not showing your audience how they are connected
Beyond the list of takeaways for certain contribution amounts, most campaigns do not really connect with their audience of potential investors because they never say what the product or service will do for them. It may give a list of benefits, but there is no connection to an issue or problem the audience has or relates to. This connection would get them to invest or attract more people.
7. You are using low-quality video
When it comes to launching a successful crowdfunding campaign, do not skimp on video production. Instead, invest several hundred dollars in making sure your video is shot professionally, edited, and polished.
8. You fail to build trust
Most crowdfunding projects fail to deliver to their customers. Visitors are aware of this, and crowdfunding projects fail because the campaign does not build enough trust. Be trustworthy in your video, be realistic with your claims, and make a quality campaign page with good images.
Hajdarbegovic gives an example of what can diminish trust: “When you see a crowdfunding campaign promising to disrupt a mainstream market, that should be a red flag. You do not need crowdfunding if you have a truly awesome idea and business plan with much mainstream market appeal. You simply need to reach out to a few potential investors and watch the money roll in.”
9. Your video does not tell a story
Stories are the best way to sell anything and the only way you can effectively do that on crowdfunding campaigns is to have the right video to deliver the message effectively. Your video has to connect with the audience and it has to feel genuine. If it does not, it will be difficult to get anyone to follow you or buy into your story.
You can read more about perfecting video marketing in my blog Video Marketing Mistakes to Avoid This Year.
10. You set the wrong goal amount
In crowdfunding campaigns, image is everything. If within the first few days, your campaign is not able to achieve its funding goal, it will appear like a doomed campaign. Hence, reporters coming to your page will not write about it, and backers will not back you. That is why it is better to set a conservative goal that you can actually reach. Once achieved, the sky is the limit.
11. You are relying on the crowdfunding platform too much
Are you are to launch a product on a crowdfunding platform? Great. How big is your email list? How many bloggers and publishers are ready to write about the launch? Do not think that, if you get traction on the platform, crowds will rush to your campaign. You need to take care of the initial traction part first.
12. You are not prepared to act as a customer service desk
It is common for a campaign to launch and receive hundreds and even thousands of questions, emails, and comments about the campaign, rewards, and the end product. Creators have to be ready to deal with the volume of communication required of crowdfunding. Successful communication strategies during the campaign have been shown to make a campaign more likely to succeed.
Have a plan and communicate openly with your audience. The better you can incorporate your backers and get them excited about your campaign, the more likely you are to have your campaign go viral. Your audience will want to share it.
13. Crowdfunding is not as easy as it looks.
The truth is that crowdfunding requires much planning and work. Many of the top crowdfunding campaigns — the kind you read about in the news — use top marketing and PR agencies to run their crowdfunding campaigns. They spend time and money planning and executing their campaigns. Take your time to plan out your crowdfunding campaign and you are already well on your way.
Questions to ask and answer before launching a crowdfunding campaign
As you can see, quite a lot can go wrong with a crowdfunding campaign, so planning and thinking the campaign through is required. Crowdox also believes that the main reason why crowdfunding campaigns fail is the lack of preparation. It urges you to think about the answers to these 10 questions because they can make or break your campaign.
1. Is your product a good match for Kickstarter/Indiegogo?
To answer this question, identify your specific target audience. For example:
- Sex: Female
- Age: 25-35 years old
- Location: living in an apartment in a megalopolis
- Education: has a college degree
- Marital Status: single
- Social Life, interests, etc.
2. Are there successful crowdfunding campaigns for similar products?
Use search functions available on both platforms to find out the following information:
- Number of campaigns run with similar products
- The success rate of these campaigns
- How much was raised?
- What were the most popular rewards?
- What media outlets covered them?
You would be surprised how much you can learn from other campaigns by reading their descriptions, backer comments, and updates. You will have a significantly higher probability of reaching your goals if there is an existing community of backers for your type of product.
3. Are you targeting a local, national or international market?
Traditionally, the products with a wider potential customer base have had a higher success rate. This will also affect your marketing strategy. Compare your target geography with the crowdfunding website’s community using SimilarWeb.com or Quantcast.com. To see the geography of supporters for specific products, use the “Community” tab on Kickstarter when researching similar projects.
4. How much does it cost to make your product and to ship it to your customers? What discount are you ready to offer to your campaign backers to make it more lucrative for them to support your project?
The vast majority of successful crowdfunding campaigns have between 100 to 300 backers. Conduct precise research about your production and fulfillment costs.
Interview potential manufacturing and distribution partners. Ask for referrals. Think about different scenarios (compare the costs based on different numbers of backers). Make sure to have as accurate information as possible about the shipping costs to different countries. Experiment with packaging options and set money aside for damaged products and returns due to incorrect addresses.
5. What will it cost to complete the project?
You will also have a number of other expenses:
- The crowdfunding platform & payment processor fees
- Video production & Marketing
- Taxes
It takes much more time and effort to run a successful campaign than you might imagine. Make sure you have a realistic budget and be diligent about sticking to it.
6. What will be your funding goal?
This point has been raised in the reasons why crowdfunding campaigns fail. After you come up with specific numbers to the two questions above, you should decide how much you can realistically raise.
Apparently, only 11% of Kickstarter projects raise over $ 10,000. You should research the amount of money raised by similar projects, and evaluate your marketing budget and pre-existing community of supporters.
Indiegogo experts suggest that you secure 30% of your funding prior to launching your campaign. So, make sure to balance the project’s financial needs with your capabilities.
7. How long would it take for you to deliver the product after the campaign ends?
Multiple studies have proven that the delivery time has a significant impact on the funds raised. In most cases, your campaign has a low chance of success, if you need more than 6 months to ship the product to your backers. It is especially critical for technology products and kids/baby campaigns.
8. What is your team’s expertise?
Campaigns run by teams almost always raise more funds than those created by individuals. Build a team of supporters who are not only excited about your product but who can also add value to your campaign. The most critical skills include product design, project management, campaign marketing, and creative expertise.
9. What is your marketing strategy?
As mentions, you should create a significant buzz. The worst mistake you can make is to post your campaign on a crowdfunding website and expect backers to find it. Kickstarter hosts 4,000-8,000 new campaigns every day, so it is up to you how you are going to stand out from the crowd. Make sure to have all your ducks in a row before you push the launch button.
The main sources of crowdfunding traffic are:
- Your own personal connections
- Social networks
- The media
- The crowdfunding platform itself
Do not launch your campaign until you have a clear vision of what you are going to do to convince your own friends/family/business partners to support you, to mobilize the power of social networks, and to attract the attention of journalists.
Crowdfunding backers support those who look like a winner. It is your job to present your project this way.
10. What is your action plan?
After you come up with a strategy, you need to create a timeline with specific milestones. Decide on the critical goals that you need to reach in order to have the campaign ready.
Make a weekly schedule. Decide on the best time of the year for your campaign, the launch day, and the duration of the live campaign. Make sure to mobilize all your resources. Discuss with your team how you are going to monitor the effectiveness of your actions, personal responsibilities, and who will have the decision-making power.
If you want your campaign to become a big success story, treat it accordingly.
Why crowdfunding may not be right for your business
Let us face it: with all the crowdfunding campaigns failing and the preparation they require, crowdfunding might not be the best idea for your company. I think the first step in the whole preparation process should be asking yourself whether crowdfunding is the best way to secure funding. Law Inc lists the following 7 reasons why crowdfunding may not be right for your business.
1. Someone may steal your idea
The whole idea behind crowdfunding is to get strangers excited about your business, product, or idea. That also requires you to reveal your plans to the public, usually long before your product is actually ready, or firmly off the ground.
Although there are definitely ways to protect yourself (e.g., patents and copyrights), there is no doubt that making your project public makes it easier for others to cop you, especially if your crowdfunding campaign ends up failing.
2. Crowdfunding can be stressful
You have read my blog so far. You know this by now: a crowdfunding campaign is more than just asking for money.
It requires marketing, PR, and strategy. It requires being sure that you can deliver whatever you promise to your investors. It also comes with deadlines and the very real chance of failing if you set your goals too high.
Combined with the other responsibilities of running a business, crowdfunding can wear your company out before it really even gets off the ground.
3. Crowdfunding comes with deadlines
Crowdfunding usually comes with two key deadlines: (1) raising enough money by the date you have set, and (2) delivering the product or idea by the date you have promised.
Using a small number of key investors can avoid the stress of these deadlines. Unlike crowdfunding, traditional investors do not usually invest on an “all or nothing” basis—you will not lose everything if you do not make your target by a specific date. And unlike crowdfunding, traditional investors may let you stretch your deadlines because they understand your business needs, whether that is getting your product just right before retail or making sure your business is truly ready for launch.
Thousands of strangers, by contrast, are less likely to be forgiving.
4. A failed campaign can kill your company
A good crowdfunding campaign involves marketing, PR, and social media. To get strangers to invest, you have to attract their attention first.
Unfortunately, this also means that people will be acutely aware when your crowdfunding campaign fails. Those same people will be less likely to invest in your business again, and your business may also be less likely to attract other investors in the future.
5. Other money sources may be better
Sometimes it is just easier to get a loan because it avoids most of the downsides on this list while getting you the funding you need.
Indeed, crowdfunding sometimes amounts to “free money,” and a loan is definitely not free. Some businesses simply cannot get bank loans.
Nevertheless, your business may qualify for a loan and, in any case, it is worth looking into.
6. You may lose too much equity
Maybe you are only raising money for a product, and giving your investors some of that product in exchange for their investment. But very new businesses—or businesses without a product—usually must raise capital by giving away some ownership in the company.
If you do not structure your crowdfunding campaign carefully, you could end up giving out more equity than you intended. And in general, crowdfunding gets a worse equity-to-dollar ratio than you would get using traditional investors.
Hopefully, you have seen that crowdfunding is not as easy as it seems. It is not free money and it requires a lot of hard work before, during, and after the campaign. All that hard work may not pay off. In fact, seeking another type of funding may work better for your company. My other blog The ins and outs of crowdfunding may help you succeed if you are starting a campaign anyway.
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