Crowdfunding has emerged as a game-changer in the world of entrepreneurship, offering a unique opportunity for founders to raise capital, validate their ideas, and build a community of loyal supporters. Crowdfunding offers three significant advantages over other sources of funding for new ventures.
First and foremost, crowdfunding allows entrepreneurs to access a diverse pool of investors, including individuals who believe in their projects. This inclusive approach democratizes access to capital, reducing the need to rely solely on traditional sources like banks or venture capitalists.
Secondly, crowdfunding serves as an effective tool for market validation. When a crowdfunding campaign attracts backers and meets its funding goal, it's a clear sign that there's a genuine demand for the product or idea. Moreover, crowdfunding platforms encourage direct engagement with backers, creating a sense of community and loyalty. This engagement can lead to valuable customer feedback and the building of long-term relationships.
Lastly, crowdfunding, particularly in its rewards-based form, typically doesn't involve giving up equity in the company or taking on debt. Backers receive rewards or products in return for their support, allowing founders to retain control over their ventures and avoid the financial obligations that come with loans or shared ownership. This offers a level of financial flexibility and creative freedom that may not be as readily available through other funding sources.
Crowdfunding is actually four different types of funding:
- Rewards crowdfunding: Indiegogo and Kickstarter are the best-known platforms in this space, where entrepreneurs and creatives offer rewards in exchange for funding to launch their product, service, or production. Rewards might include anything from branded swag to discounted and early access to the new product.
- Equity crowdfunding: with equity crowdfunding, the business owner gives up a share of financial control of their company in exchange for funds to grow. Like Angel funding, equity crowdfunding is appropriate to early-stage startups. StartEngine and WeFunder are two of the platforms that are well-known in this segment.
- Debt crowdfunding: similar to obtaining a bank loan, individual backers loan money, which must be repaid with interest. LendingClub and Kiva, among others, support this type of crowdfunding, and it can be a good option for business owners who are willing to commit to repaying a loan, but unwilling or unable to work through traditional lending institutions.
- Donation crowdfunding: backers donate funds to a campaign, typically because they believe in the cause. GoFundMe is well known for these types of crowdfunding campaigns, where backers are donating to help or support individuals and communities through hard times. Entrepreneurs launching new products or services are unlikely to receive backing from donation-based crowdfunding.
Stripe offers some more guidance on choosing between the different types.
Kickstarter released eleven years worth of data on campaigns hosted on their site, and we can analyze that data to identify characteristics of successful rewards-based crowdfunding campaigns. UCLA's DataRes offers a good analysis of the data.
The key lessons from the data are:
- Success rates vary strongly by category. Tech-centered campaigns tend to be much less successful while setting the highest goals, with only about a 1-in-5 success rate. Arts-centric campaigns do better, running closer to 1 success out of every 2 campaigns. If you're developing a tech product, consider equity crowdfunding or Angel investment instead of rewards crowdfunding.
- While Kickstarter recommends running campaigns for 30 days, a campaign's duration has no relation to its chances of success. That said, most successful projects finish within 35 days, though this varies somewhat with the category and subcategory of a campaign. Unsuccessful campaigns tend to run longer.
- In all categories, successful campaigns ask for less. From the 2009 to 2020 dataset, half of successful technology-oriented campaigns asked for $10,000 (USD) or less, and a maximum of $1,000,000, while half of unsuccessful technology campaigns asked for twice as much, $20,000 and a maximum of over $110,000,000. The categories with the highest success rates are dance, comics, and theater, where successful projects usually set goals of less than $5,500. Crowdfunding usually does not net you Venture Capital, or even Angel, levels of funding.
- Expect your backers to pledge between $10 and $100. To get to your $5,000 goal, you need to plan on attracting about a hundred backers. A successful campaign, therefore, has a mass appeal and a good crowdfunding marketing plan.
- Successful campaigns often receive much more than their goal. Don't think of your goal as a ceiling; set your goal to the minimum you can for your MVP or first production run, but add aggressive stretch goals and communicate frequently and openly with backers about how your campaign is doing relative to those stretch goals. The sky's the limit!
Read the rest of this series of blog posts.
Posted by Thomas Hopper on Permanent link for Funding a Startup: Crowdfunding on November 3, 2023.