Written by: Fredrik Mues
The role of Crowdfunding
In today´s business world, there are many options to finance a company or the development of a new product. Opposed to the traditional methods like equity financing, shareholder investment or debt financing, crowdfunding presents a more innovative and considerably different approach.
But first things first. What exactly is crowdfunding?
“Online crowdfunding is a popular platform for entrepreneurs to engage consumers by raising funds for creative projects” (Chen, Thomas & Kohli, 2016). Crowdfunding can be described as an effort of individuals or organizations to raise capital through small contributions from a large amount of people. Innovators, entrepreneurs and business owners utilize their social networks, usually with the help of the internet, to finance individual projects or entire businesses (De Buysere, Gajda, Kleverlaan, Marom & Klaes 2012). Belleflamme, Lambert and Schwienbacher, advance “Crowdfunding involves an open call, mostly through the Internet, for the provision of financial resources either in form of donation or in exchange for the future product or some form of reward and/or voting rights” (2012, p.9).
In times where consumer’s online behavior changes from traditionally consuming internet content, reading, watching and buying, to more recently actually creating content themselves (Kietzmann et al., 2011), crowdfunding has become a popular method to finance the development of a new product online. In fact the statistic below illustrates the enormous growth of funds raised by crowdfunding platforms worldwide (Statista, 2016) and thus shows the growing importance of crowdfunding.
In order for a crowdfunding campaign to be successful, certain steps have to be taken. This article will guide the way to a successful crowdfunding campaign focusing on three steps:
1) Revealing measures that project creators should implement before the launch of a crowdfunding campaign to maximize its funding progress, especially in the first 24 hours of the project.
2) Outlining tools which should be utilized during a crowdfunding campaign to raise additional funds during the project and prevent a large drop off in the funding progress during the campaign.
3) Depicting actions which should be undertaken after a crowdfunding campaign to increase the sales of the funded product.
Before launching a campaign:
Find the model and the funding platform that best suits your cause
The very first step for each project creator should be do identify which crowdfunding model suits the cause of the project best. Currently there are two main types of funding models. The first, is donation based funding where project supporters donate money in return for products, rewards or perks (Barnett, 2013). Opposed to that, in investment crowdfunding, supporters become owners or shareholders and have a chance for financial return as project creators seek capital by selling ownership stakes (Barnett, 2013). After a suitable model has been identified, the next step is to select the right crowdfunding platform. Forbes ranks the top then crowdfunding sites for fundraising and placed Kickstarter and Indigogo one and two respectively.
Besides both platforms making major contributions in the crowdfunding world, both follow a donation based funding approach. As of today, more than 2 Billion U.S. dollars were raised by over 100.000 projects which have been successfully funded with the help of almost 11 Million contributors since Kickstarter was launched in 2009 (Kickstarter, 2016). In contrast to that, Indigogo unfortunately does not disclose the number of successful projects but the Indigogo infographic shows that from 2008 to 2015 more than 800 Million U.S dollars were raised on the platform and more than 2.5 Million people supported a project on the in 2015 alone (Yeh, 2015).
A major difference between both platforms is the ‘All-or-Nothing’ policy which Kickstarter deploys and where project creators only receive their money if the previously set funding goal is reached (Andrei, 2011). According to Kickstarter (2016), this policy generates additional tension and helps to motivate supporters to raise money as projects are not going to be realized if they don´t reach their funding target. Therefore, supporters will not receive their pledges if a campaign fails to meet its previously set funding goal. Projects on Indigogo instead implement a ‘Keep-it-All’ approach, where project creators receive all funds raised even if the campaign is not successful (Andrei, 2011). Additionally, Kickstarter campaigns require a working prototype while on Indigogo everyone can create a campaign (Barnett, 2013). Moreover, there is a minimal difference in cost, Kickstarter on the one hand is free to use but charges 5% of the raised amount when successful. Indigogo on the other hand charges 4% if a project is successful and 9% if it fails to meet the funding goal (Andrei, 2011).
Identify the right audience
The digital media advocacy agency 2.0, emphasizes the importance of identifying the right audience and explains the target audiences should include individuals, groups and communities who can influence those who have direct decision making power over the issue an organization is wants to address (Olenik, 2014). Moreover, Clay Hebert the founder of crowdfunding advisory, Crowdfunding Hacks, clarifies that most successful crowdfunding campaigns have fewer than 1,000 backers (Clifford, 2014). Thus it’s not important for everyone to like your idea but instead, Herbert advises to target a subgroup of people who are likely to be interested in the project and have a high probability of being won for it (Clifford, 2014).
Setting an appropriate funding goal
Thereafter, the funding goal should be carefully considered as several factors influence the amount of money project creators need to raise in order to realize their projects. More precisely, on Kickstarter for example if a campaign is successful, Stripe who manages all payments, receives a 3% – 5% payment processing fee of all funds raised by the campaign (Kickstarter, 2016). Besides that, the crowdfunding platforms themselves receive a commission, as outlined above usually between 4-5 % in case the campaign is successful.
Furthermore, project creators need to calculate the costs arising from the pledges they offer and all expenses directly involved with creating and marketing the campaign. In the end, it’s important to set a realistic funding goal. For Kickstarter projects it is advised to set the funding goal as low as possible as Kickstarter has an all or nothing funding policy (Kickstarter 2016). The Entrepreneur article “Become a Crowdfunding Wizard: 8 tips you’ve probably never heard before”, points out that barely surpassing a high goal is positive but nothing special instead, setting a low goal and blasting past it is exciting and might even attract additional press (Clifford, 2014). The infographic depicted below shows the success rate of Kickstarter and Indigogo campaigns per funding goal range, emphasizing that the higher the funding goal the lower the rate of success.
Determining the right duration of the campaign
The next step is to determine the duration in which the campaign aims to achieve and surpass its funding goal. Longer durations do not always equal more success for crowdfunding campaigns. In fact co-founder of Kickstarter, Yancey Strickler, states “Thirty days is the optimum timeframe, as momentum is more important than time. Longer durations encourage procrastination” (Ü 2013, p.102). When planning to launch a Kickstarter campaign it is important to consider the fact that campaigns which last for 30 days have a 35% chance of meeting their funding goals whereas campaigns lasting for 60 days only have a 29% success rate (Dyson, 2013).
The first 24h are the most important, line up supporters before the launch
Kim Hyungsoo, co- founder of Eone timepieces which raised $600,000 on Kickstarter, argues that whether campaigns meet and exceed their overall funding goals mainly depends on how much progress they make towards their goal in the first 24 hours of the project (Hyungsoo, 2014). In this article on Business Insider the expert elaborates, “Campaigns that receive impressive amounts of pledges from the beginning are more likely to be featured on the homepage and that’s how members of the Kickstarter community discover new projects to support” (Hyungsoo, 2014). This is not only the case for Kickstarter crowdfunding campaigns, but almost all crowdfunding platforms feature successful campaigns on their website. Hence, in order for a campaign to be featured on a platform, it’s crucial to have as many people as possible who support the project from the start. Thus, project creators are advised to implement measures helping to maximize the amount of project supporters before the launch of a crowdfunding campaign.
In fact, Alon Goren, founder of crowdfunding advisory invested.in, states that project creators should have several contributors lined up before the launch in order to maximize the funding progress during the first day and quickly build momentum around the campaign (Goren, 2013). Online marketing expert Chris Dyson (2013), suggests creating a landing page to encourage people to sign up to an email list. This list should be linked to a mail marketing tool, preferably MailChimp, as it’s free for the first 2,000 (Dyson, 2013). This email list is essential as it allows project creators to notify community members when the campaign goes live (Dyson, 2013). However, Ryn Colucci of R.E.M, which surpassed its funding goal by over $10,000, stresses the importance of personalizing emails when convincing individuals to spend their money on a crowdfunding project (Peters, 2014).
Furthermore, a study analyzed that project creators with ten Facebook friends succeed only 9% of the time, whereas those with 1,000 friends were successful 40% of the time, according to this Entrepreneur article (Arora, 2014). In fact, Chance Barnett, CEO of crowdfunder.com, says “Entrepreneurs who have completed successful crowdfunding campaigns effectively deploy their social capital and leverage it through social media” (Dresner 2014, p.20).
Engage the press before the launch
Most successful crowdfunding projects benefit form relevant press coverage at the beginning of the campaign. As a matter of fact, CEO and founder of the funding website peerbackers, Sally Outlaw, explains that crowdfunding projects that generate strong press do not only benefit from additional funds, but also build brand awareness (Outlaw, 2014). She emphasizes the importance of contact suitable bloggers and media professionals long before the launch of the campaign (Outlaw, 2014). On top of that Dyson advises to use the website journalisted to find relevant journalists and their contact information (Dyson, 2013).
During the campaign
Answer every single query, question or comment
Once the campaign has been launched, project creators will receive numerous comments and requests. Hungsoo (2014) stresses to answer every single potential backer as project creators do not know who will become a loyal supporter and better yet, share the campaign with their network.
Offer new stretch goals & rewards
According to Thürridl and Kamleitner (2016), rewards can make or break success in crowdfunding. In their article “What Goes Around Comes Around? Rewards as strategic assets in crowdfunding” the authors offer guidance in strategically selecting rewards (Thürridl & Kamleitner, 2016). Angela Broyles and Ashley Rankin, who each raised more than $15,000 via crowdfunding advise to offer new incentives, known as stretch goals midway through the project to fight the natural midway dip in contributions and spark supporter’s enthusiasm once again (Lancaster, 2013).
Send frequent updates to project supporters
According to an Indiegogo analysis, campaigns which send at least eleven updates raise over 50% more funds than projects that send less (Ü 2013, p.103). Moreover, Kevin Peeples outlines that his novel ‘Fighter’ rose over 90% of its funds through continuous email newsletters (Peters, 2014).
Engage in cross promotions
To prevent a large drop off in contributions and to gain new supporters, it is recommended to engage in cross promotional efforts, mentioning other campaigns to their own supporters and vice versa (Crowdfundingdojo, 2014).
After the campaign
Thank your supporters
After a successful crowdfunding campaign it is not the time to rest. Kent Oyler, Chairman of CommonWealth Crowdfunding outlines 10 to dos after a successful crowdfunding campaign and reminds project creators to thank their backers personally, sending them at least personalized emails (Oyler, 2014). Project creator Lisa Curtis even explains that the best way to thank supporters is to record a short video (Curtis, 2013).
Protect your idea
Oyler (2014) reminds project creators to check if their product idea, particularly their intellectual property, is patentable and consequently if it can be protected to guarantee their product cannot be copied by competitors.
Finally, the infographic illustrated below summarized the most important characteristics of successful crowdfunding campaigns.
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