This week we got an update email from a Kickstarter project we backed in December 2016 – yes, three years and we are still waiting for the rewards. It was update #37 and here is what it said: “Until the last few weeks, we thought we were more likely than not to make product xyz (we blinded the product to protect its owner). This is no longer the case. There’s still a small chance we can do it, but we are less confident about that now.”
What happened in this case has been a litany of all of the possible problems with creating a new product with crowdfunding as the primary source of funds:
Outsourced designers/developers who did a poor job that had to be redone
More rigid regulations meant reworking the design
Poor quality parts from a supplier
Having design parameters that were beyond the capabilities of the component parts
Designs that fail in user testing, despite the best design efforts
Product hold-ups due to quotas on shipping from China
Running out of money to fix all of the above problems
So we thought we ought to address the pros and cons of crowdfunding campaigns. In The Titanic Effect, we cover some of these issues in Chapter 5, The Technical Ocean. One aspect we should clarify early - there are at least 3 types of crowdfunding platforms these days (we are only listing the biggest USA platforms):
Reward-based or Get funds to make products, books, movies, arts, etc. – Kickstarter, Indiegogo,etc.
Donation-based or Make charitable contributions – GoFundMe, Kiva, DonorChoose.org, etc.
Equity-based or Take equity stakes in startups – SeedInvest, Republic, NextSeed, IFundWomen, etc.
They each have different outcomes, but generally the keys to success are similar across them.
Let’s start with the Pros. First, you can access a whole new tribe (or target market) beyond the one that you already know. Kickstarter had a total of 17+ million backers. Each crowdfunding platform has a different audience. Offering your idea to a new group of people is great. But, you will still need to plan for how to attract that audience to your campaign. Second, they have mechanisms for getting your campaign promoted. So, the crowdfunding platform is doing some of the work for you. Third, they have experts who can help you figure out how to design and promote your campaign. But most importantly, you can generate funding that you could not get otherwise – pre-seed funding, not a bank loan, and not your own credit card.
On to the Cons. Kickstarter is the most popular and best-recognized rewards-based crowdfunding platform. So we will use it as our example. First, your campaign might not be successful. Believe or not, only 37% of Kickstarter campaigns are “successfully” funded – that means that nearly two-thirds of campaigns are unsuccessful. If you don’t get pledges for your minimum goal, you are unsuccessful and you get no money. Here’s a great overview of how to create a successful campaign from the founder of IFundWomen.com.
Second, it takes longer to both run a successful campaign and then execute against that plan. You need a long enough timeline for the campaign to be fully promoted and give it the best chance of success. Then, developing a product is harder than most people think it will be. Studies suggest that in as many as 84% of the top-funded Kickstarter projects, backers did not deliver the promised goods on the original timeline[1]. Moreover, 9% of Kickstarter projects never deliver rewards to backers[2] at all.
Third, they do each take a percent of your fundraising and make your financing more complicated. It ranges from 3% to 10%. If you use equity-based fundraising, you will have a more complicated capitalization table (called “cap table”) which can affect later funding rounds. And you will have to do some annual tax paperwork for your investors.
Bottom-line, crowdfunding can be a great source of funding. Like any funding, it takes time and energy to do effectively. So do your homework first. Then, launch your campaign and make it successful. You can even read more about our own Kickstarter.
[1] Pepitone, 2012. http://money.cnn.com/2012/12/18/technology/innovation/kickstarter-ship-delay/index.html
[2] https://www.kickstarter.com/fulfillment