This article was written by Elena Mikhaylova, the CEO of CrowdfundProductions, a company that puts on crowdfunding events and helps entrepreneurs launch crowdfunding campaigns.
One of the first decisions every potential crowdfunding creator has to make is how much money he or she is going to ask for. There is no simple answer, but I’d like to share with you several things to keep in mind and strategies to consider.
How Much Do You Need?
To answer this question, you should create a detailed budget that includes:
- The product/project’s costs, including tooling, design, manufacturing, certifications for the product
- Reward fulfillment, including storing, shipping and packaging, returns (because of broken items or a wrong address)
- Taxes
- Crowdfunding platform and payment processor fees
- If you are running a Kickstarter campaign, expect at least 5-8 percent of your pledges to not go through after the end of the campaign
- Campaign costs: video production, consulting, marketing and PR, campaign management, advertising and paid press release distribution, participation in off-line events
Some of the costs are optional. You can run the campaign yourself (of course, your time is not free either), avoid using advertising or paid distribution, ask your friend to shoot and edit the campaign video. But most of the expenses are unavoidable. You need to make sure to have all numbers in place, strategies for different campaign outcomes, and additional cash for unexpected expenses (which always happen).
How Much Can You Realistically Raise?
The answer to this question depends on your current resources, human and financial:
- What is the size of your current social network?
- How engaged are your fans and followers AND how relevant are they to the crowdfunding campaign? One of our clients had more than 10,000 Facebook fans, but 70% of them were teenagers. So his rewards, mostly priced at $250 – $350, were out of their reach, and for the campaign that resource was useless.
- How involved are you in the local community and your industry networks and organizations?
- Do you have any influencial supporters who would be willing to talk about your campaign?
- How much money can you raise from your friends and relatives?
- Do you have a budget for advertising and professional help?
- How long would it take you to deliver the rewards to your backers: our research has proven that the time you need has a significant influence on the potential backers’ wilingess to support your project.
- What is your expertise in fundraising, marketing, PR and project management?
- How much time can you devote to the project (before and during the campaign)?
- How popular is your website? Do you have a subscription list? We’ve seen up to 25% of a campaign’s pledges coming from the creator’s website. Of course, the website existed for a couple of years, and the creator spent significant time on building the audience and communicating with the visitors.
- How much funding have campaigns similar to yours raised, and what is their success rate?
You’ve probably heard many times that you need to bring your own crowd first, before the crowdfunding community will support you. Usually, you should raise at least 25%-30% of your goal during the first three days, and most of the money should come from your own connections. So, if you are shooting for $100,000, ask yourself if your network is going to stand behind you with $30,000 as soon as you launch the campaign. If the answer is “no” or “no clue,” then, think again.
What is the Main Goal of Your Crowdfunding Campaign?
Surprisingly, the answer is not that obvious. Crowdfunding has become a huge marketing mechanism which is being used by startups and established companies for promotion, rather than for fundraising.
According to a recent TechCrunch article, 70% of the hardware projects that managed to raise over $100,000 on Kickstarter and Indiegogo had received venture or angel backing PRIOR to launching their crowdfunding campaign.
So if you are more interested in marketing and publicity than in funding, you should spend money on professional help and paid promotions on social networks and the blogosphere. The funding goal is not really important, as long as you are capable of reaching it.
Of course, if your main goal is to fund your operation or to test the market demand, you should make sure that your campaign costs will stay reasonable and rely more on organic reach. In this case, you should set the goal as low as possible in order to make your project successful.
Here Are the Strategies You May Consider
1. Set the goal based on your costs. In this case, you should decide on the necessary minimum startup costs and stick to it. Usually, this strategy works best for small/medium campaigns and those who have additional funding from other resources.
2. Set the goal lower than you need. This strategy is often used by technology project creators. Most of them require significant initial investments. In order to “game the system,” a creator can post a lower goal. It would help him/her to stay higher in Kickstarter search results and to bring more visitors to the campaign’s page.
It also creates an illusion of success (when you are getting closer to the goal), so more people would be willing to pledge and more media would cover the campaign. The idea behind this strategy is that the campaign becomes popular and significantly exceeds the official goal. If it doesn’t happen, the creator can cancel the campaign and use the publicity and community created during the campaign for future development.
3. Break it up into several smaller campaigns. This strategy works best for game, app and software developers, comics, journalism, as well as creative projects. A lower goal increases the chances for success, and the backer’s community created during the first campaign will become the base for the initial push in the following campaign. I know several creators who have run five or more crowdfunding projects following this strategy.
According to the Kickstarter blog post, 22,000 Kickstarter creators—12% of all of them—have launched more than one project. The funding success rate for creators who come back after a successfully funded project is nearly double that of the overall site average—and their next projects do even better.
4. Fixed vs Flexible Funding campaigns. If you host your campaign on Indiegogo or other similar crowdfunding platforms, you can choose between a fixed and a flexible funding campaign. Ninety-five percent of all Indiegogo campaigns have chosen flexible funding. It is less risky, but the platform takes 9% of the funds raised.
While in some cases (like personal fundraising, community projects, causes), flexible funding is preferable; for product based campaigns, it creates major dangers. If you fail to reach your goal, you are still responsible for delivering the product to the backers.
Unfortunately, in most cases, it is impossible, so the delivery rates for flexible funding campaigns are significantly below those with fixed funding. For this reason, the majority of serial backers stay away from flexible funding campaigns, at least until they reach their goal. Because of that, their success rates are also lower.
Most campaign creators learn about crowdfunding from “success stories” in the media. But you need to realize that almost 62% of Kickstarter campaigns fail, and among those that succeed, the vast majority raises below $10,000. Crowdfunding is tough, and it takes time, effort, and money to get funded by strangers. Only 1% of all Kickstarter projects raise $100,000 or more. Doing your homework and coming up with a realistic funding goal is crucial for your probability to succeed.
About the Author
Elena Mikhaylova is a serial entrepreneur with twenty years of experience in diverse industries including crowdfunding, PR, and social media marketing. She is an internationally published author of hundreds of articles, several research papers and two books.
Elena has been a speaker at a number of international conventions and conferences and an instructor at Colorado Free University. She was also an organizer of one of the top ten largest crowdfunding meetups in the United States and was recognized as Top 1% on LinkedIn in 2012.
