Crowdfunding continues to grow - but does it really represent a good strategy for your startup?

Crowdfunding for Seed Money

Many start-up owners regard crowdfunding as the panacea of business financing infinitely preferable to equity or debt. And who can blame them? It’s free money, right?

Well – yes, it can be, if it’s done well. But the headlines of £100k, £300k, £900k etc are rarely as clear as they seem.

We wanted to give our overview of our own experience – from our business and from clients – of three commonly overlooked areas.

1Failure Rate

Sad, unavoidable and cliched. And you won’t fail, right? You have read what to do by spending days on Google reading tips and blogs. However, the current failure rate on Kickstarter is 37% – two out of every three campaigns fail. And on Kickstarter, “failure” is not meeting your own target, which means you end up with nothing. (IndieGoGo has a different model.)

And while there are many articles showing the main reasons for failure – the key causes are the same for crowdfunding as they are for any e-commerce business; namely how to attract and how to convert.

The crowdfunding marketplace is very congested and making your campaign stand out isn’t easy and can cost a significant amount of money. Nobody starts their day wondering about which campaign to support that day – a campaign is rarely pushing against an open door.

Most campaigns fail for two reasons

i) Lack of Exposure

ii) Lack of Conversion.

2Exposure is Expensive

We all dream about capturing the zeitgeist in one perfect viral clip which will set our campaign on the road to stardom.

So are the other campaign managers.

If you are lucky and have social media accounts already, you already know the “secret sauce” to getting attention and can use your audience to head over to your campaign. But if not, you need to pay for advertising to attract visitors.

However, consider the following from Funded Today

“Although you should expect higher conversion rates if your pledge size is lower than average, and vice-versa. This dependency upon price is one reason why we don’t find conversion rates as useful as other rates in comparing one campaign with another. For such comparative purposes, we prefer to focus instead on a related rate known as earnings per visitor (EPV), which is also called per session value in Google Analytics. As for some EPV benchmarks, if your campaign is getting an EPV of at least $4-$5/visitor from “organic” traffic and at least $1/visitor from social-media ads, then you’re doing rather well. “

In other words, you should expect to get $1 per visitor from visitors that you attracted via ads (they are less motivated to spend than visitors who visit directly ie maybe from your social media). Then consider your Cost-Per-Click advertising costs – if they are 70c per click, you are only getting a net 30c per visitor. Then add platform fees, payment fees, campaign production costs and you could be looking at a net income of 20% of the campaign.

3Crowdfunding or Sale?

You’ve invented a new gadget and want to crowdfund the development costs? Join the crowd – people will be desperate to get hold of it. Crowdfunding agencies call this the Field of Dreams fallacy – “If I build it, they will come”.

To increase your conversion rate, your reward needs to stand out and be attractive. So you offer your £500 gadget at a price of £250 to your funders and the money starts rolling in – your campaign is a success!

But is it? Let’s assume that your new gadget will cost you £200 to produce in future before you retail it at £500 for a tidy profit. So – your crowdfunding campaign actually nets you £50 per sale. But then add the 8% platform fees on that £250 and that’s suddenly another £20 in costs – it’s now £30 you are taking home.

 

Crowdfunding is often seen as “easy money” and many start-up investors head there with a “nothing-to-lose” mentality. But be cautious – the costs of producing a video, the website, the copy and the advertising  are very real and if your campaign fails, you still need to pay those bills.
Treat those “Amount Raised” numbers with a sceptical eye, think about the net amount raised and then decide if you can compete in that crowded space.

We are angel investors and Entrepreneurs

 

For start-ups and growing businesses, we provide investment and financing for growth and launch plans. Our team are experienced executives and entrepreneurs with strong track records of success as both business owners and active investors. We have developed a new, simple & fast process for investment applications.

Bypass the networks and come directly to Bayleaf Angel Investors.