Crowdfunding Report: Why a Business Raises Funds Has a Big Impact on Success Rate

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In part one of our crowdfunding report, we looked at some general averages – percentage of successful and failed campaigns, average asks, average percentages funded – and left you with a little cliffhanger.

For part two, we’re looking at things differently. Why are businesses turning to crowdfunding? The 73 campaigns were divided into three groups:

  • Startup: new concept or business
  • Growth/Expansion: established business seeking funds to grow, expand, purchase equipment, etc.
  • Product: new product launches and pre-sales (apps included)

When it comes to crowdfunding, business stage or purpose for seeking funding definitely matters. That 87 percent failure rate – that’s the percentage of startup campaigns that failed. Fifty-four percent? That’s the success rate for product-based campaigns.

Here’s how those three distinctions performed overall (click to enlarge):

crowdfunding-charts-02

Further diving into the successful campaigns, another trend emerged: food. Of the 23 winners, seven of them pertained to food in some way.

Our panel of expert crowdfunders is back to weigh in on why these two sectors trend towards better results.

Product Launch is a Go

Out of the three categories, products were by far the most successful, seeing a 54 percent funded rate.

“I’m not surprised that product-based campaigns do better generally because people are getting something concrete in return,” says Chris Hawker of Trident Design.

Many campaigns raise dollars to help launch a product, offering pre-sales in return for support. He sees three big reasons why this tends to be the case.

“First and foremost, it’s not the money,” he says. “You get market validation based on people spending real dollars for your innovation.”

It’s the same reason Ryan McManus of ContentVia calls crowdfunding the best way to launch a physical product. Real customers. Real dollars. If people are willing to spend money on it at this stage, that’s a better indicator people will in the future.

Hawker’s second plus for product campaigns is the ability to raise non-diluted capital. A campaigner receives funds without forking over a percentage of their business. And, this can help a company receive a higher valuation and make it easier to raise money elsewhere. Market validation is already done.

The third reason Hawker sees it as a good platform for product launch – campaigners get to play with their marketing strategy a bit. He says a business can tweak and refine their value propositions and track which gain the most traction through analytics.

“It’s super valuable for marketing insights,” he says.

Food Fares Well 

Whether it was money for a food truck, funds for a brick-and-mortar or needs for new equipment, 30 percent of the successful crowdfunding campaigns had some tie to food.

Kate Djupe ran a successful campaign in 2014 to launch The Commissary – a commercial kitchen space and much, much more that has become a haven for food-based businesses, and now a launchpad for other entrepreneurs running campaigns. Djupe has not only been through the crowdfunding wringer herself, but now advises others on it. Funding for food is tricky.

Passion, big ideas and wanting to share good food drives people into food entrepreneurship. Very little of that inspires banks, investors, or the proverbial rich uncle. The money a food entrepreneur needs to raise is either for a lot of small demands (money to repair or scale up equipment or new packaging) or an astronomical ask (building out a kitchen of any size) and the payback schedule typically needs to be long and slow. Crowdfunding, when done right, gets food into the mouths of the eager consumers faster. – Kate Djupe

“Food also traditionally requires a large amount of capital to start so restaurateurs are always looking for creative new ways to help with financing,” adds Tomos Mughan of DareDevil Dogs, a restaurant that successfully funded their food truck through the medium.

He sees food as something that everybody can get behind, especially in Columbus.

“Columbus as a city is very responsive to food so it seems logical that the food entrepreneurs would reach out to the community,” he says.

Their hard work paid off, but he knows that’s not always the case.

“I think a lot of crowdfunding with food is feast or famine,” Mughan says. “Food seems to have the most successful as well as the most failed campaigns.”

Backers = Royalty 

While a lot of this analyzing has focused on the money and the campaigns themselves, let’s not forget the reason campaigns succeed or fail – backers. Two insights from our campaigners show the juxtaposition of backers. There is likely different backers for different campaigns.

Mughan says, “Food is something that everyone can relate to. Not everyone plays the newest video games or needs the best smart watch, but everyone eats.”

On the flipside, Hawker says products often perform well because they have a broader appeal. People across the country, and even the world, might be interested in the latest smart-phone connected device, but people in California likely wouldn’t back something like a Columbus-based restaurant. Products…nationwide audience. Campaigns with a more local focus…activate the local network and family/friends.

McManus also express the importance of being transparent with campaign backers. Chances are something is going to go wrong, whether it’s with fulfilling rewards or manufacturing the product itself. Campaigns have been making headlines recently for such faux pas and some campaigns have been known to simply not fulfill obligations (but that’s a topic for another article).

You need to treat your crowdfunding backers like royalty. Give them priority access, be more transparent, and ALWAYS tell them first when things are changing. These are loyal and passionate fans of your product, but they are quick to turn on you. Treat them well and they will share your product with the world! – Ryan McManus

Building Community 

Whether food or gadget, there is a common theme that can tie campaigns together. They are a way to build community.

When raising funds for The Commissary, Djupe positioned her campaign as such, and if the community helped, she could do it faster.

“Crowdfunding – when you aren’t selling pre-orders of a product –  should be seen as community building,” she says. “Make sure your idea is something your friends and family want to share with others and then ask them to do that. See if you can build a community that wants to see your idea come to life.”

Hawker thinks product-based campaigns can actually be about the community, too. He wants to see the community further galvanize around risk-takers running campaigns. It’s not just about supporting a campaign but the entrepreneurs behind it. Backers have the opportunity to help create and be a part of something in the community.