Crowd Funding Bite #4: Underestimating your financial need
April 17, 2014
“Be strategic and mindful of the market – set your expectations at the minimum not the maximum”
Many people go into crowd funding and think that they will raise what they want as opposed to what they need. Before you set your fundraising target you need to know some important information about crowd funding more generally:So let’s look at some of that earlier data – only 8% of the projects with targets in excess of $100,000 were successful and only 17 projects raised more than $1 million.
In one case an organisation with a really great product thought they would be able to raise twice as much and therefore use the surplus to fund activities they had forecast in year two of start-up. Granted the product was fantastic but by listing the amount at $1 million (all major crowd funding websites ask you to list a target or a goal) the campaign ran the risk of asking for too much even though they thought the crowd would go for it.
The truth is, the crowd probably would have gone for 25% of that amount but because they were not getting volume (i.e. each site shows how close or far away a project is from reaching its target) people were passing it over – why? Because they thought there was no way they would meet the target in the timeframe specified and so it was a fruitless use of time investing.
This led to the project fundraising target failing. The reality is that the project failed long before it was uploaded to the crowd funding site and that’s because the individuals involved relied too heavily on crowd funding as being the principle or sole source of finance. Let’s take a look at a much more recent business example that, with 24 days to go from a 60 day campaign had reached 575% of its funding target.
That means that “Pono Music, where your soul rediscovers music” sits to bank more than $4.6 million.The original target was set at $800,000 and they offered more than a dozen different investment levels. The levels were relatively affordable starting at $5 with an open ended number of packages available through to $5000 packages limited by number.
Each level of investment came with a different level incentive.In other words they took a very pragmatic view, set the funding goal at a relatively achievable target based on the pre work they had done and went to great lengths to include those who ranged in the amount or investment contribution level.
But, and this is a big but, these sorts of spectacular results are still rare and a significant amount of pre-work and planning go into a campaign before the fundraising page is even established. As we noted in the earlier article – not everyone is like Australia’s Climate Council! Where possible do not attempt to raise all of your investment by crowd funding alone and limit the amount to below 50% (or lower) reliance unless it is project specific and the success or failure of the overall social enterprise or business is not reliant solely on crowd funding.
By using 50% as the benchmark it may be possible to plan so well that the amount raised gets you to the point of the development cycle (of the product or service) that you can then raise the final 50% from traditional investors.So, it is very important that you do not bank the entire farm on crowd funding alone as evidence to date tells us that if you do attempt to raise a large figure you have a less than 8% chance of success.
Conversely, when dealing with smaller amounts below $20,000 it may be the case that the crowd will be so excited by your idea that they are prepared to fund the whole amount.Key to everything is understanding what you are trying to raise, what you are prepared to give away (incentivising your investors) and what people therefore get for the size of contribution. For example, give people the ability to invest by giving them realistic levels.
Don’t just expect that you will get 100 people all wanting to invest $1,000 and for that contribution they get “X” incentive.Break it up a little and attract both those who can afford larger sums alongside those who may only be able to contribute in the region of $20 or less. In doing so you diversify your offering to a broader investment community.
Our advice is to always break it into the following amounts and match that with the appropriate level of incentive (more about incentive later): $200$100$50$25$10 Of course, you can aim for the top line figure to be much higher but in general terms try and keep your levels of investment contribution at realistic levels.The final thing to consider is while the team at Pono were able to raise more than $4 million they did so from 13,581 separate investors.
This means that depending on the incentives committed the amount of logistical and administrative work involved has the potential to be very high and that, in itself will carry a cost. The same is true of your own organisation – raising funds can be tempting but the cost can be larger than you expected!Very rarely do we plan for the cost of the capital raising using crowd funding because many people think of it as an easy exercise.
So when making sure you have a target also be careful to factor in the cost of the exercise.
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