Beating the Odds and Avoiding Failure When Crowdfunding

The following excerpt is from Entrepreneur's book Finance Your Business. Buy it now from Amazon | Barnes & Noble | iTunes

Although we’ve all heard of wildly successful crowdfunding campaigns, the truth is that the majority of crowdfunding campaigns fail. The leading reward-based crowdfunding site, Kickstarter, has a 35.85 percent success rate as of July 2016, and Indiegogo’s is even lower, at 9.8 percent overall and 17.1 percent for fixed funding. And those cool hardware projects that seem to just take off and get immediate traction with backers? Don’t be fooled: According to research on completed hardware projects, 70 percent of those that raised more than $100,000 on Kickstarter and Indiegogo added venture or angel investments before launching their campaigns.

Related: 9 Steps to Launching a Successful Crowdfunding Campaign

Those entrepreneurs’ inability to get traction with backers didn’t necessarily occur because their products were unappealing. More often than not, the key reason a project fails to meet its goal is that the project owner underestimated the time and cost required to properly market that campaign.

The need for a marketing budget, then, isn’t just for reward-based campaigns; it applies to investment-based crowdfunding campaigns as well.

While top equity platforms promote the thousands of registered investors just waiting to discover the “Next Big Thing” on their sites, most of those platforms have criteria and costs for actually marketing a deal to those investors.

Just remember, there’s a price tag for getting highlighted in that platform’s weekly email or being promoted to its social media followers or featured in its webinars. To gain visibility, an entrepreneur must be ready to commit marketing dollars, or at the very least willing to surrender (sometimes substantial) equity or warrants in his or her venture.

So how, exactly, do you maximize your marketing efforts? Here are five tips:

1. Don’t launch without a budget

While much can be done for free, like sharing your campaign via your social media channels, emailing your friends and family or hosting offline meetups or launch parties, the most successful campaigns still incur costs. From shooting a video to buying Facebook ads to launching a PR campaign and even hiring a graphic designer, many crowdfunding campaigns invest a minimum of $20,000. With more than 4,000 active projects competing at any one time on Kickstarter, these campaigns need to invest in ways that help them look polished and get noticed.

2. Ensure that your vendors have experience with your type of campaign

Investing in a campaign manager or marketing expert doesn’t always mean success. Take the case of Simon Thomson of social app Source. Despite extensively researching and interviewing PR and crowdfunding agencies to give his campaign the best possible chance, Thomson spent $20,000 with a well-known crowdfunding PR agency, only to be greatly disappointed in its work. “Quite quickly into the first three months of working with this agency,” Thomson said, “we understood that the claims made about greatly increasing our social media presence on various platforms and having strong press relationships were false.”

Related: 5 Niche Incubators and Accelerators That Could Be Good for Your Business

Thomson said he also discovered that the PR group was uncreative and unresponsive when faced with challenges or requests to help the campaign get back on track. The lesson here is, when selecting a PR or marketing firm, be sure it’s not only creative but also able to support the specific type of campaign you’re launching (sports, film, tech product, service and so on).

Since crowdfunding has become synonymous with preordering a product, make sure that if your campaign isn’t product focused, any company you work with has experience that aligns with your particular campaign type and industry sector.

3. Understand who does the heavy lifting

Many of the companies using crowdfunding today are actually organizations with their own substantial PR and marketing budgets -- as well as a full back-office support staff of internal PR people, marketing experts and financial backers fueling and helping their campaign.

Given this, you should clarify with any potential marketing vendor what it actually contributed to any campaigns it cites as examples of its past success. Review the vendor’s press contacts and ask to interview previous clients to ensure that the success it’s touting resulted from that vendor’s own efforts rather than the work, staff and budgets of the companies behind those successful campaigns.

4. Make sure your copy has the appropriate call to action

Although you may successfully drive traffic to your campaign, what’s key is to convert those viewers to backers. Thomson’s app Source had 10,000 visits to its campaign page, yet it still had issues converting visitors to backers because its copy had not been drafted with the appropriate calls to action to encourage contributions.

Although Source’s original campaign for $25,000 succeeded, the company had hoped to raise well beyond this sum and ended up launching a second campaign to meet its capital needs -- this time, however, without the marketing budget it had previously lost on a nonperforming vendor.

5. Strive to gain early momentum

One key to a successful crowdfunding campaign is to gain early momentum. Most platforms indicate that project owners should attract the first 30 percent of their support from their own networks before turning to PR. Then the first three days of any subsequent campaign are crucial.

At this juncture, founders should send a project-preview link to their inner circle in advance of their campaign launch and be diligent about keeping in contact, so these supporters will contribute as soon as the campaign goes live. Founders should also rely on PR -- but not to drive backers the day they launch. Instead, the PR should be there to help entrepreneurs cross the chasm between the initial support they’ve had (from friends, family and co-workers) and the supporters to whom they have no connection as yet.

Related: The Dos and Don'ts of Using a Well-Known Business Accelerator

If you’re a founder contemplating crowdfunding, don’t be misled by the handful of “hits” that seem to go viral, then easily amass thousands of supporters and funders. While any project can be successful given the right combination of preparation and execution, any attempt you make to raise significant funds will most likely need a well-planned and well-funded marketing and PR campaign.

And, along the way, don’t forget to check those client references if you’re hiring an outside firm.