Tuesday, March 24, 2015

Calibrating crowdfunding expectations

[TL;DR summary – we raised $54,600 from 506 backers in our Kickstarter campaign. It literally saved our startup and was amazing for visibility and marketing. However, our expectations of how much we could raise were wildly off. Of the total, $28,300 came from just four relatives. The all-or-nothing model at Kickstarter misleadingly skews the “average backing” to high amounts.]

A year ago, our startup ZappyLab ran a Kickstarter campaign for the creation of protocols.io – a platform for sharing and discovering up-to-date science methods. This was the first successful crowdfunding project aimed at researchers. This Kickstarter also saved our startup. We were bankrupt, deep in the “death valley” of startup funding, with no one willing to back us. The response to our project was overwhelming; that gave us the much-needed visibility, led to our first major contract with a reagent vendor and helped to convince investors to support us.

I want to emphasize the above again – the Kickstarter saved us. I am deeply grateful to the hundreds of people who contributed, to the bloggers who wrote about it, to the countless people who spread the word. I think Kickstarter is an amazing platform and am writing this post simply to help those who plan crowdfunding campaigns. My goal is to share so that others can better calibrate their expectations and run more successful campaigns.

Before launching our project, I did a lot of research to determine the feasible funding goal. Kickstarter stats show an average pledge is $70. There is variation by category, with technology projects at an average backing of $107. Several crowdfunding gurus told us to expect a mean at or above $100 because a lot of our support would be coming from our existing users who already love and value our company and tools. We thought we could get 400-500 backers, and so we set the funding total at $50,000. We ended up raising $54.6K from 506 backers; an average of $108 per person, right around the expected range. But averages are wildly misleading. The median contribution to the protocols.io Kickstarter was $20, and the true average closer to the median than it may seem.

Within two weeks of launching our campaign, it became painfully clear that even with 500 backers, we would be nowhere near the $50K mark. Plotting our curve, we were on the path to $20,000 total. Our estimate that we could get about 500 backers was on target, but the average pledge amount was less than half of what we expected.

The tricky part is that if didn’t get to $50,000, we would get nothing and everyone watching would see a failed campaign on Kickstarter. We panicked. That didn’t help. We went to our closest relatives and begged for help. By begging for help, I don’t mean the expected leaning on friends and family to back the crowdfunded campaign. I mean an “SOS”. In the end, four relatives contributed $28,300 of the total that we raised.

Of course, our campaign is unusual for Kickstarter. The true reward we promised was better and faster science; we did not have a physical product to ship in the end. It is possible that our experience is an outlier. On the other hand, 4/6 people who ran crowdfunding campaigns told me privately that they also had the exact same experience and were forced to beg parents and other relatives to get them to the target in the end. Given our experience, I expect that this is rather common.

Kickstarter’s all-or-nothing model means that a campaign that raises $48,000 out of the target $50,000 will get zero. I understand why Kickstarter does this. This protects the backer against a campaign that raises 10% of the required total, with no product ever delivered, but the money gone. I personally would not have backed the crowdfunded projects that I did without this safety. On the other hand, this also creates an extraordinary pressure on the people running the campaign to come up with the funds by whatever means are possible. Especially for startups like ours, when investors warn that not reaching your goal is a red flag, failure is not an option.

I doubt that we are the only ones to naively launch a Kickstarter with wrong expectations. I hope this post doesn’t hurt Kickstarter, and if it helps the people running the campaigns to set better targets, this may actually result in more of the projects succeeding. To that end, more details are below.

[UPDATE March 31, 2015]

To determine if our experience is common, I looked at 30 projects in the Food section on Kickstarter, funded at $10K or above (data here). The hypothesis is that projects raising close to 100% of their funding target will frequently be in the save-our-souls mode as we were, begging friends and relatives to close the gap with enormous contributions. Indeed, projects funded 100%-110% had an average backing of $112 while projects raising 150% or above averaged only $65.
Average contribution as a function of the percent of funding targetNumbers are from 30 projects successfully funded in Kickstarter's food section at $10,000 or above.

1. Distribution of all 506 contributions to protocols.io Kickstarter.

2. Distribution of the 502 contributions to protocols.io Kickstarter, excluding the four relatives who saved the campaign.

3. Distribution of the 486 contributions to protocols.io Kickstarter at or below $200.

4. The average was ($54,600-28,300)/502 = $52 (compared to $108 from all).

5. Of the 502 backers, 138 were friends and relatives. They contributed $12,121. That’s an average of $88. The median contribution from friends and family was $50 (compared to $20 from everyone).

6. Excluding the friends/family contributions, we got $14,014 from 361 backers, for an average of $39 – much closer to the $20 median.

7. Naturally, considering that this Kickstarter helped us survive, we are glad we did it. But if you are planning to run a crowdfunding campaign for marketing and outreach, keep in mind that it is far from trivial to pull this off. See my guide to crowdfunding here for a description of the required effort.

8. This is part 1 of a 2-part post. Next week, I will be sharing thoughts about crowdfunding for research (now published).

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