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There are plenty of Cinderella stories but also just as many cautionary tales out there. How to make yours the former, not the latter.
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When Retro Computers turned to Indiegogo for crowdfunding, it promised $100-level funders a handheld gaming device called the Vega+. With promises from the company that the device would come equipped with more than 1,000 games, the console quickly gained a following, and more than 3,600 people pledged $100 each to receive one.
The successful campaign gained U.K.-based Retro Computers more than half a million dollars.
But when the time came for those backers to receive the handheld devices, Retro Computers wasn't able to deliver. Legal battles and production issues caused hiccups. The promised September 2016 delivery came and went. Users began getting upset -- more and more publicly.
Finally, after unwanted media attention and, just this month, a lawsuit, Indiegogo intervened. The crowdfunding platform announced on June 6 that it was siccing debt collectors on Retro Computers in an effort to reimburse its donors.
Despite that tale of woe, entrepreneurs can't ignore the potential of crowdfunding. Kickstarter has hosted nearly 150,000 successful projects, raising $3.7 billion since 2009, and Indiegogo has raised more than $1.5 billion since 2008. Done correctly, crowdfunding could provide the perfect building block for your next venture.
Related: The Basics of Crowdfunding
The ups and downs of crowdfunding
Crowdfunding’s popularity is not all hype. It can yield benefits beyond financial backing, helping your company build a loyal customer base and establish credibility before you’ve even launched. But you can't just set up a Kickstarter page and watch the money roll in. The right strategy is essential to reap the rewards.
Pebble shows how it can and should be done. One of Kickstarter’s most successful campaigns of all time, the company raised more than $20 million from 78,000 backers -- exceeding its goal by 4,068 percent. Pebble turned that consumer confidence into more than 2 million sales of its smartwatch and was ultimately bought out by Fitbit.
But when it comes to crowdfunding, there's more to consider than whether your project will meet its fundraising goals. Even a successful campaign without serious forethought and planning can encounter challenges that will sink a business before it gets off the ground.
Coolest Cooler, on the other hand, might be one of the most disastrous campaigns in Kickstarter history. The company raised $13 million, but it wasn’t prepared to operate in the wake of such success. Coolest Cooler couldn’t fulfill rewards for its 62,642 backers.
Remember: It's not just about hitting the goal. Even in successfully funded projects, 9 percent fail to deliver on promises to backers. That's a hard hurdle to overcome in the beginning stages of any new business.
Related: Why Crowdfunding Leaves Other Growth Tactics in the Dust
Campaign mistakes to avoid
It's easy to think of crowdfunding as easy money, but campaigns should be hard work if you're doing them correctly. If you want to start your project on the right foot, avoid these common mistakes:
1. Kicking off without leads in place. Crowdfunding campaigns have short time lines. What's more, campaigns rely on a momentum of interest. You’re going to have difficulty hitting your goal if you don’t have leads in place ready to back your campaign on day one. Not gathering enough leads before launching is the problem partially to blame for nearly every failed project.
Set up a landing page ahead of time describing your product and promoting your upcoming project. Include a contest in which people can enter their email address for a chance to win your product. This will give you a list of already interested folks to reach out to the day you launch your campaign.
2. Ignoring Facebook for potential conversions. Platforms such as Kickstarter and Indiegogo have large audiences, but if you rely solely on the backers already there, you probably won’t hit your goal.
So, look elsewhere. Facebook advertising is one of the most cost-effective ways to reach a highly targeted group of people that is likely to convert.
Consider the PEEjamas Kickstarter campaign, which my company mounted. That project hit its $14,000 goal early on, but my company wanted to see how far we could go. Funding increased from around $26,000 when we started the ads, to $227,469 by the time the campaign closed. I highly recommend working with a team of Facebook Ads specialists who can make the most of your ad budget.
3. Failing to consider scale. You might have a goal in mind, but what happens if you exceed it? Is your business model scalable? Are you going to be able to fulfill rewards? Don't be Retro Computer or Coolest Cooler.
Make sure the price of each of your rewards is sufficient, whether you hit your goal exactly or raise more than you anticipate. Have a plan in place for shipping and fulfillment. Examine your profit margins closely as you set your funding goal, and determine product pricing. Consider factors such as minimum order quantities, manufacturing costs, marketing costs, platform fees, shipping costs and more.
One last thing to consider: Kickstarter and Indiegogo both have a 5 percent use fee and a 3 percent to 5 percent processing fee. Factor this into the goal you initially set.
Related: 4 Famous Crowdfunding Fails
Platforms such as Kickstarter and Indiegogo have broadened the horizons of startups and consumers alike, but getting the most value out of crowdfunding requires forethought and planning. There are plenty of Cinderella stories out there but also just as many cautionary tales. Avoid their mistakes to make the most of your fundraising endeavor.
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