Set your goals too high and you may not get funded. Set them too low, and you're likely to get less than you need.
With crowdfunding projects, either you get funded or you don't.
And with some recent projects like smart-watch maker Pebble and the smart-phone creator Ubunutu cracking $10 million on Kickstarter and Indiegogo campaigns, it's tempting to get carried away. On the other hand, you don’t want to set funding goals too low either. So what's a startup to do?
Entrepreneur Sam Beck has studied the process in some detail. Beck created the super-capacitor, bluetooth speaker system called Helium and successfully funded it on Crowdsupply, gathering $36,000 as of Thursday when the investing period ended.
1. Decide how much you need at minimum. Beck wanted to cover the launch cost of his first product, which he knew would be about $8,000. But he also knew he'd need more funding than that to continue operations.
2. Use data to set a ballpark goal. Beck used a graphic model created by visualization graphics company 4 First Names, which modeled data from all Kickstarter campaigns. Beck was able to look at similar companies with technology and product design projects that had successfully raised at least $2,000 on the crowdsourcing platform.
Beck then found that 45% of projects with financial targets of between $25,000 and $35,000 were successful, compared to 35% of those with goals between $36,000 and $50,000.
3. Consider success rates of projects in your industry. Drilling down further into market data, Beck discovered only 21% of audio projects seeking more than $30,000 got funded. So Beck settled on $30,000, believing his idea was in the top quintile.
4. Survey potential investors on product price points. Beck found for his product, $300 was the sweet spot, and that demand declined about 30% for every $50 increase.
5. Find your break-even number. Beck also built a model for pricing that would allow him to break even with his funding goal, pushing price discounts early rather than late. In that way he was able to create a sense of urgency as well as anticipation, convincing people they were getting a good deal.
But remember, crowdfunding is in its early stages, and nothing is written in stone.
By way of comparison, crowdfunding is pretty different from the way venture capital funding works, says David Zilberman, partner at Comcast Ventures, Comcast Corp.'s venture capital firm in San Francisco, Calif.
"[Venture funding] is about setting achievable interim goals that 'de-risk' the venture at each plateau," Zilberman says, adding that's why venture-funded companies raise money in increments, rather than all at once.
In the VC world, early investors are willing to take on more risk for a higher return, which is backwards from the way Beck structured things. Essentially later investors were asked to take equivalent risk for investing later in Helium, Zilberman says.
"The entrepreneur in this example didn’t take investor risk tolerance sufficiently into consideration and solely bet on scarcity to incent follow-on investment," Zilberman says.
In other words, later investors might be attracted to your offering through discounts or some other benefit too.