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Why Most Entrepreneurs Fail at Crowdfunding

The co-founders were excited. They had read online to succeed in crowdfunding, they needed both a great product and a great campaign video. Check and check. Their product was truly unique; there was nothing like it on the market. Their campaign video was upbeat and showcased the product perfectly. To attract backers, they handed out glossy promo cards on Venice Beach’s boardwalk and lined up a celebrity friend with millions of followers to tweet out their campaign. In their mind, everything was set to succeed.

Instead, the glossy cards they handed out ended up in the trash. The celebrity tweeted to his 2 million followers on the third day of the campaign, which turned out to be the lowest contribution day that week. And in the end, the Kickstarter project failed, raising only 60 percent of its funding goal, which meant the founders got nothing.

This is a real story -- and if you’ve ever used rewards-based crowdfunding and failed, it might ring a bell.

“You need to find the people who want your product and then launch it to them, not launch it and hope people will find it. Crowdfunding projects get funded before they launch, not while they’re live.”

Enter Clay Hebert, Founder of Crowdfunding Hacks, an online resource guide that helps entrepreneurs run rewards-based campaigns. Hebert, who has helped over 150 entrepreneurs raise over $50 million, is no stranger to understanding why situations like the above occur. While it seems like everyone is crowdfunding now -- from celebrities to successful startups to ordinary people -- the reality is that most campaigns fail. According to Hebert, these are the biggest reasons why:

Not Identifying Your Target Market

“Most people think they need more traffic, they get seduced by the media covering big campaigns, but what they really need is better conversion,” explains Hebert. Rather than trying to sell to the whole world, it's necessary to create what he calls a “subtribe.”

Take the example of a campaign Hebert worked on for Lee Miller, owner of Kittyo, a connected device that allows you to see and play with your cat while you're not home. Miller found Hauspanther, which describes itself as “the premier online magazine for design-conscious cat people.” Its readers were exactly the type of people who would want Kittyo. Following Hebert's guidance, Miller offered a giveaway on the site, and in a single weekend collected over 2,000 emails from cat lovers interested in Kittyo. Around this same time, Whoopi Goldberg heard about Kittyo and mentioned it on her show “The View,” which garners 2.5 million viewers per episode, more than 100 times the reach of Hauspanther.

The Kittyo Kickstarter campaign hit its funding goal in 36 minutes, was 200 percent funded on the first day and ended up raising over $270,000. But far more backers came from the Hauspanther promotion than from “The View— proof that focusing on what Hebert calls “cash press,” where the smaller, more targeted blogs convert better than “flash press,” or the flashy, big-name press outlets that reach more people, but rarely convert to backers.

Not Bringing Your Own People to the Party

Thinking there is a crowd waiting to back your campaign is huge misconception. “People slap projects up on these platforms and hope to get funded. That’s just not the way crowdfunding works,” says Hebert. “You need to bring the first 30-40 percent of people to the party.”

You can achieve this through smart pre-launch marketing and building permission ahead of time, often through an email list, as Miller did through Hauspanther and other outlets. Those first backers share it with people they know, which usually brings another 20-30 percent. Only then should you count on the platform to bring your remaining backers. “If your campaign is 60-70 percent funded with two weeks to go, you’ll almost surely get funded,” says Hebert.

Pricing Your Rewards Too High

When rewards are priced too high, conversion will be low. “For example, an e-book by an established author on Amazon typically costs $9.99, with the latest book from popular authors like Malcolm Gladwell fetching $12.99,” says Hebert. “But creators often conflate rewards-based crowdfunding with donations-based crowdfunding. New authors might ask for $20 for their digital book, yet none of them are twice as good as the $9.99 book, let alone Malcolm Gladwell, so why ask for $20?”

You can't expect strangers to pay more than market value for something that has no guarantee. “There's a certain amount of fulfillment risk when it comes to crowdfunding,” explains Hebert. People don't know if the product will ever come. It could be late, or it could be something other than expected. “You need to compensate the backers for the fulfillment risk by giving them a deal and pricing your rewards below MSRP.”

The global crowdfunding industry will likely account for more funding than venture capital this year, according to a recent study from Massolution. As the industry gets noisier, the real winners of crowdfunding will be those who approach it with smart strategies, patience and planning. Are you marketing, pricing accordingly, and, as Hebert says, finding those who will say, when they see your product, “Whoa, where have you been all my life?”

If you want to learn more, Clay Hebert offers 10-day crowdfunding course at FreeCrowdfundingCourse.com.

 

This feature originally appeared in our Winter 2016 issue of YEC Quarterly, our print magazine for YEC members. If you’re a YEC member, feel free to download all previous issues of YEC Quarterly here.