The Next 36’s Chris Grouchy recently took to the Financial Post to drop a bit of knowledge about how crowdfunding projects can achieve greater success.
Grouchy offered some tips for success based on the “economics of crowdfunding,” after watching a June lecture from Christian Catalini, assistant professor of MIT’s Sloan School of Management.
1. Presales Win: More than 86 percent of the funding raised from the Oculus Rift campaign came from people who ordered the product, and that seemed to be the linking tie among other highly successful crowdfunding wins like Oculus Rift, Pebble, and more recently the Vanhawks Valour.
“Allowing pre-orders has obvious benefits, but leaves the impression that donations are not driving the success of rewards-based crowdfunding. But crowdfunding allows founders to create a community of early-adopters and presales are a metric to gauge interest in your product before it hits the market, as well as providing the all-important word-of-mouth marketing.”
2. Hot projects attract a larger crowd: At first, mostly family and peers are supporting projects, but that changes as the project attracts more dollars. “The crowdfunding culture is about winning and hopping on projects that will win — and win big. Our propensity to back a project increases the more funds that a project has already accumulated, Prof. Catalini said. In practical terms, the closer a project is to reaching its goal, the more capital will be received.”
3. Information Disclosure: Time and time again we cover successful and not-so-successful crowdfunding projects, and a lack of transparency or a lack of information is usually a red flag resulting in less backers or more inquiries that fill up the comment section (which generally isn’t always positive).
However, Catalini and Grouchy both argue that too much information actually might not be a good thing. “One of the major disincentives of crowdfunding is that competition in your space will immediately be able to identify your market strategy and value propositions before you even enter.”
4. Changes in the VC Landscape: “A commonly known piece of value provided by angel investors and VCs is that they can provide advice to the entrepreneurs they fund. However, this isn’t possible or always relevant when an entrepreneur seeks funding through crowdfunding platforms,” wrote Grouchy. “Prof. Catalini makes the argument that many “crowdfunders” may not be the best advisors for infant startups, whereas VC firms can leverage their expertise to help their portfolio of companies succeed.”
5. Yes to Unauthenticated Startups: “Not all companies should turn to crowdfunding, though it may seem tempting, especially when founders can receive capital without compromising equity. However, it may not be necessary, depending on the market validation and growth of your venture.
Democratizing a funding process to allow talent to reach its true potential has fundamentally altered the entrepreneurial landscape, and crowdfunding will continue to engage the public on the next breakthroughs in tech.”