Opinion | How the get the best outcome when pitching new ventures to crowdfunding backers
Testing reactions to your product first, doing your homework on pricing and being factual in product descriptions can help avoid potential failure
The growth of online crowdfunding has been phenomenal, and led by Malaysia and Singapore, online equity crowdfunding has also become legal in many parts of Southeast Asia.
Using Kickstarter as a yardstick for the growth of online crowdfunding platforms gives us a sense of the dramatic growth experienced by such platforms. Since its inception in 2009, projects listed on Kickstarter have raised US$3.3 billion. Over 133,000 projects have become successfully funded.
Based on such data many have claimed that crowdfunding can democratise product innovation and access to capital by allowing small entrepreneurs, who lack access to resources, find funding and markets. Indeed, the World Bank is upbeat. It estimates that the crowdfunding market will reach US$90 billion annually by 2025. That is roughly 1.8 times the size of the global venture capital industry today.
But, similar to the age old finding that most start-ups fail, most Kickstarter projects also fail to get funded; only some 36 per cent of projects make it. This success rate is not very different from what happens in the venture capital world. Research from CB Insights shows that just under 30 per cent of start-ups make it through the entire VC process and raise adequate funds.
One reason Kickstarter projects could be falling short of their funding goals may be how the ventures are pitching their projects.
In a recent research paper with co-authors Anirban Mukherjee of Singapore Management University, Cathy Yang of HEC Paris and Ping Xiao of University of Technology Sydney, we considered all Kickstarter projects concerning products since the platform’s launch in 2009 (excluding art and categories that accounted for less than 1 per cent of listed projects on Kickstarter).
These totalled 50,310 projects, and the paper examined how claiming that a project was innovative, i.e., novel and useful, affected the pledged amount. We found that projects increased their pledge amounts when sponsors described their projects as either novel or useful. But, surprisingly, claiming that a project was both novel and useful reduced the pledged amount by 26 per cent. In other words, claiming the project was innovative reduced funding.