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.
Why might this be so, particularly on a platform designed to raise funds for innovative projects, i.e., projects that by definition are supposed to be both novel and useful? We concluded that there could be a few reasons behind this:
First, it could be due to credibility, as prospective backers may think that a project claiming to be both novel and useful sounds too good to be true, and may just dismiss it as exaggerated. Most of us have had the experience of purchasing a product that did not perform as it was supposed to.
Second, risk aversion could be a factor. Assuming that the crowd or prospective backers believe in the project, they may take steps to mitigate risks if they feel that execution of the innovative project carries some potential risk of failure.
And the third reason could be that potential backers may feel that a highly inventive product may be polarising. Once they think that the crowd could be spilt into believers and sceptics on a fundraising project, they will find it hard to pick a side and hence hesitate in making a decision, impeding its funding momentum. A couple of examples are the very first mobile phones and microwave ovens – being novel and useful, they took decades to gain popularity.
Convincing others to buy into it requires us to revisit the fundamentals of marketing when pitching a new venture, either to an investor or the crowd. To narrow the gap in perceptions and risk, one might consider the following tips:
1. Test how the crowd views your product before it goes public to gain a greater understanding of how they view it. Today this does not have to cost an arm and a leg. A project sponsor could crowdsource an opinion of their project through platforms like Amazon Mechanical Turk for a few hundred dollars.
2. Pricing is another difficult issue as research shows that owners (read project sponsors here) on average want a higher price for any given product than potential buyers are willing to pay. Thus, using crowdsourcing to get a good handle on what backers may be willing to pay is crucial. When all is said and done, success rests on asking for what consumers are willing to pay for the proposed product.
3. Focus on facts, i.e., on product attributes/benefits, to overcome the idea that the product’s benefits could be inflated by an overambitious start-up founder. Here it is important to focus on search attributes. That is, attributes for which a customer is able to find out without actually buying the product. For example, if you are selling a washing machine, you can explain its size dimensions, or its noise level in decibels that have been tested and certified and therefore can be shared as fact for the consumer to consider.
Ultimately, start-up founders have to be able to demonstrate value and diminish the gap in risk perception by sticking close to facts and making it clear what your backers are going to get.
Amitava Chattopadhyay is the GlaxoSmithKline chaired professor of corporate innovation and professor of marketing at INSEAD