Crowdfunding – supplying more than just funds
The main motivation for using crowdfunding is the access to funds from the community. Certain projects may be unable to access traditional sources for various reasons – institutional investors may doubt a project’s success, the size of the market may seem too small or the creators may not have an appropriate track record. In inviting communities to act as gatekeepers, crowdfunding effectively allows the free market to regulate project survival.
In addition, crowdfunding fulfills other functions that may be useful for creators. In the words of Richard Branson, founder of Virgin Group, it provides a connection to people by insuring “market validation, access to new investors, promotion, community exposure and real-time feedback.” Businesses can use community interest as a metric to gauge market response. A project that is unable to achieve funding may indicate failure and thus save creators the time and effort they might otherwise have invested in the project.
Even established companies have used crowdfunding to test the demand for or appeal of new products. It enables creators to engage with communities and to listen to their feedback throughout the entire development process.
Crowdfunding – success or failure?
Crowdfunding is able to help projects that would otherwise have fallen through the cracks, and there are many success stories. In 2012, for instance, Eric Migicovsky crowdfunded his idea of a smart watch, called Pebble Watch, after being rejected by venture capitalists who considered his idea too risky. He set up his project on Kickstarter, and the community rallied behind him. At the end of the crowdfunding period, the project raised US$10,266,845 from 68,929 backers, exceeding its funding goal of US$100,000 by more than a hundred times. Following that, the company has earned US$60 million in revenue just in their first year. Pebble Watch has since gone on to create two other crowdfunding campaigns – a new smartwatch raised over US$20 million from 78,471 backers in 2015, and a heart rate–enabled smartwatch raised over US$12 million from 66,673 backers in 2016.
However, these impressive cases of success are in the minority. On average, success rates for crowdfunding have been moderately low. Kickstarter, the most popular crowdfunding site, has a success rate of 35 %, with certain categories such as technology garnering only 20 %. As a huge majority of projects fail, it is important to learn from success stories. Crowdfunding is by no means easy. It is necessary to manage the expectations of diverse stakeholders during the whole funding and development process. All may affect the success of a venture. Disappointing the community can result in a huge fallout that may adversely affect the business. Box 1 lists important success factors.