There are lots of kinds of crowdfunding–starting with asking for donations to selling stock in your company. Clearly asking for donations is going to result in a lot less money than offering a discount for pre-ordering a product or selling shares of stock.
There are a lot of sources of information on the success rates of crowdfunding, and much of it aggregates a huge number of campaigns across a broad range of approaches. These tell you that somewhere between 25% and 40% of campaigns are “successful”–meaning they raised money, maybe not as much as expected, but something. And that is a pretty good success rate. The average raise in this aggregation is about $7,000.
You might ask why do people bother for so little money? Because these statistics cover up the important details. The vast majority of crowdfunding campaigns are asking for donations–for a big birthday party, for someone’s surgery, to buy desks for schools in Africa, for paying expenses for a school band to travel to a contest. These typically raise only a few thousand dollars at most. They don’t reveal what happens when one uses crowdfunding for business.
Results for businesses are better than those averages. Donation-only campaigns for business are a little tricky because one will need to establish a pretty compelling story about giving money to a business for next to nothing in return. Sometimes it is for a small reward like a shirt or coffee mug. Sometimes it is linked to raising money for installing a product to benefit someone in need. Sometimes it is a promise of a discount on the eventual product if and when it is finished. In these circumstances it is possible to raise over $10,000 routinely, and $25,000+ is clearly possible. The better the reward, the higher the amount raised.
Selling shares is even a more compelling reason to write a check, but can entangle one in a lot of requirements for reporting, disclosure, and limitations on the number and kind of investors from which money can be accepted. It also requires a lot of work to make a compelling case. But in these cases raising $1-5 million is common for successful campaigns. The failure rate for these offerings is also higher than for the simpler donation campaigns.
Compared to the success rate of trying to win a prize of $50-100,000 in a business plan competition, or looking for money from venture capitalists, crowdfunding can be a much better source of capital for a business. That’s why people bother. It is something that they feel is more under their control and has a better chance of success. Crowdfunding also tends to focus a start-up on making the case to customers more than just to investors, something that could be much more important to long-term success.
To learn more, please come to our June 20 class “Is Crowdfunding Right for Your Tech Start Up?”
ABOUT THE AUTHOR Gary Simon is the Chair of CleanStarts Board. A seasoned energy executive and entrepreneur with 45 years of experience in business, government, and non-profits.