Design driven startups are one of the most attractive ways to raise funds through crowdfunding today. The only problem with this is the fact that backers have a finite amount of resources to contribute. Some projects can achieve millions of dollars in crowdfunding, yet the average funding amount is $7,500. Why is this?
It all boils down to what is called the Power Law. The top percentile projects on every platform will secure most of the pledges. Other campaigns will also gain pledges, but not of the same value or level as the others.
Why Focus on Crowdfunding?
Even with the Power Law in place, there is no denying the fact that crowdfunding can be an effective way to test a concept. Pre-orders are often taken on Kickstarter and similar sites as a way to offer “rewards” to backers. These orders help to finance the first push of products from the start-up and then the process can continue to repeat.
That’s assuming there is no progression in the concepts being offered by companies that have multiple crowdfunding campaigns. When a concept is successful on Kickstarter, Angel investors typically approach the organization or venture capitalists get involved. This gives a startup extra sources of cash it needs to have a full brand launch instead of a single product launch.
Strategy Is An Important Concept
Many entrepreneurs and start-ups rely on their innovation and ingenuity to gain a share of the market and that is a mistake. Pledge behavior is influenced not by goals and amounts, but by the marketing that brings them to a campaign in the first place. Setting goals that are realistic is always important, but showing off the value of a product or idea in a tangible way gives every backer something to think about.
Coolest is the best example of this. They cleared $100k on their first crowdfunding campaign. On their second, they raised $13 million. Why? Because the product was featured and marketed to specific customer segments who could see the value in it.
Crowdfunding brings concepts that can be developed without much risk. Valuation brings backers and VCs. Some ideas can help a company become publicly traded. This makes it the ultimate win for everyone involved.
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