- Crowdfunding can provide access to capital for new business and products.
- Successful campaigns depend on developing consumer trust and reducing psychological distance.
- Brevity, locality, social network integration and playing within platform attributes for promotion are key to unlocking crowdfunding’s power.
If you’ve ever looked into raising capital for a new business or product, you’ll know it’s not easy.
It’s no surprise then that crowdfunding, a seemingly easier way of accessing capital, is often dubbed the next big investment trend. Seeking small monetary contributions from the 4.2 billion people on the internet eliminates several of the challenges and stressors associated with preparing a pitch for difficult-to-obtain VC success.1
By shifting power to the consumers, the crowdfunding industry not only provides access to financial capital but also allows entrepreneurs to access early adopters, free promotion and a chance to test the market appetite for their product.
of the crowd
Successful crowdfunding campaigns are not hard to come by and demonstrate the sheer power the crowd can possess.
In just 17 minutes, for example, the Pebble Time Kickstarter campaign reached its crowdfunding goal of US$500,000 and by the end of its run, had garnered US$20,338,986 from 78,471 backers to mass produce and distribute its smartwatch.2,3 The Oculus Rift VR Headset raised US$2,437,429 via crowdfunding, and gained so much notoriety that social media platform Facebook saw the sense in acquiring it.4,5
Such numbers suggest crowdfunding is a no-brainer when it comes to raising money. However, consumer behaviour research tells us that people are complex and risk-averse – they won’t just hand over their money to anyone. Crowdfunding campaigns need to convey credibility and legitimacy to be successful.
The ‘Construal level theory’ (to be technical for a short moment) explains how an individual’s psychological distance (how closely they see themselves being associated an object or event) can influence how they evaluate and respond to a campaign. It suggests that a greater psychological distance leads to a more abstract analysis of the campaign. As a result, this decreases the likelihood of individuals contributing as they fail to develop a thorough understanding of what the campaign is offering.
So how can entrepreneurs hack the consumer psyche for crowdfunding success?
1. Keep it short
Research shows that for crowdfunding campaigns, the majority of funds are collected in the first and last three days and most successful campaigns have a maximum duration of 30 days.6 A shorter campaign duration creates a sense of urgency, motivating potential backers to respond immediately instead of procrastinating and forgetting. This means that the audience is immediately drawn in and can closely evaluate the campaign’s value proposition. A longer duration can also imply a lack of confidence on the entrepreneur’s part and deter potential backers.
It’s highly likely that the nearest consumers will be the first to contribute to a crowdfunding campaign as the common background and cultural context conveys a likeness and familiarity which encourages trust and a belief that the campaign owner will deliver on their promises. In contrast, a greater geographical distance between potential backers and campaign owners can increase the ‘otherness’ of cultural stereotypes which can result in a greater sense of perceived risk.
Therefore, campaigns should capitalise on perceptions of familiarity and target local crowds first. With over 1000 crowdfunding platforms currently in existence – from large mainstays such as Kickstarter and Indiegogo, to lesser known niche platforms such as Fundable and PledgeMusic – researching user bases to understand their reach is key to choosing a platform.7
3. Don’t underestimate the power
of social networks
Herd mentality is a real thing. People trust their friends and their judgement, including when it comes to what campaigns they support. To leverage this, it’s important to choose platforms that have built in social media capabilities. If peers see that ‘234 friends have backed this campaign’, there’s a very high possibility that they will also contribute. Campaigners should encourage existing backers to share the campaign with peers, as well as reach out to their own friends and family for a boost in reach.
Transparency is also important. Concealing information about the product owner makes it harder for a potential backer to establish a personal connection with the campaign, and consequently to build the trust necessary to contribute.
4. Get the
A campaign that has received $0 in funding makes people question (and assume answers) as to why. Putting some initial funding into a campaign can help address such concerns. Alternatively, sharing the campaign with select members of the community prior to launch with an ‘early bird’ reward can also incentivize contributions and get things going.
Crowdfunding provides potential backers with real time feedback on how a campaign is tracking. The more money a campaign raises, the closer it is to its goals and the greater chance that a backers contribution will provide them with a return – increasing their probability of contributing.
Additionally, given the way search and sort algorithms have been designed on most crowdfunding platforms, ‘most popular’, ’most backed’ and ‘most funded’ campaigns are significantly easier to find. Therefore, marketing a campaign will increase its visibility and the amount of funding received.
Overall, crowdfunding campaigns need to provide enough information for potential backers to develop a clear understanding of the their purpose. Regular updates remind consumers that a product is genuine, that their contributions are valued and that they are making a difference.
While crowdfunding isn’t for every product, or every business, it provides a unique, and perhaps even more democratic way to unlock innovation than traditional routes. For that reason, among many others, it is worth investigating.