Why the number of backers matters more than how much you raise

As crowdfunding has grown in popularity, a number of studies have set out to better understand what lies behind the most successful projects.  Indeed, UC Berkeley recently announced a new hub for crowdfunding research.

We’ve had a paper from UCL/Stony Brook that revealed the importance of early success in your crowdfunding.  A Georgia Tech study focused instead on the language you should use in your pitch, and revealed that having a community before you crowdfund is great, as is regular engagement with that community throughout your campaign.

Another study has looked at the kind of people that support projects, be they occasional investors or professionals.  It outlined a number of qualities that frequent backers look for in a project.  A recent study from North Carolina State University suggests that the very number of backers themselves is also a key measure of potential success of a project, and is more indicative than the overall sums raised.

“A lot of people initially see crowdfunding solely as a way to raise money – but, to me, it seemed like a way to learn and create a community that raises awareness of a product,” the authors say. “So, I wanted to know whether my perception was accurate. How important is the dialogue with crowdfunding backers? What aspects of a crowdfunding campaign contribute to a product’s later success in the market?”

Raising support

The researchers examined over 1,000 successful campaigns on Kickstarter, with the people behind each campaign contacted to learn more about both their experiences with crowdfunding, but also their subsequent market success.  Each project was contacted approximately 1.5 years after their campaign ended to give them time to mature their offering.

“The first key finding was that the amount of money a crowdfunding entrepreneur raised was inconsequential to their product’s ultimate success in the market,” the authors say. “We found that crowdfunders who raised a lot of money were no more likely than those who raised smaller amounts to meet their sales, profit or other financial goals when their products later hit the marketplace. Margins on pre-orders tend to be much smaller than crowdfunding entrepreneurs expect and delays are common. Pre-order revenue doesn’t generally translate into sizable enough margins for entrepreneurs to effectively leverage the proceeds of crowdfunding to the benefit of the product’s mainstream market launch – for instance, by increasing advertising spending.”

Indeed, in many instances, exceeding ones fundraising target had a detrimental impact upon their subsequent market performance.  The authors suggest it’s almost equivalent to the innovators dilemma, whereby early success discourages us from attempting to innovate in future.  What’s more, there is also a strong rush to fulfil pre-order demand, and this emphasis on the here and now prevents appropriate emphasis on the future.

All about numbers

The number of backers each project received was especially important to the long-term success of the project.  Whilst money is undoubtedly a crucial aspect of crowdfunding, the study suggests that it’s better to have your target split across more backers if possible, with projects that achieved this achieving better performance in the long-term.

In addition to providing financial support, backers would often act as evangelists for the project, helping to raise awareness for it via a range of media.  The backers would also be an invaluable source of feedback and support, and this constructive criticism provided crucial input into product development.

“Crowdfunding can be a powerful tool for enabling innovation,” the authors conclude. “But entrepreneurs need to better understand that crowdfunding is not merely a financial exercise, and that backers can play a significant role – beyond their wallets – in determining the later market success of their products.”

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