“Hey look, there’s this place here where we just create a cool page and we get free money!” Says still way too many entrepreneurs, just before they find themselves stuck in a trap they don’t know how they got into and don’t know how to get out of. Some call it the Crowdfunding Trap (news site in Swedish).
Dismantling the crowdfunding trap takes some careful investigation of its mechanics. In this post, we’ll check out the deceptive part that makes a trap a trap: the bait. In a later post, we’ll examine the spring and the hammer and look at what makes the trap snap. And most importantly, how to avoid getting stuck in it.
I co-founded Narrative in 2012, then under the name Memoto. In October the same year, we went on Kickstarter and ended up raising $550,000, which meant our campaign became one of the most successful hardware campaigns on Kickstarter up until then. Four years later, with 30,000 units shipped and additional millions of dollars raised from VCs and angels, the company filed for bankruptcy.
There’s plenty to say about Narrative’s rise and fall, but that’s for another time. For the context of the crowdfunding trap, it suffices to say Narrative’s demise was not directly caused of the Kickstarter campaign. If anything, the campaign helped Narrative achieve further success with sales, marketing, production, shipping, recruitment, fundraising and much more. However, I believe my experiences from what it was like running a company on the back of a successful crowdfunding campaign can help shine some light on the alleged “Crowdfunding Trap”.
Fake Baits and Real Cheese
Running a crowdfunding campaign does have some potential positive effects. Some are indisputably and truly beneficial (as long as you don’t get stuck in that trap, in which case you’re done anyway). Some are more like mirages than true positive effect. Baits of fake cheese in the trap, if you will. They don’t hold any true value even if you avoid the trap itself.
Real Cheese: The Truly Good Stuff in the Trap
Let’s start with a look at the real advantages:
A crowdfunding campaign can make your team really pull together towards a common goal. It can help implementing a focus on shipping in the company’s culture in a way that are oftentimes hard to create in tech-driven startups.
Successful crowdfunding campaigns look good. They look good to future investors (although not as good in 2016 as it used to do in 2012), they look good to future recruits, they look good to future customers. A success on Kickstarter or Indiegogo means you have one more badge on your chest, that help you stand out in the competition.
Not to say a crowdfunding campaign is not for real. Your backers are real, their money is real, the product you put out to them better be real. But at the same time, your room for mistakes is bigger than when you’re out in the cruel world of retailers, investors and customers at scales many magnitudes larger than what a crowdfunding campaign typically brings. Taking the opportunity to tune your product development, engineering processes and communication messaging through a crowdfunding campaign can turn out to be crucial for the future of your company.
Fake Baits: Sounds Good, Doesn’t Work
By contrast, here’s what looks like advantages but are in fact just baits of fake cheese in the trap:
No, a “successful” reward-based crowdfunding such as Kickstarter and Indiegogo, does not necessarily translate in to a net cash gain. First, you have the costs to set up and run the campaign (video production, content creation, marketing). Then you have the fees from the platform and the payment providers. And then you have to, you know, build and ship the product. Even a healthy budget that made sure you priced your pledges with some margin to cover production costs can crumble if/when your production gets delayed and you have to pay yourself out of trouble.
Kickstarter is not a market. It’s a website for people who like to spend money on new stuff. Two thousand backers on Indiegogo is not a market validation. It’s a sign, a hint, that you’re maybe, possible, on to something that maybe, possibly can have a market similar to the audience on that website. For true market validation, your product needs to prove itself with a larger and much more diverse audience over a longer period of time.
The engagement on the larger crowdfunding platforms is amazing. Backers are typically vocal, honest and intelligent about how they would recommend you to further improve the product they are backing. This is super useful, as long as your total addressable market perfectly overlaps that of Kickstarter’s audience. But from the previous discussion of the limited diversity of the crowdfunding platforms’ audiences also follows that the feedback you’ll get there tends to be somewhat one-sided. The backers’ tastes and preferences probably differ from your larger outside-of-crowdfunding audience, and blindly following their advice is a risky strategy. So risky that, fully executed, it will make that trap snap on your back and crush you.
Grabbing the Good Stuff, Avoiding the Trap
Apparently, some baits are worth taking the risk of getting stuck in the trap. Ideally though, you wouldn’t want to get stuck at all. In a later post, we will take a deeper look at this fundamental question: what makes the trap Snap?