Herzlich writes the Small Business column in Newsday.
There may not be one magic bullet that can ensure crowdfunding success, but new research points to three key factors that can improve an entrepreneur’s odds.
According to researchers at the University at Buffalo School of Management, the use of media such as photos and videos, previous crowdfunding success, and positive comments from backers can increase the chances of a project reaching its funding goal.
These factors can work together to quell backers’ concerns and convince them to donate.
They help overcome a key challenge — the “information asymmetry” between the project founder and the crowd of potential backers, explains Yong Li, study co-author and associate professor of strategy and entrepreneurship at the UB School of Management. Potential backers don’t have as much information as the project founder about the quality of the project and the credibility of the founder to deliver the promised reward, he says.
That’s why factors such as photos and videos that help explain the project, and positive comments from other backers that point to the entrepreneur’s credibility, can contribute to success, says Li, who along with UB colleagues Supradeep Dutta and Christopher Courtney, analyzed a sample of more than 170,000 Kickstarter projects.
Video helped her hit goal
Kristen Rounsley, owner of Amityville-based Elegant Eats Food Truck, thinks at least one of those factors, a video she had professionally made for her Kickstarter campaign, helped.
She successfully raised her goal of $22,500 in April 2014 to purchase equipment for her “healthy gourmet” truck.
“In the grand scheme of things, the money I had to foot for the videographer was pennies because the campaign was successful,” says Rounsley, who operates her truck at private parties, events and fairs.
On rewards-based sites like Kickstarter, a large number of backers generally give small donations in exchange for a reward such as a T-shirt. Campaigns are all or nothing, so if you don’t reach your goal by the deadline, you don’t keep any money.
Starting May 16, entrepreneurs will have an additional avenue to raise money. They’ll be able to solicit up to $1 million a year in investments from the public through online funding portals. Participants in these new equity crowdfunding platforms will own an equity stake in the companies they invest in, says Alon Kapen, partner in charge of the emerging companies and venture capital practice group at Farrell Fritz PC in Uniondale.
While the University at Buffalo’s researchers looked at Kickstarter, the three success factors they identified could potentially apply to equity-based sites as well, if an information asymmetry exists between the potential backer and project founders, says Li.
Kapen, though, thinks those factors come into play more in donation/reward crowdfunding.
Disclosure rules for equity
In order to raise money on equity crowdfunding portals, entrepreneurs will have to follow specific disclosure obligations mandated by the Securities and Exchange Commission, he says, making it less likely that potential investors will lack information about a project they’re considering.
Still, Kapen feels the common link between non-equity and equity campaigns is the impact of discussion forums, such as chat rooms, and the continuous “presence of the crowd,” which both share.
This lets backers and prospective backers interact with each other and the company, making it harder for those raising funds to commit fraud, he says.
Lee Kaplan, one of the owners of Farmingdale-based Lithology Brewing Co., which raised $36,335 — above its $35,000 goal — last April on Kickstarter, said the campaign was boosted by feedback from supporters on social media.
“We’d post the link and video to Instagram and Facebook and would have a lot of comments there,” he says.
In addition to using social media during your campaign, soliciting feedback before you start can increase your odds, says Roy Morejon, president of Command Partners, a Charlotte, North Carolina, agency specializing in crowdfunding startups. Find out if this is something people “truly want and need,” he says.