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The myth of crowdfunding

200-indiegogoIf you're an entrepreneur, even a wantrepreneur, chances are someone has told you at some point to "do a kickstarter." I hear this so often that if each of those people had just contributed $20 to my cause, I wouldn't have to raise funds at all.

I have tried crowd-funding a couple of times, and am about to make my third attempt, so it's worth taking a look at this whole business - starting with the observation that none of those helpful people telling me how to raise money has ever actually done it.

There are two and a half thousand names on my personal contact list, but I have never been asked to contribute to a single campaign on kickstarter, indiegogo, or any of the many similar sites. Everyone talks about it, everyone tells me about things they've seen or backed, I know plenty of people who were "going to try crowd-funding" at some point, but but nobody has ever asked me to back something they made. Nobody I know has ever written to me and asked me to support their project. So why is everyone so sure it's a great idea?

300-cloud 65-crowd-fundingI'm going to risk making myself unpopular here by saying publicly that I think the concept is over-hyped. We've all heard of campaigns raising millions of dollars. They're the ones that get the publicity, the ones we all hear about, but they're not representative of what really happens to most of us. Over half of them fail to get anywhere at all.

There is no community of philanthropists and early adopters eagerly seeking good causes to donate to, there's just your own network and your own efforts.

Most of the successful campaigns are basically pre-selling a product they haven't produced yet, running an online store with no stock.

The crowd-funding sites function as a platform you can use to collect the money, but often get in the way of effective marketing, as well as adding an extra layer of fees and hassle to eat into your precious budget! The idea that crowdfunding enables you to magically raise money from strangers is a con, a myth that the entrepreneur community buys into because it's easier than thinking.

Let's start with the basic premise as invented by Kickstarter: You describe your project, offer some rewards or incentives, and then the world gives you money. The crowd-funding site lets you use their platform, giving you access to their community of eager investor/buyers. Then you use the money to complete your thing and provide whatever incentives your backers have signed up for, minus a small fee for the site hosting your project. It all sounds great, with lots of trendy anti-establishment buzz about alternative economies and democratisation of capital, what's not to like?

actnow-190I jumped straight onto this concept back in 2010, when Kickstarter was still in beta mode, and immediately ran into a few problems with the way they do things: you had to be in the right country, and needed their approval.

At that time, there was no viable alternative that I knew about, so I did what entrepreneurs do. I improvised. I simply made a webpage with a built-in shopping cart. I wrote it up as if it was a Kickstarter project, created incentives instead of products, and wrote to all my friends. Amazingly, some of them actually pressed the red button and sent me some money. I even received US$100 from a complete stranger who heard about me from a friend. It worked! I didn't need Kickstarter anyway.

Last year, I decided to try another project, this time using the IndieGoGo website. They don't curate the projects, anyone worldwide is free to post anything, and their fees were slightly more attractive than Kickstarter's too. So I spent the time and energy to create my project page, wrote to all my friends ... and not much happened. I got about the same level of response as with my home-made effort a few years before, but I didn't get any additional benefit from using a crowd-funding platform. No random stranger said "oh, this is a great project, I'll put some money in," even though some of my friends did. But this time I had to pay IndieGoGo their fees too.

200mouse-trapAnd the reason for this is very simple - crowdfunding websites don't do your marketing for you. As I said already, there is no community of philanthropists and early adopters eagerly seeking good causes to donate to, there's just your own network, your own efforts. If you want to be on the front page of their website, if you want them to mention you in their marketing newsletters, you have to be already successful. If you attract a lot of attention, raise a lot of money, they will tell people about you. But if you're not truly exceptional, then you are going to fall flat on your face.

Maybe this is why nobody I know ever does it?

So here's something positive about crowdfunding: being on a known site can help you a little bit by "validating" your project. People will see it and be more inclined to believe your message just because they've heard of the brand. They trust the payment process, etc. And they feel comfortable telling their friends. You can use it to build your own brand, even if you don't raise any money.

But it's still up to you make people look and to tell them a story that they want to share. You still need to do a hell of a lot of marketing. You must already know a lot of people, be able to tell them a compelling story, and offer them exciting incentives.

RSA Fellowship logoHaving said all this negative stuff, I'm planning a Kickstarter campaign in the near future! I'm doing it because the RSA is supporting me and will tell their ~30,000 followers about me. I need their help with marketing myself, and they want me to use Kickstarter. It's a fair deal for me, although I wish I didn't have to pay all those fees to a site that doesn't do a lot for me.

And as this is all about effective marketing, let's remind ourselves of a universal truth ...

As an entrepreneur, you probably know that your marketing message needs to be continually tested and improved. For an important campaign, you will experiment with different landing pages, different sales funnels, to maximise your effectiveness. Maybe you want to tell your story in a different way to different kinds of people? One landing page for students, some other message for engineers, a different focus for your friends who want to change the world. One of the great gifts of the internet revolution is that marketing can be personalised. (Another is that anyone can create their own site, you don't have to use someone else's service.)

But if you're using a crowd-funding site, you get one shot! You have to create one message, one video, a limited range of incentives and deals. In short, you have no control over your own sales process. You can't test and iterate, respond to feedback from the market as you go. You can only fail and start a new campaign in the future. This goes against everything we know about how to build a business!

If this article is too serious for you, here's a video of Nikola Tesla pitching VCs and being asked repeatedly if he has "done a kickstarter." I think the point is that glibly telling people to do this is the lazy way out.

Update: The RSA crowdfunding failed, because a) they insisted I use Kickstarter and Kickstarter didn't like my project, b) to use Kickstarter it is still necessary to be in the wrong country and so I had to use IndieGoGo instead, and c) the RSA then didn't tell anyone about it. IGG gives you a control panel where you can see where the traffic to your project comes from. As usual, it all came from my own efforts. I did raise some money, but if I had put the same amount of time and eergy into flipping burgers in a fast-food store, I would have earned more - with a lot less stress.