In her book Cash From the Crowd, Sally Outlaw, founder and CEO of crowdfunding website peerbackers reveals the secrets of funding your business with help from colleagues, peers, family, friends and even perfect strangers through a crowdfunding campaign. In this edited excerpt, the author offers tips on deciding exactly how much money you should try to raise.
Many "successful" crowdfunding projects ultimately fail because owners realize that the funding they sought wasn't enough to cover their expenses. These entrepreneurs may have reached, and even surpassed their goal, but they didn't anticipate the high costs of creating or shipping their rewards. As a result, they lost money or simply couldn't complete their reward fulfillment. When setting your goal, keep in mind that the risk of not being able to deliver to backers is more important than the risk of not hitting your goal.
You'll need more money than you think to ensure that all the ancillary costs of executing your project are covered. When budgeting for the product you're trying to create, keep it as simple as possible without losing the usefulness of your idea. You can then add extra features and functionalities via "stretch goals" in your campaign.
One issue on the radar at the time of this writing is the online sales tax bill, which would allow states to tax online purchases. If this bill, which has already passed the Senate, passes the House and is signed into law, those who are crowdfunding and offering pre-sales of products may have to charge and collect sales tax as a function of their crowdfunding campaigns. Keep an eye on this.
Okay, so there's some basic math here. You'll need to determine:
- Actual, fixed cost of executing your project (whether producing a product, building a website, or renting a store front).
- Costs of creating your rewards.
- Costs of shipping your rewards. Don't forget shipping supplies such as padded envelopes, boxes, bubble wrap and tape. Be sure to include an additional shipping fee in your pledge levels for international backers.
- Advertising costs, such as pay-per-click or press release distribution.
- Crowdfunding platform and payment processing fees, which can be 10 percent or more of your funding. Note that some websites like Indiegogo and RocketHub charge twice as much for campaigns that don't reach their goals -- 9 and 8 percent, respectively -- as opposed to 4 percent if you do. Because the majority of campaigns don't succeed, you may want to err on the high side when pre-calculating your costs.
- Consider building in the costs of hiring a campaign consultant, a PR company or creatives such as designers and a video producer to help make the strongest presentation possible.
Lay out a spreadsheet in which you calculate the revenues and costs associated with the implementation of your project. You'll need to break down each reward level you're offering (perk cost plus shipping), along with the estimated number of each item you anticipate will be supplied (based on the number of people in your network you think will back you at each pledge level), so you can see what your campaign will generate. Then subtract all your out-of-pocket costs. Will this net amount be enough to execute on your business idea?
Another calculation to compute is the per-day amount you'll have to raise to reach your goal. If your 30-day goal is $30,000, then you must attract $1,000 a day on average to reach that goal. Ask yourself if you have the network in place to generate this level of support.
If you fear your goal is too large for your network to cover, you can consider raising what you need in phases. You can break down your goal into two funding cycles, for instance, and try running two separate campaigns (with some time in between, of course, not simultaneously). Although you may not have the intestinal fortitude or time to pursue two campaigns, there may be a benefit in following up a smaller, initial campaign that's successful with another one rather than running one large campaign that risks not meeting its goal.
There are two problems with setting your funding goal too high:
- If you're running a "fixed funding" campaign, in which you don't receive any money unless you reach your goal, then you risk investing months of work and walking away without any capital.
- It can turn off backers, as they either sense greed or don't believe you'll actually reach the goal (backers like to see that progress bar move and know that they helped get you to the finish line).
Many campaign owners set their goal at the minimum they've calculated they'll need to execute, and then in the text of their project page outline the "stretch goals" mentioned above. This way, they can inform backers of all the wonderful things they can accomplish if they exceed their goal -- install a coveted piece of equipment in their food truck, for instance -- yet there's a level of confidence that they can execute without having to reach a huge goal.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Sally Outlaw, a crowdfund junkie, is the co-founder and CEO of fundraising platform peerbackers.com and crowdfunding media company Crowdcast Network. She's the author of Cash From the Crowd (Entrepreneur Press, 2013) and speaks nationally on the topic of crowdfinance and the JOBS Act.