By Jesse Jones
As you may have read in this space recently, the Forrest Firm recently worked with Winston-Salem health and wellness company Vios Nutrition, preparing the company for just the second Regulation Crowdfunding offering in North Carolina. As crowdfunding becomes a new norm in fundraising for privately-held firms, taking its place alongside angel investment and venture capital, we will surely see some interesting trends develop. However, the Vios crowdfunding should be distinguished from the subject of this article because Vios was an equity crowdfunding transaction whereas the rest of this article (and the research referenced) is discussing crowdfunding campaigns where financial backers are not purchasing securities of the company raising money. This is an important distinction and one that is often and easily missed.
New research released from NC State this month reveals some interesting trends in crowdfunding circles with regard to indicators of success. Michael Stanko, an associate professor of marketing at the university’s Poole College of Management, was the lead author of a study on predictors of success in crowdfunding, specifically what factor or factors in crowdfunding specifically indicate future success in the marketplace.
Most of us tend to judge capital fundraising—no matter the method—as successful only by the amounts raised. Whether you set a goal of $100,000 in angel investment or $10 million in venture capital, we default to measuring success and predicting market viability based on achieving that metric, and rightfully so. But according to Stanko and his study collaborators, we’re wrong to make the same assumptions in the (non-equity) crowdfunding space.
Dr. Stanko worked from an interesting hypothesis, one that’s not too surprising for those with a marketing perspective. He instinctively realized—and sought to prove with hard data—that crowdfunding campaigns are more likely to deliver greater ROI in the long term, based on the number of backers on the bandwagon – not due to the amount of funds raised.
In this fascinating research, Stanko and the team at State looked at 1,000 successful Kickstarter campaigns related to product innovations in technology, product design, hardware, and video games, all sectors where we are continuing to see nice growth here in North Carolina. The team reached out to the people behind the successful campaigns one to two years later, hoping to learn about their experiences, the market success of their products, and any trends that may connect successful crowdfunding campaigns with marketplace success.
According to Dr. Stanko, the responses from more than 170 crowdfunding entrepreneurs indicated that the amount raised in the campaign was inconsequential. While all of the participants ran campaigns that eclipsed goals of at least $10,000 with a mean of $78,726, Stanko found that those who raised a significantly higher amount of money had no more likelihood of marketplace success than those who raised less.
In addition, Dr. Stanko found that entrepreneurs who exceeded their goals tended to lose focus on bringing out more new ideas, mainly due to having to place more energy on filling pre-order demand.
Perhaps the most impactful finding of the study was the emphasis on the number of backers a campaign attracted. While often a relatively small sample size, the number of backers was the best indicator that the company would exceed its financial goals after the product formally launched in the mainstream market. The dynamic, it seems, is a twist on the old phrase “put your money where your mouth is,” as backers tend to put their mouths where their money is, becoming evangelists for the products through social media and word of mouth.
In addition to becoming evangelists, backers become a friendly source of criticism, helping entrepreneurs refine their products in the early stage before going into the larger marketplace.
I think the NC State research points to a new dynamic in fundraising and forces us to acknowledge, if we haven’t already, that crowdfunding is a completely different proposition than the more established fundraising routes for private companies, angel investment and venture capital. With the kickstarter style, non-equity crowdfunding, you can achieve your funding goals, and get proof of concept feedback straight from a sample of the market. What will be interesting to see is whether Dr. Stanko’s observations will translate over into equity crowdfunding as it continues to grow in popularity.
My colleagues at the Forrest Firm and I enjoy working with companies to explore funding options. If you’re interested in learning more about taking on investment from angels, VCs, or even the crowd, contact me at the firm to start your journey.
Dr. Michael Stanko’s paper, “Toward a Better Understanding of Crowdfunding, Openness and the Consequences for Innovation,” was recently published in the journal Research Policy. The paper was co-authored by David Henard, a colleague at the Poole College of Management.