Originally Published at Entrepreneur.com on January 23, 2014
If I had a dime for every person who didn't understand the concept of setting a realistic crowdfunding goal, I could crowdfund the next Pebble Watch and a second Veronica Mars movie.
As a crowdfunding expert, many people call or write to me about great ideas that are perfect for rewards-based crowdfunding. Inevitably, after hearing their ideas, I close my eyes tight, scrunch up my face, hold my breath and ask the magic question:
How much do you want to raise?
The guy with a really cool idea for a fuel-efficient car needs $5 million. A lady with a great concept for a new kitchen gadget said $4 million would do. One filmmaker working on his first movie told me he could get by on $15 million.
We could all "get by" on $15 million, but less than a 10th of 1 percent of crowdfunding projects in the history of Kickstarter have raised over $1 million. The reality is 74 percent of successful Kickstarter projects raise less than $10,000.
If you need more than $100,000, you better have a great idea, a huge social network and a team to support your effort. If not, you need to wait for the JOBS Act to kick in and then use equity crowdfunding, where you will be able to sell stock in your business, because less than 2 percent of Kickstarter crowdfunding campaigns successfully raise $100,000 or more.
You need to set a more realistic goal.
In order to do so, it is important to create a budget for the project and make sure to account for all expenses. Make sure to not miss expenses involved with the rewards promised to donors. You need to be sure to factor in the cost of the rewards, the expense of packaging and shipping the rewards, any marketing expenses and, most importantly, the crowdfunding platform fees and credit card processing fees, which will generally cost about 10 percent of the total amount raised. Add this all together, and you know how much you need to raise.
If the budget you create requires you to raise more than $25,000, consider breaking the campaign down into manageable sections. Raise $10,000 first to build a prototype, get the initial marketing materials finished, handle the legal and accounting and be ready to manufacture. Then, raise the rest in a second campaign for the first production run of your manufactured products.
By showing your donors that you can follow through on your first campaign, effectively raise money, build a prototype, fulfill rewards and communicate your success, you have built in a second round of donors who have a vested interest in your success, and who will not only support you in round two, but will also help you spread the word for the bigger second campaign.
Remember that there is a psychology to crowdfunding from the donor's perspective. Most donors will not give money to a campaign they believe will be unsuccessful. If your goal is high, and a donor sees you have raised very little when they review your campaign, chances are they will not donate, no matter how much they like your idea.
This is why smart crowdfunders line up 25 percent or more of their financial support before they launch their campaign, then have that money donated on the first day before promoting to the general public. Doing so makes the goal seem more attainable to potential donors and helps build momentum from the very beginning for a successful campaign.
One final thought on setting a crowdfunding goal: Taking donations and failing to fulfill rewards, or live up to your promises, could lead to legal trouble and will certainly result in negative publicity for you and your idea. Rewards-based crowdfunding has had surprisingly few instances of fraud or massive failures to fulfill rewards or promises, but when they happen, they are big news. As we all know, what happens on the internet, stays on the internet forever.
Having a large number of angry donors writing, blogging, tweeting and otherwise spreading the electronic word about your poor business sense, or worse, your dishonesty, can have a lifelong effect on your personal reputation and even your business or employment.
So set a realistic goal, hit it, then follow through on what you promised. Keep the crowd happy, and the crowd will keep coming back for more.