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Start Your Business Startup Funding

Realistic Crowdfunding Goals Inspire Backer Confidence

Realistic Crowdfunding Goals Inspire Backer Confidence
Credit: Designer 419/Shutterstock

While success or failure in crowdfunding campaigns hinges on a variety of factors, the most important aspect is the level of confidence backers have about the campaign's outcome, according to a study by the University of Michigan, University of Toronto and Google.

"Pledging is not costless, and hence consumers would prefer not to pledge if they think the campaign will not succeed," the study's authors wrote. "This can lead to cascades where a campaign fails to raise the required amount even though there are enough consumers who want the product."

When deciding whether to back an entrepreneur's crowdfunding campaign, backers examine multiple factors, including the price of the product, how much has been raised, the funding target and how long the campaign lasts.

"The absence of early pledges makes those who arrive later pessimistic about the chances of campaign success, and therefore discourages them from pledging," Mohamed Mostagir, one of the study's authors and an assistant professor at the University of Michigan, said in a statement. "This can create a vicious cycle where even good products can fail."

The opposite can hold true as well, according to Mostagir. He said early funding on a campaign can create a cascading effect that propels a campaign well past its funding goal. [See Related Story: Crowdfunding Entrepreneurs Should Sell Themselves First]

Based on their research, the study's authors suggest that entrepreneurs consider a lower funding target in order to reduce the uncertainty in a backer's mind about the chances of a campaign's success.

They use the Coolest Cooler campaign on Kickstarter as an example. The campaign was first launched in 2013 with a funding goal of $125,000. At the time, it never reached its target.

However, when the campaign was relaunched several months later with a funding goal of only $50,000 it was wildly successful. The second campaign raised more than $13 million, making it the largest funded project in Kickstarter history at the time.

The study's authors admit, however, that there are some risks to this type of approach.

"Of course, the downside to the strategy of shading the real target is that it is possible that the campaign ends up raising enough money to cover the artificial target — and hence 'succeed' — but not the actual one," the study's authors wrote. "This leaves the seller with a commitment to deliver a product that it does not have enough means of producing."

In addition to considering a lower funding goal, it is also important to make sure backers can see in real time how much a campaign has raised, according to the research. The study's authors said that if the backers can always see the current funding level, they may be more inclined to start pledging when they see that a campaign is doing well.

"Conversely, if the campaign is off to a slow start, then maybe that will put off potential consumers from pledging," the study's authors wrote. "Not revealing the pledge amount, while it may circumvent the later scenario to a certain extent, also brings about uncertainty and ambiguity about how the campaign is going, and as a result may end up delivering undesirable outcomes as well."

The study was co-authored by Saeed Alaei of Google and Azarakhsh Malekian of the University of Toronto.

Chad Brooks

Chad Brooks is a Chicago-based freelance writer who has nearly 15 years experience in the media business. A graduate of Indiana University, he spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including, local and state government, crime, the legal system and education. Following his years at the newspaper Chad worked in public relations, helping promote small businesses throughout the U.S. Follow him on Twitter.