When Does Crowdfunding Work — and When Doesn’t It?

Since I founded StartEngine in 2014, Crowdfunding has become increasingly popular—and in my opinion, one of the most effective—ways for entrepreneurs and small businesses to raise capital. Lately, the Regulation Crowdfunding and A+ industry have seen some significant growth recently.

Let me cite this 2022 Crowdfunding Industry Report I came upon a couple of years ago: the global crowdfunding market is expected to reach $42.9 billion by 2028. That’s at aCAGR of 16.4% (2022 2028)! However, not all crowdfunding campaigns are successful —trust me, I’ve seen some moon bounders and sinking ships in my time.

One of the things I preach to prospective companies is to have a strong understanding of what sets up for a good raise and what doesn’t. It’s why our process here is all about finding the greatness in your startup and seeing if your big idea has the goods to succeed.

Whether you’re an investor or fundraiser, I find that it’s critical both parties understand the factors that can make or break a crowdfunding effort. Here’s what I’ve seen in my experience that leads to a successful crowdfunding raise—and what doesn’t.

When Crowdfunding Works

1. Compelling Product or Service: Successful crowdfunding campaigns typically feature a product or service that resonates with an audience. Backers are more likely to contribute to a campaign if they believe in the value and potential of the offering.
   
   
2. Engaged Community: Crowdfunding thrives when the fundraiser has a strong, engaged community of supporters who are willing to contribute and share the campaign with their networks. Building a following and generating “buzz” before the campaign launch is crucial. A community creates the potential for a snowball effect. The more they invest, the likelier others outside of the community will. 
   
   
3. Effective Marketing: Another aspect I’ve seen ignored by many founders is the urgency and investment in effective marketing. Fundraisers need to create compelling video content, leverage social media, and engage with potential backers to drive awareness and interest. If not, the idea is likely to be dead before it can even get going.
   
   
4. Realistic Funding Goal: Setting a realistic funding goal that aligns with the project’s needs and the target market’s willingness to contribute is key. Campaigns that set overly ambitious goals are less likely to reach their targets. For Regulation CF, you can raise up to $5M; for A+, up to $75M.
   
   
5. Rewards and Incentives: Even though ownership is the most valuable thing you can offer, providing attractive rewards and incentives to backers can be a powerful way to encourage contributions. These can include early access to the product, exclusive merchandise, or unique experiences.

When Crowdfunding Doesn’t Work

• Lack of Differentiation: Let’s be serious with ourselves for a moment — if a product or service is not sufficiently differentiated from existing offerings, it’s more likely to struggle than attract the necessary funding from backers.
  
  
• Insufficient Marketing: Campaigns that fail to generate enough awareness and engagement through effective marketing and promotion are less likely to succeed. It’s not just getting people in the know here. People respect and believe in your brand when you put the time into your marketing. Think about this: how many times have you thought about buying a product, then going to the website, and seeing a chaotic mess that resembles a link you would’ve clicked on in 2000? It happens more than you realize, and it’s a sure-fire sales killer!
  
  
• Unrealistic Funding Goals: Campaigns with funding goals that are too high or not aligned with the project’s needs and the target market’s willingness to contribute are more likely to fail. Even the greatest products start off small. 
  
  
• Poor Communication: Fundraisers who fail to keep backers informed about the progress of the campaign and the use of funds are less likely to maintain trust and support. This plays into keeping your community engaged like I mentioned above. The more you keep them involved, the likelier your raise will do better. It’s not a guarantee but I could almost guarantee if you don’t, you’ll set yourself up for failure.
  
  
• Lack of Credibility: Campaigns led by individuals or teams without a proven track record or relevant expertise may struggle to build the necessary trust and confidence among potential backers. This isn’t a death sentence but it helps to have professional experience in the industry you’re entering. 

Now none of this is rocket science, or the end all, be all of having a successful raise. Heck, I bet you as a founder—or investor—probably already knew most of this information. But still, it’s good to reflect upon these factors that contribute to successful campaigns and pitfalls, especially if you’re looking to raise or invest in the coming months.

I will leave you with this: if you can take these little points of wisdom and apply them to your own campaigns and investments, you can set yourself up for success. It’s really that simple in my opinion.

Sources:

Global Crowdfunding Market Report, https://www.globenewswire.com/en/news-release/2022/06/28/2470607/0/en/Crowdfunding-Market-to-Reach-42-93-Billion-By-2028-As-Entrepreneurs-are-Bypassing-Traditional-Banks-and-Opting-for-Modern-Finance-Solution.html

FINRA Crowdfunding Rules and Regulations

SEC Crowdfunding Regulations