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Utah Business

Many entrepreneurs use crowdfunding to launch products online, but profit isn’t always a given. Here's what you need to know about crowdfunding online.

When Crowdfunding Works―And Doesn’t

When Kelsey O’Callaghan raised $70,000 on Kickstarter to create “the world’s driest bathmat,” it seemed she and her fiancé were off and running toward their dream of launching their own business.

Then, they started shipping the product to backers and realized they’d woefully underestimated how much money they’d actually need. “We thought we had good margins,” she says, “but when it came down to it, our margins were not enough.”

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Ms. O’Callaghan managed to pull through and make good on her bathmat campaign, but both she and her fiancé had to pick up side-gigs to pay the bills and fulfill their promises to customers. Having learned some hard lessons, Ms. O’Callaghan launched a second campaign this past May—but this time, with a different set of expectations.

Crowdfunding, Ms. O’Callaghan says, “is a great way to validate a product. But you don’t make money on Kickstarter.”

Using Crowdfunding To Fund A Concept

It’s been more than ten years since crowdfunding platforms such as Kickstarter and Indiegogo erupted onto the entrepreneurial scene—poised, it seemed, to disrupt traditional startup financing and bring product development to the masses. As crowdfunding has matured, competition has raised new barriers to entry instead of democratizing product launch. 

But these days, crowdfunding success is rarely measured in profit. Bryce Hansen, an associate director at the Salt Lake Small Business Development Center and the organizer of the Utah Crowdfunding Summit, believes crowdfunding is here to stay as an essential validation tool for product developers at startups and established companies alike.

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Those willing to invest the necessary time and resources, he says, still save money and accelerate the development process. And increasingly, local entrepreneurs find crowdfunding opens doors to traditional opportunities such as venture capital.

The days of making millions off little more than a concept have long since passed, Mr. Hansen says. Electronics, luggage, kitchen goods, and all manner of games—board games, card games, and even video games—have become popular crowdfunding mainstays, but many sites now require proof of an existing prototype. And that means would-be crowdfunders have to develop and market their product with their own time and resources.

“That’s the difference between 2011 and today,” he says. “In 2011, you could launch with an idea and no experience. Today, that’s almost impossible.”

Using Crowdfunding As A Marketing Tool

Kate Hansen—Mr. Hansen’s wife—spent even longer working on their product, a spout-and-handle lid attachment for mason jars that spent two years in active product development and was first conceived six to seven years ago, when Ms. Hansen’s vintage syrup dispenser chipped. 

Once they had a functioning mason jar lid, Ms. Hansen says, they weren’t sure what to do with the product. Mr. Hansen assumed the market for such a product wouldn’t be very large, and cautioned his wife that she would need 5,000-10,000 email contacts to fully launch a business based on the product.

“When he said that, I wanted to cry,” says Ms. Hansen. “It seemed impossible.”

So she started small, setting up social media accounts to collect metrics on who might be interested in the product. Facebook revealed their real audience—homesteaders and DIYers, which prompted them to attend farmers markets and home shows to gather up email addresses in person. You have to get creative to draw an audience to a crowdfunding campaign, Ms. Hansen says. Platforms such as Kickstarter are just that—platforms. They don’t come with built-in customers.

When they finally launched their campaign after spending a year building an organic email list, the Hansens raised $40,000. But Ms. Hansen is uncertain she could replicate that kind of success in the future without additional ad spend.

“Advertising on Facebook was different five years ago than it is now,” she says. “Even Instagram, if you talked to people five years ago, it was a lot easier to build a large audience then than it is now. I don’t think it’s impossible, but you do need to check your expectations.”

To contain costs, Jamaica Trinnaman, founder of Salt Lake’s Hello! Bulk Markets, also utilized grassroots marketing, recruiting a handful of friends to serve as ambassadors for her brand. It was exhausting and at times terrifying, she says, but it worked—she raised $15,000, and kept $9,000 after campaign costs.

But if she did it again, Ms. Trinnaman says she’d probably do it differently—relying less on volunteer labor. She hadn’t anticipated the emotional rollercoaster that would accompany her campaign, she says, which strained her relationships with friends.

At one point, she says, she was waiting in a coffee shop for her team of volunteers to arrive, and started getting texts from friends bailing out. “My nerves were shot,” she says. “More than anything, you just need them to be there and give you a hug and tell you they’re sending out their emails, and instead they’re not showing up. That hurt. That’s hard.”

Using Crowdfunding To Turn A Profit

Ms. O’Callaghan’s second crowdfunding attempt—a quick-drying, antibacterial dish rack—spent months in product development, beginning in August 2018. She and her fiancé, who works a day job in product development, sent surveys to their old backers and friends, asking them to send pictures of how and where they do their dishes to determine what customers were looking for. They then built models out of foam to test size and shape before filing for a patent in January.

After learning some difficult lessons on her first campaign, Ms. O’Callaghan took a different approach with her second Kickstarter. From here on out, she says, her first step in launching any new product will be meeting with a financial expert to determine if the numbers pencil.

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“You need to have your costs before you do anything,” she says. “And know that if you cannot charge 4-6 percent higher than that, you are probably not going to be profitable. That’s just the reality.”

Depending on the complexity of the product, prototypes and testing can cost several thousand dollars. Filming a quality video for the campaign page—another several thousand dollars, Ms. O’Callaghan says. Orchestrating a photoshoot involves renting locations and hiring models. Those without web design experience will need to hire a designer—and the platform will take a five to seven percent cut as well.

“You’ve got to take off 30 percent of what you’re making and assume it’s gone before it even gets to you,” Ms. O’Callaghan says. 

The time-intensive and costly nature of building a successful crowdfunding campaign has, naturally, led to the rise of an entire industry of agencies such as Utah’s Funded Today, where cofounder Zach Smith has the marketing side down to a science with talk of cost-per-click and ready-made email lists. But these, Ms. O’Callaghan points out, often charge steep commissions—the agency she’s working with will claim 15 percent of any dollars they raise.

Without the applicable skillset, do-it-yourself crowdfunding may not be any easier—or cheaper. Ms. O’Callaghan, who has a background in branding and design, spent $20,000-$30,000 on the bathmat. Even after learning some lessons with her first campaign and becoming more efficient, marketing for her second product still cost between $5,000-$10,000, she says.

“You should be willing to spend 20-30 percent of the goal you want to raise on marketing,” she says. “That means we need to spend $40,000-$50,000 to hit $200,000 [for the dishrack].” And that’s just for marketing.

Steep startup costs mean “crowdfunders should not try to make money on their campaign,” Mr. Smith says. “Their goal should be to break even.”

Using Crowdfunding For Market Validation

Because of the high costs associated with product development and marketing, the primary motivator for today’s crowdfunders is market validation, Mr. Smith says.

Many founders have parlayed crowdfunding feats into favorable terms with venture capitalists, says Mr. Smith. Instead of giving up, say, 50 percent equity in their company, a successful crowdfunder may only need to offer 10 percent for the same amount of money. Some of his Utah-based campaigns have gone on to land lucrative deals on Shark Tank, he says.

This, Ms. Trinnaman says, is what drew her to crowdfunding in the first place. As the founder of a package-free grocery store, Ms. Trinnaman didn’t have a product to develop—she needed to prove community buy-in to help her secure a storefront. Her campaign helped her build a relationship with the Giv Development group, which helped her secure an appropriate space. Her store opened in February.

“It’s meeting people and getting the word out through the Kickstarter that brings you other things,” she says. She’s now considering a second campaign to expand the reach of her business with a mobile unit.

Ms. Hansen, similarly, used her crowdfunding success to secure a loan to manufacture her mason jar lid. She quit her job as a corporate lawyer and began working on a wide-mouth variety of her lid once she secured the funds.

“As soon as we proved it was viable, banks were like, ‘yeah, yeah, we’ll give you a loan,’” she says. “We couldn’t get a loan before.”

Most successful campaigns, Ms. Hansen believes, do come out ahead one way or the other. But with ever-larger companies entering the crowdfunding seen, Ms. Hansen says, the cost of marketing a crowdfunding campaign is on the rise, making it difficult for small companies and startups to compete.

“I think the window is closing,” she says. “I think it’s still open, but it is closing. Within a few years, it will be a lot harder.”

Emma Penrod is a journalist based in rural Utah who covers science, technology, business and environmental health. She writes a weekly water politics newsletter at pactio.us/host/emma-penrod and Tweets about the latest science and industry news @EmaPen. When she's not writing, reading or researching, she's hunting sagebrush-scented air fresheners.

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