Getting Tripped Up By Crowdfunding

Crowdfunding sites (of the incentive-based, Kickstarter-variety) have become wildly popular as a way for startups to raise seed capital for their companies, bypassing the traditional private equity methods that generally cost equity in the company. Most of the prominent success stories on crowdfunding sites are companies who are making a product — crowdfunding allows these companies to fund development of its products and of the company by making advanced sales to customers while building buzz and awareness for the product and the company.

Although some crowdfunging campaigns take off and become wildly successful, raising far more money than the entrepreneurs initially targeted, such a windfall may in fact be a curse disguised as a blessing. The problem for some companies who use the incentive crowdfunding model (i.e.: donors get a copy of the company’s product) and who receive contributions far in excess of what they initially targeted is an inability to handle the excess contributions.

For starters, if your product is a tangible one, you may not have enough to fulfill all the donations/orders your campaign received. If you initially targeted 500 donations, and then you receive 5,000, you now have to come up with 4,500 additional units, relatively soon. You may not be able to fund the production of additional units, even with crowdfunding money. And even if you are, there may be a lag time of weeks or months that your funders-turned-customers now have to wait.

If your startup is still just a couple of people, you may not have the logistical resources to handle shipping out thousands of units (unless you’re lucky enough to outsource your manufacturing and can ship to the customer directly from the manufacturer). Even if shipping is not an issue, a couple of people may not be able to handle the customer relations load of thousands of donors (who may be waiting a long time to receive their product). If you’re going to have many users of your product, you should consider having a dedicated PR employee or team — if operations or product development people have to spend their time answering emails/tweets/Facebook posts/etc., that’s less time for them to work on growing the company.

Finally, the worst thing to happen to a company who uses crowdfunding to fund development and refinement of the product is that the product is never finished, and donors never get their product. Having this happen to your company, along with any of the above-mentioned issues, can create a public relations nightmare and destroy your company’s credibility, which can be the death-knell for a startup.

The point is, if you’re going to use incentive crowdfunding, you should ensure that your company has the mechanisms in place to be able to handle your campaign taking off beyond your wildest dreams, as well as the resulting overflow of donors who are now waiting to receive their products.