Small donations can add up to big bucks. That’s the promise of crowdfunding, a process by which entrepreneurs and nonprofits raise money online from individuals instead of banks and investors. Last year, 6.4 million crowdfunding campaigns worldwide brought in $34 billion, according to the crowdfunding data company Fundly.
But most of those campaigns didn’t live up to their promise. Only 22% reached their fundraising goals.
In new research, Diwakar Gupta, professor of information, risk, and operations management at Texas McCombs, has some practical advice for successful crowdfunding. Using data from a major crowdfunding platform and a sophisticated mathematical model, Gupta worked out an optimum strategy for when to contact potential backers.
Whereas a typical campaign reaches out to everyone on its contact list early on, Gupta finds it’s better to hold back some contacts, reserving them for the final phase. That tactic, he found, raised up to 20% more funding than the traditional all-out approach.
“Pay attention to how you use your contacts,” Gupta says.
“Don’t bombard everybody in your address book right away.” — Diwakar Gupta
Following a Crowd vs. Crowding Out
A truism of fundraising is that most people don’t give unless they’re asked. In crowdfunding, that means contacting individuals through email or social media, inviting them to look at the campaign’s website and become givers.
Most entrepreneurs reach out to individuals they know personally. Past research has found a strong correlation between crowdfunders’ success and the size of their social networks, Gupta says.
But knowing the best time to reach out to each friend can be tricky, he says. Potential donors may have competing psychological instincts.
One is herd instinct. If people see that many others have kicked in early on, they’re more likely to follow the crowd and help the campaign succeed. “People want to go to the website and contribute because other backers’ early contributions provide social proof of the quality of the fundraising campaign,” Gupta says.
But if a campaign is nearing its goal, visitors might decide that their gifts are not as crucial, and their charity might do more good elsewhere. Gupta calls this phenomenon “crowding out.”
How should a crowdfunder balance those considerations? “Who should you be targeting, how many of them, and at what point in time?” he asks.
To find out, Gupta, along with Gordon Burtch of the University of Minnesota and McCombs doctoral student Paola Martin, looked at 934 crowdfunding campaigns run between August 2012 and March 2013.
To analyze the campaigns — most of which ran between 30 and 60 days — Gupta divided each into five equal periods. For each period, he looked at what percentage of the funding goal had been reached at its beginning and at its end. He correlated those numbers with how many referrals to visit the campaign website had been sent out in each phase.
Using that data, he compared the outcomes of three timing strategies:
· A myopic policy that sends out all referrals during Period One.
· A heuristic policy based on a simplifying approximation that happened to spread referrals out over the first four periods.
· A policy based on the mathematical model that sends most referrals early on but reserves some for the final phase.
The third strategy performed better than the other two. In the example, that strategy sent 54% of referrals during Period One, 24% during Period Two, and 14% during Period Five.
Donor psychology explains those results, Gupta says. By sending out a majority of requests at the start, a campaign can amass a large percentage of its target early on — and impress potential donors.
“You get to a level where you can start to see the benefits of the herding effect,” he says.
By saving a surge of referrals for the end, when people are more reluctant to donate, “You create interest in the project once again,” he says.
“You get people to come to the website and make sure the campaign succeeds.” — Diwakar Gupta
Costs of Contacting Strangers
Another reason for holding some names in reserve is cost, Gupta says. Once an entrepreneur has exhausted the list of people he or she knows, it gets more expensive to acquire contacts through advertising or renting lists.
In his model, as referrals got more costly, they ate up as much as 26% of a campaign’s revenue. So, reaching out to some existing contacts in the final push saves money, rather than paying for new ones.
Additionally, Gupta notes strangers are less likely to contribute than people who know the entrepreneur. “Reserve some of those high-quality referrals for the end,” he advises.
The lesson for crowdfunders is to put themselves in potential donors’ shoes, Gupta says. Most are less motivated by perks and rewards than by altruism: a selfless desire to make a difference. Reaching out to them at the right moment helps them feel that their gifts are ensuring the project meets its goal.
“The people who visit your website are strategic,” he says. “They’re looking at how much money has been generated versus how many days are left. You need to be strategic, too.”
“Referral Timing and Fundraising Success in Crowdfunding” is published in Manufacturing & Service Operations Management.