Graphic icon art of a personal drone in white against a green background

The True Cost of Crowdfunding

Tech ventures that meet or exceed their financing goals on crowdfunding platforms like Kickstarter are less likely to deliver their product, according to recent research from Greg Fisher, associate professor of entrepreneurship at Indiana University’s Kelly School of Business and Alex Murray, assistant professor of management at University of Oregon’s Lundquist College of Business.

Looking specifically at drone startups as a bellwether of the overall tech sector, Murray and his colleague examined roughly 20 drone-related ventures seeking capital on Kickstarter from when the platform first launched in 2009 through 2015.

Focusing their research not only on the substance of the initial campaign, the pair considered the frequency at which founders posted updates and solicited advice, as well as the overall bulk of exchanges between founders and backers. Coupled with this data, the researchers also measured the tone of industry media about the products, including interviews with the founders on podcasts, among other outlets.

The researchers then followed these ventures in the second phase of their research through March 2020 when the coronavirus pandemic disrupted all production, providing ample opportunity for the companies to deliver on their campaign promises.

By that time, Murray said, “most had delivered or gone under.”

Ultimately, the research illustrated that the more buzz a campaign received and the more the founders overpromised of their product, the less likely they were to deliver—as if founders were intoxicated by the social media-like attention available through crowdfunding, ending up burdened by unrealistic expectations.

The research also showed that campaigns raising less—sometimes far less—were more fruitful in the long run.

To eliminate the possibility this disparity arose from the relative complexity of the project, Murray and his colleague solicited a panel of drone-industry experts, finding no significant systematic differences across the range of projects.

“The successful ones,” Murray said, “were much more fact-based, while the founders with more lucrative campaigns got wrapped up in the process of raising more and more.”

“They looked to Kickstarter as an outcome that was to be maximized rather than a means to deliver a product and start a venture,” he continued. “There was this fundamental difference in the mindset of the entrepreneur.”

Despite these risks, Murray emphasized that Kickstarter is an effective tool for founders, providing market analysis and the ability to build a following before a product is even created.

“It’s also a great way to raise funds without giving up any ownership in the company,” he said.

“Nevertheless, the research does prove the age-old business axiom: Capital comes at cost,” Murray said. “Money raised through crowdfunding may seem free, but in truth, it’s not free. Only take as much as you need.”

—William Kennedy, Lundquist College Communications