With the Coronavirus creating uncertainty everywhere, it’s hard to make decisions. That is also true, of course, about Kickstarter campaigns. Should you launch or delay and wait for more information? What are the risks? How is the backer community responding to all of this?
Our teams at Tross and BiggerCake answered many creator questions about the crisis these past weeks. I’ve gathered the top 5 questions and will try to provide an in-depth analysis with perspectives and answers. As we always do, I’ll base the answers on data. This is possible with some of the questions. With the rest, I’ll provide answers based on logic that you can follow and then decide for yourself.
Regardless, after reading this you’ll be able to make better decisions about your campaign and understand the risks involved. Oh, and you’ll be very affraid of exchange rates.
Question 1: Are backers still supporting Kickstarter campaigns?
This is an obvious worry for most creators. To try and answer this, a good place to start is with campaigns that just ended. It’s hard to remember, but when campaigns that are ending now started, Coronavirus was not top of mind. These past two weeks were all about the virus, so if the crisis changed consumer behavior significantly, it should reflect in the numbers. Even more so considering the last fourteen days of a given Kickstarter campaign account for more funding relative to their portion of the campaign. If we assume the relativity is 1.4X, the last fourteen days of a 40-day campaign should account for 49% of the campaign’s total funding [(14/40)*1.4 = 0.49].
So did they lose anything? Let’s look at a total dollars on Kickstarter by campaign end date.
As you can see, there’s no noticeable drop for campaigns that have just ended (the number of campaigns ending on each week is relatively the same). Meaning, they didn’t suffer from the virus.
Another way to look at this metric is to compare it to the same dates in 2019, when if someone said “Corona” you’d still think of a beer.
Again, it’s hard to see any significant differences. If anything, 2020 actually looks better for Kickstarter than 2019 did.
A different way to look at the question is to ask “is there a change in consumer behavior on Kickstarter?”. There are many behaviors that are attributed to backers. One that repeats in nearly every campaign is the “end frenzy” – when conversion rates increase in the last days of a campaign due to a sense of urgency. Is it still happening? The graph below is from a campaign that ended on March 26th. It compares the conversion rate from direct traffic on the 7 days leading up to the campaign’s final day and the 7 days before that.
Clearly, the frenzy is still with us.
So is there a change in consumer behaviour on Kickstarter? As I’m writing this, the answer is no, or if there is, it’s not significant. This might change of course, but as of March 26th, campaigns are getting supported as they did a month ago.
Even if this changes, the impact likely won’t be the same across all categories. If people buy less gadgets, art, or apparel in general, this will probably reflect on Kickstarter. If I had to guess, luxury or premium products will be the first to take a hit across all categories.
Question 2: Should I delay my launch?
You’ll need to make this decision for yourself, but for 99% of campaigns there are no *logical* reasons to postpone, only emotional ones. That’s not to say that the current time doesn’t carry a higher risk, but to use stock market phrasing: “don’t try to time the market”. Nobody knows when stocks are going to free fall or rise. And nobody knows if and when Kickstarter campaigns will be affected.
Would it be better to launch your campaign in a more stable environment? Of course. But do you know when the market will stabilize? You don’t. No one does. You might have a friend or a family member that “really knows finance” and is willing to swear that this is a two-month thing or a five-year thing, but they don’t know either.
Here are just a few scenarios to consider:
- Online commerce will decrease as a result of financial panic = better to delay
- Online commerce will increase significantly as people stay home = better to launch earlier
- The financial crisis will be short = better to delay
- The world will go into recession that would only get worse for the next 2 years = better to launch earlier
- Prices of manufacturing and fulfilment will go down for a year = better to launch earlier
You get the idea. If you can truly predict what’s going to happen you don’t need crowdfunding, you can just make big bets in the stock market and use the billions you’ve made to build whatever you want. But please don’t. Besides, uncertainty is integral to entrepreneurship. Learn to live with it.
So who should postpone? Anybody who can delay their launch by 1-2 years and it won’t affect their business. In other words, if your business doesn’t depend on it. I know very few innovations that can wait on a shelf for that long.
Question 3: Is my campaign at risk for mass cancellation?
A common worry for creators spending ad dollars during their campaign is to see cancellations soar towards the end. The way Kickstarter works makes it more susceptible to cancellations than Ecommerce. Kickstarter (via Stripe) collects credit card details and only charges them at the end of the campaign if the funding goal was met. This makes it easy for backers to cancel pledges. If a backer pledged on day 2 of a 47 day campaign, they have a month and a half to consider cancelling or changing their pledge. More on the mechanics of cancellations in a different post, now let’s talk about the risk of mass cancellation.
Let’s say you spend money on ads to drive traffic to your campaign, your Return On Ad Spend (ROAS) is X, and you’re really happy with it. With a ROAS of X, you can comfortably spend money on advertising while leaving a 20% margin of error after ads, manufacturing and shipping. Hell, maybe it’ll be a profit you’ll use to build your new business.
What happens if the consumer behaviour changes suddenly and a lot of people cancel? Let’s go with 40% of them. You’ve already spent your budget, and there are no refunds on ads. In this scenario, you’ll lose the 20% margin plus an extra 20%, which will put you at a loss. This will make it hard/impossible to deliver, and send very angry backers your way, and rightfully so. It’s on you to plan and execute this, and that includes planning for risks. So how big is this risk?
As I wrote above, no one can predict the market, so I’ll be careful here and clarify that what I’m about to say is not a prediction, but IMHO mass cancellation is not a huge risk.
First, let’s define mass cancellation. Based on an analysis of 350 campaigns, the “normal” cancellation rate on most Kickstarter campaigns ranges from 6% to 12%. It’s something we advise all campaigns to plan into their financials, along with a ~3% dropped pledges rate. So to continue the example above, a mass cancellation of 40% would be 3.3X to 6.6X of a normal one. Can cancellations grow 6 fold? They can theoretically, but it’s unlikely.
This is where the crowd in crowdfunding is your potential shield. Out of 1,000 people, not all would lose their jobs, and not all of those who did will cancel. Also, the backer demographic is not a representation of the general population and to begin with, it has a higher representation of employees in industries that are expected to suffer less from quarantine and the recession that might follow. Not to mention that Kickstarter has a very global community and not all countries will be affected in the same way or in the same time.
The first thing that comes to mind when thinking of a graph declining sharply is the stock market. Only that cancellations are not stocks – backers who “stay” in your campaign don’t lose anything because other backers cancel. There might be some herd effect, but not significant.
I’m not saying that a mass cancellation is impossible, I’m saying it’s unlikely. That doesn’t mean you shouldn’t try to minimize the risk. So what can you do? Well, this is a tricky one.
You could price the risk and increase reward prices to have a higher margin than you planned, but that in itself might make your campaign fail. You could also shorten the campaign to minimize exposure to the risk, but that too costs a lot of money. For ad-based campaigns, longer = more funding. And the third thing you can do is acquire a lot of backers to offset the chance of a few tens of people being 40% of your campaign… but that’s what you’re trying to do anyway.
So the one clear piece of advice is to double check your costs and make sure you can deliver even if the margin for error falls to 2%. Try to avoid the trap of “a bigger campaign at any cost” and focus on margins as the campaign progresses. Use Kickstarter’s fulfillment dashboard or BiggerCake’s Financial Analytics (shameless plug) to follow the numbers.
Bottom line, even though the risk might not be big, you need to be hands on. Whatever you do, make sure you’re actively making decisions and not just letting things slide. It’s always true, but even more so now.
Question 4: Am I missing anything? (Yes, it’s currencies)
We’ve identified currencies as the main risk for Kickstarter creators – exchange rates to be specific. Exchange rates are mostly overlooked when running a Kickstarter campaign, though they have a great effect. If 100% of your business runs in USD and you’re running your campaign in USD, there’s less to worry about. Otherwise, you might be taking a big risk right now.
In a stable market, exchange rates volatility is low enough to be a low to medium risk. In the current financial market the volatility makes it a real threat. To continue the example above, let’s assume you’re running your campaign in Euros and have a safety/profit margin of 20% after all of your costs including advertising. If you’re manufacturing in China, it’s likely that your production and fulfillment costs are in USD. Now let’s assume the exchange rate from Euro to USD falls by 25% – you won’t be able to deliver and the bigger the campaign you have, the bigger the problem.
Now you’re asking “is 25% even possible?”. Yes, very much so. It has to do with the high volatility in the market and the length of time between setting reward prices and getting the money. Let’s assume you price your rewards three weeks before your launch and run a 45 day campaign. Add to that the 14 days until Kickstarter makes the wire transfer and you get 80 days.
So can exchange rates drop that much in 80 days? In a stable market that’s not likely, but we’re not in Kansas anymore. Between March 10th and March 20th, the Euro fell 9.3% in 10 (!) days. With countries pouring (printing) money into the markets all over the world, no one knows how or when this will stabilize.
In a small campaign, you might be able to add the extra $2,000 yourself. But in a big campaign, this might prevent you from meeting your obligations to backers.
Is there something you can do?
Yes. As much as you can, stick to one currency for everything. Usually, that means USD, but as long as everything is in the same currency it doesn’t matter. Create a US entity if you need to, and run the campaign in USD (Kickstarter doesn’t let you choose currency, it’s based on where the legal entity and your bank account are).
If you can’t stick to one currency, talk to a financial consultant and try to find a financial instrument to insure yourself. These will be pricey right now, but they’re well worth the money. You can then price that into your rewards and have peace of mind that you’re covered. These things are complex and entrepreneurs tend to find all the reasons to avoid them. But entrepreneurship is hard, and it’s better to deal with this now than later – don’t let yourself off the hook.
Question 5: Can you say something positive?
Always. This is a tough time for all of us, but there are always reasons to be optimistic. Most of them are on the human side, but here are a few from the crowdfunding side:
- Kickstarter is one of the strongest communities online. There’s no better time to support each other than at a time of a crisis.
- Markets have a tendency to balance themselves out. In this case, this means it’s likely that there will be less competition, both on Kickstarter and on ad networks. Some creators will postpone or cancel their launches. Seems like this trend has already started (see graph of launches per day below). This will make it easier to get exposure on Kickstarter. Another competitive space that should be affected is advertising. The cost of advertising (CPM) has already begun to decrease on Facebook and Google, as many companies pause their operations. I suspect this trend will get even stronger in the coming days.
- It will end eventually, and we’ll have survived this crazy, crazy time. If you ran a crowdfunding campaign on top of everything you’ll have one hell of a story for your grandkids.
Nobody knows how this will play out, thus you can’t make a clear decision based on forecasts. In the absence of those, try to minimize risk where you can and remember that for most companies, not launching is a bigger risk than all the others combined. Do whatever is necessary to be protected against the volatility in currency exchange rates. No excuses. And remember we’re a community – be kind to each other at home, online and anywhere you can.
Risking a terrible translation from Hebrew, I’ll end this with a saying I heard from a friend: All stories end happily, and if it ain’t happy yet, it’s probably not the end of the story.
P.S. What a time to start the Blog. Sign up below to get our crowdfunding analysis. This might be once a week or every two months. Dunno yet, but only when we have something interesting to say.