Data shows social following isn’t crucial to successful crowdfunding

(The following is a reprint of a story we wrote for VentureBeat. The original can be found here)

Crowdfunding is the hot new topic in the startup world. Since the passage of regulations allowing companies to source funding from Main Street American investors, startups have been flocking to crowdfunding platforms to secure capital. But what makes a crowdfunding campaign successful? The most obvious answer is a large social following — a crowd of loyal fans that would invest their hard-earned cash in a seemingly great idea. We expected this to be the case, and we analyzed the social media followings of 233 campaigns to find evidence. But while our hypothesis holds some truth, social media may not be as important to crowdfunding success as we initially believed.

The data

According to the crowdfunding law, a company must have a deadline date for reaching its minimum funding target (MFT). The offering is considered closed and not open for further investments after the deadline date is reached. If a company hits its MFT on or before the deadline, it is considered funded. We analyzed all closed campaigns, whether they were funded or not. Of the 233 campaigns, 120 reached their MFT, while 113 were not funded. Our analysis looked at the Twitter, Facebook, and Instagram networks of both groups separately then together. We also considered the LinkedIn accounts of the CEOs to see if a correlation exists between the number of professional connections and the company’s ability to secure funding. A surprisingly anticlimactic trend emerged: Overall, while social media appears to play a positive role in a campaign’s funding, this is only true to a minor extent. The chart below shows the trend line between the funds a company raised and its social following. The trend line shows that while there is a positive correlation between size of social following and raised funds, it holds little significance.

Results vary by industry

This doesn’t mean social media is a waste of time. In fact, the importance of a social following appears to vary by industry, as shown in chart below with trendlines for different industries. For industries where a social following plays a pivotal role, such as wine and spirits or apparel, the trend is more dramatic than for other industries. The wine and spirits industry appears to maximize the power of a smaller social network. This may be because wine and spirits tends to have a following of loyal fans, particularly when looking at local brands that have a storefront presence. However, for industries that have a technical background and lower social reach, such as transportation and consumer goods, the trend is almost flat or even reversed. The key here is to understand whether your industry is one that attracts followers; if so, you may be able to leverage them for crowdfunding success. If your industry is one that doesn’t attract a crowd, don’t rely on your social following to fund your campaign.

The state you’re based in makes a difference

To date, California and Texas have had the most crowdfunded campaigns. With that in mind, we assessed the importance of a social media following in both states. Our data suggests that a large social network is much more important in California than Texas, as shown below. This may be due to Silicon Valley’s influence in the region. Since there is more competition for venture capital, perhaps companies are leveraging crowdfunding and their social networks to signal popularity and a reason to invest. In Texas, a social following is not a determinant of campaign success. This could be due to a more direct financial approach to crowdfunding in Texas, where investors are searching for proven financial strength instead of social exposure. The implication for startups is that you should understand who you are targeting with your campaign and focus your social media outreach on that. A deeper analysis of other states is in order, but there simply is not enough activity in other states to make a judgement.

We came across one of the most telling findings when we compared the top 20 campaigns, all of which raised above $500,000, to those that raised precisely zero. The top 20 campaigns had a clear advantage in social media following. On every platform, the top 20 campaigns far exceeded the non-starters in number of followers. It seems almost as if the campaigns that raised no money were intentionally avoiding social media. The chart below displays the total social following for the top 20 and the nonfunded campaigns and suggests that social media plays an essential role on each side of the spectrum. If you want to raise $1,070,000, the most that is permitted by law, you should focus some resources on building a fan base. Beyond these three networks is the LinkedIn following for the CEOs of each startup. As expected the LinkedIn following for the top 20 far exceeded that of the bottom campaigns. On average, the nonfunded campaign CEOs had 32 connections on LinkedIn, while the top 20 CEO’s had 414 connections. This discrepancy suggests that a CEO’s professional network plays a vital role in the start-ups success on crowdfunding platforms.

Facebook takes priority

Our data included information for four major social media platforms: Facebook, Twitter, Instagram, and LinkedIn, in order of importance. Each social platform has its own benefits, but the one that stands out in crowdfunding is Facebook. It is almost as if Facebook is the center of a successful campaign. So at a minimum, make sure you have a Facebook presence.

All things considered, the data suggests that the more money a company hopes to raise, the more it should focus on developing a social platform. But results vary by type of industry as well as the type of investor a company hopes to attract. However, companies hoping to raise less than $100,000 may not need to invest as much time on social media and could just use crowdfunding as a tool to speed up funding from pre-existing relationships. Nonetheless, some sort of following is essential, as the campaigns that raised no money demonstrate.

Sherwood Neiss is a partner at Crowdfund Capital Advisors. He helped lead the U.S. fight to legalize debt and equity based crowdfunding and coauthored the book Crowdfund Investing for Dummies.

Tyler Monaccio is an analyst at Crowdfund Capital Advisors and is currently working on an MBA with a focus on finance and global affairs.

Your crowdfunding video could be hurting your campaign

(The following is a reprint of the story we wrote for Venture Beat. It can be found here).

Let’s be honest. After jumping through hoops to get your crowdfunding campaign live, your video is many times an afterthought. We recently analyzed over 200 campaigns to gauge how important videos are in crowdfunding.

A quick bit of background: Crowdfunding campaigns are open on average 93 days. Issuers must meet their funding target to receive invested capital; otherwise, it goes back to the investors, and the campaign is considered closed and failed.

We analyzed 243 closed campaigns. Of those, 51 percent (123) got funded. These campaigns are raising more capital than their failed counterparts — a lot more. On average, they raise 16.5 times more per campaign than a failed one, capture an impressive $277,000, and monumentally overshadow the average $16,000 a failed campaign raises. Given the SEC does not allow failed campaigns to keep their funds, it is imperative for issuers to ensure all their campaign efforts are fine tuned.

Our analysis focused on the campaign video as a highly visible, yet commonly misunderstood fundraising driver. We dissecting each video’s essential components through a weighted quality-rating system based on a 10-point scale. A perfect 10 video exceptionally demonstrated the following elements:

1. Ability to engage the audience’s attention
2. An idea that compels an investor to invest
3. Strong emotional pull
4. Solid product or service testimonials
5. Meaningful and professional speaker engagement
6. Video production quality, including the music
7. Solution effectiveness to a market problem
8. Investment opportunity and market potential
9. Team introductions and confidence in their execution ability
10. Funding needs and plans

Campaign videos scoring in the range of 0 to 3 points are considered poor, 4 to 6 points average, 7 to 8 points good, and 9 to 10 points excellent.

Videos rated poor typically do not engage the audience or compel an investor to invest because of missing key information about the product or because the product or service present more questions than answers. These videos also lack professional production quality.

Average videos have most the essential components listed in our weighted rating system but are somewhat lacking in professional production quality, audience engagement, business opportunity details, and funding needs.

Good videos are professionally done and provide solid audience engagement with a compelling business opportunity. They address most components in our weighted-rating system but leave out one or two key details — most commonly an explanation of a business’s funding needs and plans.

Excellent videos are professionally done, emotionally engaging, and provide a compelling business opportunity. They tick all the boxes in our weighted-rating system, leaving the investor informed, confident, and excited about the investment opportunity.

In addition to categorizing videos by quality, we also tagged campaigns by the type of audience they target: 1) “Explainers” are essentially commercials tailored for the consumer audience, leaving out key investor information (i.e. the investment opportunity, market potential, team introductions, experience, and funding needs), and 2) “Pitches” are videos with a message tailored for the investor, including everything an explainer does plus what they typically leave out.

For a video categorized as an explainer to score well, it needed to strongly engage the audience through its production quality, emotional pull, testimonials, and creative business solution, since it lacks more concrete business information.

Our findings led us to four recommendations:

1. Investing in quality reaps maximum returns.

The majority of campaigns funded (82 percent) have a video of average quality or better. Having at least an average quality video is becoming more of a prerequisite for an increased chance of meeting the funding target, but this doesn’t ensure above average funding. In fact, successful campaigns raised an average of $277,000. If you look at the chart below, you will see that those with an average quality video only raised $222,000 — 20 percent below average, while those with good quality videos raise 16.5 percent more than the average. Not surprisingly, campaigns with excellent video quality do even better, raising 32 percent above average.

Intero Ristorante is an example of an excellent campaign video that helped the company raise double its funding target. The founders engage investors with a compelling story, background, and business mission through a professional quality video.

A word of caution: Even though campaigns with no video have a smaller success rate, when they do succeed, they raise more money than campaigns with average quality videos. If you are looking to just make your minimal funding target, then your campaign has a good chance of falling into that 82 percent of average quality videos that are funded, but investing in quality clearly yields maximum returns.

2. Pitch videos get funded more and raise more funds.

Our data shows it pays to inform your investor audience. We divided campaigns into those with no video, those that used an explainer, and those that used a pitch. Those using pitch videos show a much higher funding success rate (75 percent) than those with explainer videos, which were funded 18 percent less. And those with no video at all were funded 67 percent less than pitch campaigns. Campaigns with pitch videos are also raised more money — $294,000 on average — which is 6 percent more than the average funded campaign, 7 percent more than those with explainer videos, and 25 percent more than funded campaigns with no video at all. So, at a minimum, when putting your video script together it’s a good idea to answer some of the questions an investor might have about your company, team, or market rather than just explain how your product works.

3. Length doesn’t guarantee funding success.

Does video length matter? Well, yes and no. We analyzed video lengths by categorizing them into short (0 to 1.5 minute), medium (1.5-3 minute), lengthy (3-5 minute), and very lengthy (over 5 minutes). We found that short, medium, and lengthy videos all have a funding success rate above the average 51 average ( 69 percent, 71 percent, and 62 percent, respectively), which further signals that having a video is better than no video, regardless of its length.

Medium to lengthy videos, ranging anywhere from 1.5 min to 5 min long, raise the most capital in total and raise more than the average campaign by 4 percent and 16 percent respectively. Interestingly, the majority of pitch videos fall into these two categories, thus honing in the point that it’s worth taking the time to appropriately inform potential investors.

Campaigns with very lengthy videos appear to be an anomaly. They raise more than 2 times the average funded campaign ($601,000 on average) but are only funded half the time (they make up less than 5 percent of all funded campaigns). They also vary wildly in the amount of capital raised — anywhere from $64,000 to $1 million. Since a very lengthy video doesn’t guarantee six-figure funding, and it’s possible to have funding success with any reasonable length of video, length should be viewed in terms of how well you have informed and engaged your investor audience with the critical video quality components.

4. Positioning your campaign amongst quality brings greater returns.

Only 43 percent (104) of the campaigns we looked at had videos. Of this group, we rated 54 percent as being of good or excellent quality. We found the quality unevenly dispersed throughout the various equity crowdfunding portals. Of the 56 total campaigns rated as having good or excellent quality video, 45 percent ran on Wefunder, with Microventure and Start Engine coming a far second, hosting 16 percent of campaigns with top quality videos. Since we know that higher quality videos bring higher returns, it makes sense for issuers to position themselves within a portal that curates a higher level of quality campaigns. Looking at the chart below, you will also notice that Microventures and StartEngine have a higher percent of excellent videos. (And Microventures’ average funded campaign is $295,547 vs. Wefunder’s $284,631, although Seedinvest wins that race with the average funded campaign of $413,698).

Is a campaign video worth the investment?

Investing in a video specifically tailored for your equity crowdfunding campaign shows dedication and commitment to your potential investors. It also visually displays for them what you can accomplish and, subconsciously, what you can execute with capital. What the data shows is that if you are looking to raise a minimum of $50,000, investing in a decent video will most likely ensure your funding target is met. But if you are looking to raise at least $277,000, investing in an excellent quality video will maximize your returns.

A final point of consideration is your actual return on investment. Given that competition is strong among videographers and that a professionally executed video can be done for as little as $5,000, the potential returns on a good campaign video versus a poor one are significantly greater — almost 6x more.

Be sure to take a look at our story from yesterday on how your social media following is likely to affect the success of your crowdfunding campaign, too.

Sherwood Neiss is a partner at Crowdfund Capital Advisors. He helped lead the U.S. fight to legalize debt and equity based crowdfunding and coauthored the book Crowdfund Investing for Dummies.

Stephanie Willard is an analyst at Crowdfund Capital Advisors and is currently working on an MBA with a focus on finance and global affairs. She is passionate about finance as a vehicle for equitable economic development.