Is Kickstarter Right for Your Business?

Many entrepreneurs are convinced that the “promised land” of pre-sales and product validation lies just beyond their next Kickstarter login screen. I hear it all the time: “We’ve got an idea for a new business, a provisional patent or app; and we're getting ready to launch on Kickstarter. We need your help to make it a success.”

But as I advised a Yale School of Management audience last September: Don’t get too excited about Kickstarter, my fellow entrepreneurs. The odds are against you.

Sure, there are the occasional success stories. The Coolest Cooler project, by Ryan Grepper in Oregon, for instance, raised more than $13.2 million (his goal was a mere $50,000) from more than 62,000 backers. But these are the exceptions.

Shocked? You should be.

Stories like Grepper's are generating false hope, giving startups the misguided idea that they, too, can be funded through "the crowd" and become an overnight success. However, if you look past the media frenzy and deep into the actual numbers, it’s clear that stories like Grepper’s are nowhere near the norm.

Related: Before You Crowdfund an Invention, Consider Patent Protection

The average Kickstarter project raises just $7,825, and projects aiming to raise less than $10,000 have a 29 percent success rate, according to Kickstarter. Successfully funded projects that fall between $20,000 and $100,000 represent just 4 percent of projects launched, while those seeking in excess of $100,000 -- which did reach their goal -- account for just .09 percent. More than half -- 55 percent -- of all Kickstarter projects never meet their goals, and 11 percent go through an entire campaign without landing a single backer.

Where does the money really go?

Kickstarter takes 5 percent of the money as a fee for using its platform, and Amazon charges 3 percent to 5 percent for credit-card processing fees, if you fully fund your project. Campaigns that include a video may succeed at a much higher rate, but those videos can be costly. A self-respecting freelancer might charge $5,000, while a professional creative service company might charge as much as $50,000 for a proper feature-length video.

Rewards and discounts eat into profits, as well. Not to mention that you may incur shipping costs and expenses for social media management, content production, guerilla marketing, PR and other promotional activities associated with actually getting people to your Kickstarter page.

What if you can’t deliver on your promise?

Only 25 percent of Kickstarter projects deliver on time ("The Dynamics of Crowdfunding: An Exploratory Study," the Wharton School of Business, June 2013). This is a great way to turn off potential customers before they even receive and experience your product.

Many pre-sales are also selling concepts that are still far from the beta stage, let alone the point at which they'll arrive in peoples’ hands. They’re dreams with no real shipping date in sight, and they’re resulting in negative experiences for backers.

Take Coin, for example, a universal credit card which was pre-sold on its own site, not Kickstarter's, and hit its goal within 40 minutes; however, it delayed its shipping date almost another year. The initial excitement around Coin has completely dissolved as a result.

Related: Should You Consider Hiring a Crowdfunding Consultant?

Is that a risk you can afford to take?

A brand has only a limited number of first interactions with its target audiences. So, how do you expect someone to believe the real value of your product is $199, when you are willing to sell it for $100 right out of the gate? Offering that kind of markdown is like marketing a grand opening through Groupon.

If you must offer a pre-sale, here’s my advice: Be transparent; carefully consider your shipping date; treat your backers as investors (because they are); and communicate with them often and clearly. Also: budget for your pre-launch, launch and post-campaign needs; consider building and designing your own experience outside of Kickstarter; always budget for contingencies; and remember that every day counts -- especially leading up to day one of your launch.

Starting a new business is hard work. If you have a great idea for a product or service and are ready for the challenge of entrepreneurship, then take your fate into your own hands. Kickstarter’s own brand is suffering right now, riddled with bullet holes like discounting, missed deadlines and false promises.

Is this the environment in which you really want to start your brand?

Related: First Time Crowdfunding? Here's What You Need to Know