We’ve been investing in the crowdfunding market for a long time. My initial exposure to it was via the non-profit DonorsChoose where I am on the board and where my partner Brad and I made an early contribution to the fundraise which allowed them to go nationwide. That was almost ten years ago now.
There are two prevalent funding models in the crowdfunding market, all or nothing and keep what you raise. I prefer the all or nothing model and I think most funders do. DonorsChoose uses the all or nothing model and that’s where I saw it first. Kickstarter also uses the all or nothing model.
In the all or nothing model, the project creator picks the size of the raise they want to do and then they have to hit that number to get the funds. In the keep what you raise model, the project creator picks a size of raise as well, but they don’t have to hit the number, they keep whatever they raise.
Many project creators think the keep what you raise model is preferable. They don’t like the idea that they will fail and not get anything. But they fail to realize a number of important points about crowdfunding:
1) Funders prefer all or nothing because they want to be sure the project creator will have the funds to complete the project
2) The need to hit the goal pushes everyone, including the project creator, to work hard to make the goal. It drives the whole raise.
3) Creators who choose all or nothing are more committed to the project, the raise, and the process. Keep what you raise often attracts dabblers.
4) All or nothing raises more money. The amount of money that is raised every year in crowdfunding via the all or nothing model dwarfs the amount of money that is raised in the keep what you raise model, except in the charitable giving category.
Crowdfunding on the global Internet may be new, but raising money is not. In the venture capital business, the keep what you raise model is almost non-existent. A founder can’t go out to raise $5mm and then say to the investors “well we only got $2mm of capital committed, but we are going to close on that next week.” That just doesn’t fly.
Keep what you raise is for people who are afraid to fail. It’s not funder friendly. And it is less effective too.
So if you are considering a crowdfunding project for anything other than charity and are being wooed by a platform that pitches its keep what you raise offering, you should see that for what it is. Lame.