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July 5, 2023
John Rizvi, Esq.

Crowdfunding Campaigns for Taking a Product Invention to Market: Budget to Avoid Disaster

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But one last question. And when you mentioned at the beginning Kickstarter campaigns, like, say, an inventor, and something that might confuse a lot of people is how can an inventor raise $500,000 in a successful Kickstarter campaign, and then go bankrupt? So like that they're saying, “Well, wait a minute, that doesn't make sense.” So can you explain that? And say an inventor starts a campaign, and they get overwhelmed by this amazingly positive response, and a lot of money comes in, what should be their next step? So talk a little bit about both of those scenarios.

The quandary, the problem is, is that they don't understand the budgeting, when they go into it. So they go, “Alright, I'm gonna have to pay this much for the platform, to use the platform, and this much for the payment processor.” So there's, you know, 8 to 10% is just gone immediately. And those folks will take their money before they give you anything. So they take it, alright? So that means, then, if you start the campaign, and this is where a lot of times it comes back to haunt the inventors—if they start the campaign, and it's not doing very well, they go out and they hire a marketing company. Well, that marketing company is going to take somewhere between 10 and 20%, right off the top. Well, if your budget then has been based on a certain number for the manufacturing, and that's what people are paying for, all right, now you've got an additional expense you hadn't expected in the beginning. And so that's got to be paid upfront. Well, now you're still obligated to fill those orders. And if it was based on, you know, $9 a unit, and now you only have $7.50 a unit, the rest of that's coming out of your pocket. And depending on how many were sold—so if you've got, you know, a campaign, and this was what I saw some of these guys do is that their target was 120,000—well, they hit 500,000. That means they had sold a lot of units, and they had to then be able to manufacture and ship all the units that they had promised, even though the money had been taken out of their account before they received any of it. And for inventors who have hard costs, I mean, the products are already on—we used to say a slow boat from China—um, but they're already shipped or they're in a warehouse here in the States. So they have exact cost, then they know the numbers to play with. If they plan on hiring a marketing company ahead of time—all right—now they can adjust the numbers before they launch the campaign. So it's the marketing companies that you see that make the biggest difference in a successful campaign or a failure, because you have to create the crowd. This is not one of those things where you know, if you post it, they will come. They don't know you're there. Alright, so the marketing campaign, they've got to buy into it, they've got to be the ones that are frequently setting up the page and, and the launch and getting ready for it. They find the followers that want the product. And so when I tell an inventor, it's like, you've got to bring the crowd to the campaign before you launch it. Well, a lot of them, they don't know how to do that, especially if they're older and you know, social media is not their big thing. If they're working to, you know, fund this, this hobby they've got, they're not going to have time to go out and grab the crowds so they hire a marketing firm. Well, if you're able then to price the product based on hiring the marketing firm, now you've got a shot at it. Now you've got, you know, a chance to do it. But hard numbers prior to launch are critical.

 

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