15 March 2012

How to correctly budget your crowdfunding campaign

The other day, I posted the results of a survey I'm working on as an on-going project to get a better sense of how perks are distributed across Kickstarter campaigns. I won't bore you with the details, but basically it's a survey of almost every successful Film & Video Kickstarter campaign since August of last year (it took a loooong time to finish). Then, I spit out the numbers, put them online, and went back to drinking.

Easy, right?

Well, what I forgot to factor in is that not everyone shares my affinity for statistics. You see, I'm kind of a stat nerd. I grew up obsessing over baseball statistics and pretty much taught myself Excel in high school as a means of winning my fantasy baseball league. I was always good at math. I took AP Calculus in high school and even considered minoring in Math for a bit. I minored in Writing instead. And Pre-Law.

Anyway, after posting the data, I kind of assumed that everyone would know what to do with it, but of course not everyone does. So, here we go. This might get a little nerdy. But it's worth it.

The first thing you need to understand is the concept of Expected Value (ooohhh…Probability Theory). I came across EV (that's what we call it) when I used to play poker for a living, where it's a really big deal.

EV in gambling kind of works like this: Let's say I offer you a bet. We'll roll a standard 6-sided dice. When "4" comes up, I'll pay you $6. When any other number comes up, you pay me $1. Do you take the bet? (Yes.) The reason you do is because if we do this 6 times (or 600), chances are that the "4" will come up once and you will make $6. But the other 5 numbers will also probably come up once each, and that'll cost you a total of $5. Ergo, you will net $1, so your Expected Value of that 1 throw of the dice is $0.17. Every single time we make that bet, you can expect to make $0.17, even though you never actually will make exactly that amount on a single bet. But you can't worry about the results of that 1 throw, because you can't control that. You can only control the decision you make with that 1 bet.

This comes up a lot in poker. Poker players play tens of thousands of hands a month, which means that the exact same situations come up a lot, especially stuff like flush and straight draws. Over enough time, the "luck" all evens out and that total EV will converge with your actual winnings. So you train yourself to not be so worried about one individual river card. Of course, if you're on ESPN and you're trying to win the World Series of Poker, the EV calculation changes and maybe you give up a positive EV situation to wait for a better one, since there's the risk of elimination.

You see this more than you think. Nate Silver (who used to post in the same poker forum I used to post in) of FiveThirtyEight uses this a lot (along with a number of other things). After a while, the whole world becomes a series of EV calculations.

So let's see how we're going to apply this to crowdfunding and Perk Distribution. Here's the numbers after 717 campaigns:

Screen shot 2012-03-15 at 9.26.22 AM

After that many campaigns, the average backer amount comes to $95.50, so if you're hoping to raise $15,000, you can expect to have 157.1 backers. Will you have that many? Probably not. You might have more. You might have less. But at the end of the day, this is the best estimate you've got. The rest is kind of easy. 7.15% of 157.1 is 11.2 and so on.

Then, you want to figure out what your perks are going to cost to fulfill. And here I'm just making up some numbers. (This is a more updated version from the previous image)

Kickstarter campaigns (all) fixed

Remember, for total EV, your $25 backers are also your $50 backers and your $500 backers and so on. $$ Cost is the cost of fulfilling the perk. $$ EV is just the $$ Cost times the Total EV. Here you should spend roughly $117.64 fulfilling your $5 perk. Again, it might be more, it might be less. But on average it should come in around here.

So you want to raise $15K? Great. First of all, make sure you can actually get the film done for $15K. Then…

Amazon and Kickstarter take, on average, 8%. 8% of $15,000 is $1,200. Now we re-run the numbers for our new goal of $16,200. That takes our perk cost to $492.17. (I'm not going to re-post the image. You're smart enough to figure that out.) Let's call it an even $500. Now you're looking at $16,700. To be safe, let's make our new goal $17,000. That's your actual goal.

Of course, since we're dealing with percentages, everything else moves. Our fees back to Kickstarter and Amazon are now $1360.00 and our perks now cost $516.47, which leaves us $15,123.53 to make the movie. And if you've budgeted the film correctly, that's what you actually need. Had you gone with your original $15K, you would have actually gotten $13,344. I'm guessing your budget is tight enough already without having to cut over $1,600.



Lucas McNelly is a cynical filmmaker who recently spent a year sleeping on couches around the world and has somehow fallen into teaching people how to run crowdfunding campaigns. You can hire him, if you want to. Also, you should follow him on Twitter.

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