Retail Crowdfunding Balances Risk Against Reward

When retail pundits throw the term “sharing economy” around, they’re usually referring to services like Uber that connect consumers in need of a ride or help moving heavy furniture with other non-retailers willing to help.

However, the sharing economy doesn’t have to be limited to such occasions.

In fact, the explosion of crowdfunding for retail startups shows that consumers are willing to pony up some serious dough for the right products.

Take, for example, the perspective from Caleb Light, vice president of sales at Power Practical, a Salt Lake City-based retail startup that focuses on high-tech products for outdoors activities, Utah’s Daily Herald reported. In just three years since its founding, Power Practical has conducted five separate campaigns on the popular crowdfunding sight Kickstarter. It’s most recent round – a fund-raising blitz for the Luminoodle, a portable lighting device powered by USB – has already accumulated more than $320,000 in funding, despite having a goal of just $10,000.

“We use crowdfunding as a fundamental tool for validation and funding production,” Light told the Daily Herald. “This tool, in essence, drives down the cost of innovating and producing new products, which really helps out small to medium businesses.”

Is the key to tapping into the latent funding power of consumers simply releasing cool products? Light doesn’t think so. He explained that Power Practical has seen such consistent success because of the way it begins its crowdfunding campaigns. Instead of releasing a new product to the world sight unseen, Light explained that startups need to boost interest through promotional videos of demos of product prototypes. If they can convince consumers their product or service has some level of prestige and “it” factor about it, many shoppers will be happy to part with their money.

“People like the aspect of backing cool products, and they look at the video for that, as well,” Light said. “You really have to build interest before you launch because those first few days are crucial to get off and running.”

For some retail startups, though, determining how best to stoke consumer interest can be a challenge. According to data from Crowdmapped, the reasons why consumers donate to crowdfunding campaigns are many and varied. The majority of campaigns – 43 percent – are rewards-based, with funders getting some add-on or extra service when the product eventually makes it to market. However, 29 percent of campaigns are funded purely because people believe in the social or economic good they will have on the wider world. Equity-based (15 percent) and lending-based (13 percent) crowdfunding efforts comprise the least common strategies, even though equity-based projects generated the highest percentage of funds per project with 42 percent attracting more than $100,000 each.

Regardless of the type of crowdfunding tactics retail startups use, there’s no denying the fact that consumers are ready to put their money behind businesses they believe in. The trouble is, as The New York Times reported, it’s not always easy to tell which companies consumers believe deserve their support. Naomi Josepher and Jon Payson, owners of a high-end Brooklyn wine and cake shop, turned to Kickstarter for relocation funding after they received a notice that their rent was scheduled to increase more than 500 percent. However, since Josepher and Payson were already established – if not wildly successful – small-business owners, the consumer response was lukewarm at best.

Don Steinberg, entrepreneur and author of “The Kickstarter Handbook,” told the NYT that consumers still have a narrow definition of what kinds of companies they’re willing to crowdfund.

“It’s the same thing, wondering whether established enterprises really should be asking for money this way,” Steinberg said. They aren’t struggling artists or inventors trying to get started. It seems to defy the spirit — and the name — of Kickstarter.”

Retailers used to only have to worry about their reputations once their products hit the market, but if startups want to get their piece of the crowdfunding pie, they’ll have to start monitoring their images far before they’re ready to launch.