By Joseph Robinson
Crowd funding enabled an entrepreneurial team of watch designers to raise 20 million dollars when they were only aiming for 500 thousand dollars. It gave a video game designer a whopping 75 million dollars along with the 2015 Guinness World Record as the most successful crowd-funded project. Now, crowd funding could help small start-up climbing gyms buffer the risks associated with acquiring start-up capital.
After multiple conversations with a diverse set of crowd funding gym owners and managers, it is my understanding that both donors and fundraisers face risk in online crowd funding, and the success of the campaign depends, not surprisingly, on the benefits to the crowd. In this type of endeavor each stakeholder faces different types of risks.
Risks for the Donor
At the outset, one might think people donate to a cause purely out of altruistic intentions. The feeling of doing something good certainly is a strong motivation for giving away cash to charitable causes, but according to Chris Dodge, owner of the start-up Black Rock Bouldering Gym in northern Phoenix, which is seeking crowd funding, people donate to businesses for an additional reason: perks.
“I think the way to appeal to a broader mass is to find their incentive, their motivation,” says Dodge. “If I’m not there to climb, what am I going to get in return for throwing down three hundred dollars?” Most crowd funding websites allow a fundraiser to imbed donation-sensitive perks, or donor benefits, into the campaign itself. These donor benefits encourage larger donations. A donor looking to do a good thing may have only donated $100 without any incentives, but the prospect of a discounted year-long membership may convince the donor to dish out $350 to claim the perk.
Donors do not profit per se from crowd funding, but economists have derived a special term for what consumers receive from any market transaction. That word is utility, which is really just a fancy way of describing happiness. Donors gain utility in crowd funding from the feeling of doing a good thing and the enjoyment of perks associated with their donation. Keep in mind, however, that donors can likely acquire perks elsewhere at cheaper prices and they lose utility when they give away cash. What’s more, crowd funding campaigns do not always succeed. When they do not, perks are usually not distributed. Thus, acquiring perks elsewhere may be less risky than receiving perks through crowd funding.
Given these conditions, a donor will contribute to a start-up gym’s crowd funding campaign if the expected utility from donating is greater than the expected utility of not donating (see Figure 1). In other words, someone will donate if they feel like they are getting a good deal they aren’t likely to get elsewhere.
Here, increasing the magnitude of donor benefits increases the probability of success for a crowd funding campaign. If perks are increased then the expected utility a donor receives from donating will increase relative to the expected utility of obtaining the perk elsewhere. As expected utility increases, the donor becomes more likely to donate. Thus, the volume of donor benefits determines the volume of donations.
“Ultimately it will come down to incentives,” confirms Dodge.
Quality or Quantity?
Of course, this decision tree presumes donors care about available perks. If an owner offers a free tuba for every $350 donation, I doubt many climbers will hand over their credit card numbers. When it comes to donor benefits, quality matters just as much as quantity. In order to supply appropriate perks, one must first know the composition of one’s donor base.
Such was certainly the case for managing director Freddie Naish and his crowd funding team at The Project Climbing Centre in Poole, United Kingdom. “We were limited by the fact that our rewards only appealed to climbers,” says Naish. As a result, donors uninterested in climbing were likely unmotivated to donate and the campaign fell short of its goal.
My findings suggest donors usually fall into one of three categories: non-recreationists, recreationists and the “hardcore”. Non-recreationists do not work out or climb, but will still donate if they are fans of active lifestyles, are friends of the owner or proponents of local business. Non-recreationists will be motivated by publicity or swag not of the exclusively recreational or climbing nature, like gym branded t-shirts.
Recreationists work-out consistently, but they do not regularly incorporate climbing into their routine. Recreationists will donate in order to work-out at the gym and will be motivated by discounted gym memberships and fitness swag, such as towels and Nalgene bottles.
The hardcore may or may not work-out at all, but they climb an average of five days a week, leave blood on holds and have occasionally been known to sleep in their Outbacks in the parking lot between operating hours. Hardcores donate so they can feel like Daniel Woods with arms raised at the top-out of a V6 boulder problem, or simply to support the greater climbing community (“Puccio for President!”). If you want to motivate the hardcores to donate, promise them a Miguel’s Pizza coupon along with a discounted three-month climbing passes — some may be just crazy enough to purchase a lifetime membership!
Fortunately for Naish and his team, their crowd funding campaign caught the attention of private investors who filled the void left by non-hardcore donors. Naish, though, still emphasizes the importance of offering the right quality of perks when crowd funding. “This is certainly something I would look to adjust in a future round of funding,” says Naish.
Risks for the Fundraiser
Most start-up climbing gyms face two methods of funding: private and public. Seeking funding from the crowd offers a number of benefits. For one, a crowd funding campaign will likely bring in funds quicker than a private campaign after the fundraising gym has exhausted the primary private funding outlets. Quicker funding means an earlier grand opening which means earlier operating revenues. Perhaps more importantly, though, crowd funding provides extensive marketing at little cost.
“Word of mouth is one of the best attributes of a crowd funding campaign,” says Dodge. “The money is cool, but you’re never going to raise enough [money] through crowd funding to support your entire operation.” Instead, Dodge recommends reaching out to the private sector first and then, once your business is off the ground, appealing to crowd funding for supplementary cash and inexpensive publicity.
However, crowd funding is still risky because fundraisers incur additional costs. Raising funds through both the private and public sectors requires time and resources, but crowd funding gyms also incur fees from the crowd funding platform (somewhere in the ballpark of 10 percent of donations for sites like Indiegogo, Kickstarter and GoFundMe), plus the cost of donor benefits (priced at the fund raisers’ discretion).
Given these conditions, a fundraiser will choose crowd funding to raise startup capital if the expected payoff from crowd funding is greater than the expected payoff from unused private funding options (See Figure 2). In other words, a prospective gym owner will turn to crowd funding if it’s an easier option than pursuing private capital.
Ideally, fundraising gym owners would increase donor benefits until the expected utility from a donation surpasses the expected utility of acquiring the desired perk elsewhere. Unfortunately, perks cost money, and maximizing profit – not utility – is the goal of prospective business owners.
On the one hand, supplying larger perks will increase the probability of success since more donors will be donating more cash. As a result, the expected payoff of crowd funding will increase relative to other methods of fundraising. On the other hand, offering more enticing perks also increases the cost of platform fees and the cost of the perks themselves which, eventually, will outweigh the increased probability of success (I’d like to see you put on a successful crowd funding campaign which dishes out $150 climbing shoes for every $10 donation). I believe this is where the short-run analysis lies: how to provide the optimal donor benefits to increase probability of funding up until the point where the cost of doing so begins to approach the benefits, the point where the marginal benefit of increasing donor benefits exactly equals the marginal cost.
Dodge of Black Rock Bouldering estimates the optimal level of donor benefits for his campaign to be 20 percent of the standard, or market, price for the same perks. “I base the number off of probability of success, which I don’t have a mathematical equation for, just prior research,” he says.
“With Other Things Being Equal …”
It is frequently joked that economists rely too heavily on coinciding unrealistic assumptions (search “assume a can opener” online and you will know what I mean). Other than the standard assertions imposed in utility and profit maximization, the above risk trees only hold true given three major assumptions which, if altered, would greatly affect the value of crowd funding.
First, the above analysis assumes crowd funding is an all-or-nothing affair where fundraisers only receive donations if their target is hit. While Kickstarter is of this nature, fundraisers do have other crowd funding platforms. Flexible crowd funding websites like Indiegogo, for instance, allow fundraisers to claim donated funds even if the fundraising goal has not been met. Some flexible funding websites, such as GoFundMe, permit continuous funding without a donation cut-off date.
Flexible campaigns guarantee fundraisers will walk away with money, but they also decrease the probability of donors giving money since donors now face the possibility of incurring the cost of donating without the guarantee that the gym will be built, or at least being constructed as planned. Perhaps more importantly, flexible campaigns sacrifice the momentum of all-or-nothing campaigns.
“Momentum is huge, and momentum begets momentum,” says Brady Johnston, owner of the successfully crowd funded nonprofit Teton Rock Gym in rural Driggs, Idaho. You will not get that last-minute rush of donations if no last-minute to your campaign exists. Consequently, switching to a flexible funding campaign to avoid rigid deadlines could drastically decrease the probability of success for a crowd funding campaign.
Second, the fund raiser decision tree quite obviously assumes alternative funding and a sufficient donor base exist. This may not be the case in less populated cities or rural towns. In the small city of Driggs, Johnston lacked donors and private funding outlets from which to draw.
“In small towns you don’t have the volume of people,” says Johnston. “And as far as rock gyms go, no banks are going to lend you money unless you have a track record.” Instead, Johnston utilized what he did have: volunteers willing to help in the construction process and donors able to give holds and flooring. Additionally, Johnston relied on different methods of reaching out to the crowd: door-to-door campaigning and a Facebook group. “That’s the thing about a small town: everybody knows everybody. You can’t be impersonal. Cities work a lot differently in that respect.”
Lastly, the above decision trees apply to the short-run, not the long-run. In the long-run, it may be wise for start-up gyms to choose the fundraising option with the highest probability of success regardless of expected payoffs in the short-run. Profits in the short-run pale in comparison to the profits a gym can earn if it opens its doors and run a profitable business for many years.
Should You Crowd Fund Your Gym?
Disappointingly, the quantity of assumptions imposed on this analysis suggests no easy answer exists to the question of whether crowd funding should be utilized by start-up climbing gyms to raise money for start-up costs. If you do choose crowd funding to fuel your dream wall, here are a few tips from the driver’s seat on how to best spark the ignition:
1. Do Your Homework
“Focus on what your members and guests want; not what you think they want, but what they actually want,” advises Dodge. And nothing gauges your members better than good old-fashioned research. Dodge, for instance, gathered information about climbing consumers from gyms outside his immediate demographic since nearby competitors are likely unwilling to share information. He also suggests placing your gym in areas with an REI which he says has a similar clientele as climbing gyms.
2. Plan on an “F”
“Aim low,” suggests Naish. “You can always over-fund!” This advice is especially true for all-or-nothing campaigns. Asking for a higher amount on a continuous or flexible funding campaign is always an option, but if you want to retain momentum, then start an all-or-nothing campaign where donations can be made last minute. Just be sure to ask for less than one million dollars.
3) Take the Test
Finally, as someone who has attempted a crowd funding campaign myself, I am reminded that every time I cipher through the plethora of successful campaigns I remember, if it looks stupid, but works, it ain’t stupid.
No one way to crowd funding success exists, and you will never know if your way is a way unless you try it. While not entirely risk free, crowd funding does offer an affordable, readily available alternative means of funding even if you lack skills in web design and market research.
Joseph Robinson is a freelance reporter for the CBJ who learned the art of climbing journalism as an intern at Alpinist and contributor to DPM.
Climbing Business Journal is an independent news outlet dedicated to covering the indoor climbing industry. Here you will find the latest coverage of climbing industry news, gym developments, industry best practices, risk management, climbing competitions, youth coaching and routesetting. Have an article idea? CBJ loves to hear from readers like you!