Saturday 9 May 2015

The Dangers Of Crowdfunding

The Dangers Of Crowdfunding

It’s never been easier to attract investors for a new business idea – nor to support pioneering new start-ups. But is there a darker side to crowdfunding? Sarah examines the pitfalls…

Crowdfunding sites like Kickstarter can be a brilliant thing. They allow people with ideas to connect with the people who might want their project – and who are willing to chuck in the money to turn those ideas into reality. There are plenty of success stories of the back of a popular Kickstarter or IndieGoGo campaign, and plenty of happy customers who got to watch the film they funded or get early adopter access to a new gadget they helped to get developed.


But let’s be honest, there are times when things go horribly wrong with crowdfunding campaigns too. Removing the gatekeepers from industries like tech and arts might seem like a good idea that allows brilliant people the freedom to do what they want, but it also allows less savoury types to take advantage of the kindness of strangers. Crowdfunding sites do their best to make sure everything runs smoothly and everyone does what they say they’re going to, but there’s still no guarantee that your money is going towards the thing you’ve paid for. Let’s look at some examples of how things can go wrong…

Scams, Scams, Scams


The most obvious issue with pledging money to a Kickstarter-type project is that you don’t really know who the person on the other side is or what they’re up to. Take the recent example of the MotivBand.

According to the project page, the MotivBand was similar to the FitBit or any number of other smartbands: it tracked exercise and sleep, issued alerts when the wearer wasn’t moving enough, and also connected to a smartphone to take calls and messages. The selling point? Backers could get one for just a $35 pledge, which is pretty cheap for a band of its type.

Not cheap enough, though, since it turns out the MotivBand wasn’t a new, innovative product at all – it was just a repackaging of an existing band, available in bulk from Chinese sellers for around $28 a pop. If you read the project page carefully, it never actually says that the product is in development or that it needs Kickstarter money to get off the ground, but it’s pretty clear that this kind of reselling isn’t in the spirit of Kickstarter. And Kickstarter’s staff clearly agreed, because when they were alerted to the issue, the project page was suspended – and $40,000 worth of pledges were cancelled.

This isn’t the first time this has happened either; in 2013 a Kickstarter page was created for the Rock smartwatch, which turned out to be a repackaged (and more expensive) version of a watch already on the market. Now, obviously buying in goods and reselling them for a profit is basically how most shops work, but Kickstarter isn’t a marketplace; it’s for funding projects that might not otherwise get investors. This kind of thing is just about tricking people into thinking they’re supporting something new and getting an early bargain – no one would be happy to find out the thing they’d ‘kickstarted’ had been available on eBay for years.

Undeliverables


As crappy as repackaging scams are, though, at least investors would have got something for their money; the products exist, even if they’re not been recently developed by the people behind the Kickstarter campaigns. But sometimes investors don’t even get that. The problem with putting money into a product that doesn’t exist yet is that, well, it doesn’t exist. That means you might be waiting a long time to get your hands on the thing you’ve paid for. And in some cases, it might never turn up at all.

Take, for example, the ZPM Espresso Machine. Launched in December 2011, the Kickstarter project offered a coffee-shopgrade espresso machine at consumer prices, and initially the provisional delivery date was set for December 2012. In order to get one of the machines, you’d need to pledge at least $200 – which more than 1,300 people did, with ten people even pledging $1,000. Unfortunately, that amount of demand turned out to be more of a blessing than a curse, overwhelming the creators. The most recent update from the project is from last month, and still the machines weren’t ready to ship to customers. Yikes.

A similar problem hit the creators of the Kreyos smartwatch, who raised a whopping $1.5 million on a goal of $100,000. Their manufacturing partners let them down, and while a few watches did make it onto the wrists of backers, they were faulty, leading unhappy customers to demand refunds. What had initially looked like a massive success had turned into an expensive (and humiliating) failure. There’s a lesson there for potential Kickstarter creators as well as backers; it’s important to know how things are going to work if your project succeeds, and make sure the amount of money you’re asking for is reasonable, even if demand turns out to be huge.

Some Ideas Just Shouldn’t Be Funded


The projects we’ve talked about so far, whether or not they ended up producing products, have at least been for fairly sensible ideas. But some Kickstarter and IndieGoGo projects should have been stopped before anyone donated even a dollar. You probably heard about the guy who created a Kickstarter project to raise $10 for a potato salad and ended up with over $55,000 to throw a massive potato salad party? That was one of the more harmless ideas.

Last November, Kickstarter suspended a project to develop a gaming peripheral that would draw blood from a player every time their character got shot in a game. Basically it tapped into the rumble function on a game controller, so as well as getting tangible feedback that their character was in danger, they’d also lose actual blood that would be pumped into a special collection unit.

It’s a terrifying idea, but at least it wasn’t designed for home systems – according to the creators, it was intended to be used at blood donation drives, to encourage people to give blood. And there would have been safety features built in to make sure being rubbish at Call Of Duty didn’t cause any actual fatalities. Blood Sport raised more than $3,000 in pledges before Kickstarter decided it wasn’t a good idea and suspended the project.

There are plenty of other distasteful ideas asking for your dosh, from sexist books to horrifying games about rape, but those don’t tend to get shut down. (Gratifyingly, most of them tend not to reach their funding goals, though.) There aren’t rules about not being an awful person before you set up a crowdfunding project, but it is just another way in which crowdfunded ideas tend to differ from conventionally funded products: there’s no legal or human resources department on hand to point out when something is a terrible idea.

Put Your Money Where Your Brain Is


At the end of the day, then, the best advice for prospective Kickstarter or IndieGoGo backers is to engage brain before handing over any money. Just as you wouldn’t enter your credit card details on a dodgylooking website selling vaguely described products without any real description or proper images, you should always consider whether the thing you’re backing sounds legit. Stick the creators’ names into Google search and see what their background is. Do they sound like the kind of person likely to be able to create the product they’re asking you to invest in? Or have they been associated with scams in the past?

Massively overfunded projects tend not to be a great prospect either, because while someone might be able to build 20 gadgets in a garage, putting together 20,000 of them will require more resources (and time).

Lastly, it sounds awful, but consider whether you can afford to lose the money you’re pledging. If you’re chucking in £10 for a band you like to record an album, it probably won’t be the end of the world if it takes two years to turn up – but paying $1,000 for a coffee machine you might never get to make an espresso with is really going to sting.