Topic: COMMUNITY INTEREST
BEWARE OF CROWDFUNDING SCAMS: KICKSTARTER AND INDIEGOGO
By Tammy Duffy
Crowdfunding, whether the target is financing a philanthropic initiative, an art project or a business proposal – is a sexy concept and has turned Kickstarter into a household name.
By pooling the resources of investors or donors with relatively tiny amounts of money to put to work, in numbers large enough to offset that small per capita sum – has helped get movies into development and launched new products.
The approach is akin to angel investing, with the key differences being that investors will get publicly traded stock and that angel investors tend to be savvy, experienced folks not looking at the deals they fund as a way to strike it rich. Most of them are already wealthy, having made millions as entrepreneurs or executives and who now are risking a relatively tiny portion of their net worth. Moreover, these angels typically are investing in a business in which they have some kind of specialized knowledge: An e-commerce angel might have been an early investor in eBay or Amazon.com, for instance, while someone putting a few thousand dollars into a health-care technology company is likely to have spent his career in that business and be familiar with what’s in hot demand and what technologies are likely to work.
But Kickstarter's most-buzzed-about projects -- the ones that blow through their funding goals and draw in thousands of backers -- have a spottier track record. Anecdotal reports abound of flawed products (try Googling "jellyfish death trap"), overambitious creators who can't pull off what they promised, and epic delays. An investigation found that 84% of Kickstarter's 50 top-funded projects missed their estimated delivery dates or never happen.
84% is a large number of potential scams occurring.
Like many of the projects it launched, Kickstarter is in some ways a victim of its own runaway success. Indiegogo does not have any better of a track record. They both hide behind the cloak of their terms and conditions and take zero responsibility for what is going on.
Kickstarter, founded in 2009 to fund "creative projects," the site wasn't intended to hatch things like new gadgets that require multi-million-dollar manufacturing lines in Asia. It began as a way for artistic types to raise a few thousand dollars for their gallery shows, records, and books.
"We had a lot of musicians and artists at first, and that's still 95% of the platform," says Kickstarter co-founder Yancey Strickler. "But we've always had a broad definition of 'creativity,' and that's led to some contemporary definitions of the word. Maybe it's not what Beethoven was doing, but if they had 3-D printers in his time, he probably would have been into it."
Such quips are common from Strickler, who looks like Central Casting's vision of a startup founder. He's got the requisite thick-rimmed glasses, casually floppy brown hair, and an omnipresent half-grin whenever he talks about the platform he created.
Thanks to the rise of crowdfunding, some amazing, otherwise impossible product ideas have made it to the masses. Risky, wildly imaginative, and innovative are some of the adjectives used to describe the most notable projects. At the time of writing this, Kickstarter has provided the means for $1.89 Billion in pledges towards 99,475 successful projects. Though Indiegogo’s statistics are kept private, you can bet their pledges are substantial as well.
A dark side to this is emerging, however; some of these campaigns are leaving their investors high and dry. Scammers are seeing these platforms as a way raise tons of money and then disappear without a trace. There are now numerous poorly-executed projects floating around the web, and even more exploited investors floating around right behind them. Just like investing in the “real world”, it has become critical that you perform your due diligence as a backer before throwing your money at the next big thing.
Thankfully we are seeing efforts to mitigate these dangers, from backers, authorities and the platform makers themselves. Last year, a few developments set a new tone for accountability. Kickstarter hired Mark Harris, a well known tech journalist, to investigate the high-profile failure known as Zano. Zano raised an incredible $3.4 Million to bring their video recording drone project to the public. They failed not only to deliver on the actual product, but also failed to provide adequate transparency as to where the funds went or why backers still hadn’t received their drones.
To help the overall cause, last spring the FTC successfully pursued and settled charges with a different scammer who canceled his project and then used backers’ money to pack up and move.
Though most crowd funding supporters will agree that the defensive moves mentioned above do set a positive precedent in protecting backers, they are simply not practical in each case. Not every project is fortunate enough to be properly investigated, and even “verified” LinkedIn and Facebook accounts may not be effective to ensure you’re dealing with someone who is who they claim to be, or selling a product that exists in the form they suggest.
Take a good look at the prototype being offered. You must ask yourself: what credentials does the project creator possess? Besides having access to the technical resources, do they have the ability to manage the project from conception to fruition? What does your gut tell you about the project you’re looking to back? Or ask them – what do they tell you? If it seems too good to be true or too far out there, it likely is.
On the flipside, not every delayed project is automatically a scam either. Anyone who has worked in design, manufacturing, or development will tell you that “things” happen. Delays caused by issues sourcing specialized parts, inconsistencies in manufacturing quality, or shifting shipment timelines may all be genuine reasons to postpone a project. What is not acceptable, however, is refraining from explaining the reason(s) to backers and failing to keep them informed on how issues are being resolved.
It is up to you as a consumer and potential backer to invest wisely, just as if you were pouring capital into some risky new stocks. There is a bit of risk inherent with each project you back because there is only so much Kickstarter, Indiegogo, or GoFundMe can do in each case to ensure legitimacy, and even less to ensure success. Understandably, no one wants to spend their hard-earned cash on something that will never materialize. On the bright side, there’s still always Amazon.
Some Kickstarter scams:
Stone Tether: 6,927 backers pledged $366,199 to help bring this project to life.
Juicebee: 758 backers pledged $57,852 to help bring this project to life.
Agent Watch: 5,685 backers pledged $1,012,742 to help bring this project to life.
Coolest Cooler: 62,642 backers pledged $13,285,226 to help bring this project to life.
Indiegogo scam: Triton Gills: 2,409 backers pledged $878,180
Let the buyer beware.