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When Kickstarter & Indiegogo funding go wrong
Crowdfunding has barely been out of the news in the last five years. It has helped to propel the maker movement and foster innovation in a wide variety of fields, not least technology. The ability for creative types to appeal to ordinary people to fund their great ideas and help make them a reality is exciting.
It takes the decision-making process out of the hands of risk-averse, purely profit-driven business types. It also empowers would-be inventors and indie developers lacking financial backing to realize their ideas without having to bow to corporate compromise.
When it goes right, we get success stories like the Pebble watches. When it goes wrong we get frustrated backers with nothing to show for their investments.
Victim of its own success
There are actually quite a few crowdfunding platforms, but two big names have been dominating the scene. According to its own data, since Kickstarter was founded in 2009 it has pulled in $1,162,128,033 and successfully funded 63,550 projects. Indiegogo doesn’t disclose figures, but it has been running since 2008 and has raised somewhere over $100 million for around 50,000 successful projects. It’s also interesting to note that Indiegogo has raised $56.5 million in venture capital for itself so far.
When you have sums of money like that floating around big business starts to take an interest. This can play out in a couple of different ways that seem to go against the spirit of crowdfunding, namely proof of concept and acquisitions. Crowdfunding success can be used as a proof of concept showing that something is a viable idea to secure further investment, and it can be used to boost the value of a startup and put it in the shop window for a big company to buy.
What’s the problem?
The trouble is that backers are paying cash because they want the finished product and/or they love the idea or the creator enough to want to help make it a reality. If the idea they were sold on gets snapped up by a big business then there’s simply no telling where it will end up.
There’s a good example we can discuss. Oculus raised $2.4 million on Kickstarter to developer the Oculus Rift, a VR headset for gaming. Less than two years later Facebook announced it was buying Oculus for $2 billion. Many of the backers were unhappy. Oculus currently employs some very talented game industry veterans and it has benefited from Valve’s R&D. With Facebook on the scene there are fears that the entire project may get subverted in a new “social” direction which is not what the original backers envisioned.
You’re not an investor
There was also a lot of noise about the fact that backers “investments” helped Oculus turn a huge profit. If they had sunk those payments in for a share of the company then they would have cleaned up, but that was never what crowdfunding was about. Oculus raised a bunch of extra investment after the Kickstarter campaign before the Facebook deal.
Investors are buying themselves a stake in the company and their interest must be served. Backers are putting money in to support an idea.
It’s also worth pointing out that Ouya raised more investment privately after the Kickstarter campaign, Pebble raised investment before and after the Kickstarter campaign, and Pono is following the same path (it already took investment before Kickstarter and it’s bound to take more after).
Investors are buying themselves a stake in the company and their interest must be served. Backers are putting money in to support an idea. The best case scenario is that they get the reward outlined when they paid and get it on time.
Rules, what rules?
What’s actually right and wrong on crowdfunding platforms is pretty vague. Oculus didn’t break any rules and there are certainly projects that have panned out worse.
Kickstarter thinks creators should return backers money if they don’t meet their target, Indiegogo allows them to keep it as long as they pay a larger percentage fee. Neither of them is going to guarantee a project or give you a refund if it fails. Creators are supposed to keep the community informed, but they often don’t and long delays, leading to angry backers are common, see Pressy, Kreyos, and many others.
In terms of fees Indiegogo takes 4% of the funds raised when a project is successful and if a creator wants to keep the money after a failed project they have to pay 9%. There’s also an additional 3-5% “payment processing fee” on top (PayPal).
Kickstarter takes 5% of any successful project’s funds raised and has the same 3-5% “payment processing fee” (Amazon Payments).
Projects that secure their funding and then fail are problematic because the platform that you invested through washes its hands of responsibility. That’s why Kickstarter has been bringing in stricter rules and controls over what it allows on the platform, but there’s a risk with all of these projects.
What are you actually backing?
We may think that crowdfunding is for independent entities and it should only drive projects that wouldn’t otherwise be realized, but that’s not the way it works. We can’t possibly know whether something we’ve invested in will be acquired down the line. If you want to own a stake and be an investor then look up “equity crowdfunding”.
The platforms are also not going to turn away projects with big names attached, because they make money from those projects.
The platforms are also not going to turn away projects with big names attached, big businesses backing them, and a marketing machine, because they make money from those projects. You have to stop and ask yourself whether you’re comfortable paying upfront to a business that’s merely trying to mitigate risk by taking your money, suck in some of the cheapest investment cash it will ever get, and generate headlines in the process. It’s the deception that rankles and the fact they’re subverting a platform that wasn’t intended for them, but as long as they deliver on what was bought into most people won’t care.
We shouldn’t get too negative here. If we look at crowdfunding platforms in terms of the number of projects funded then the majority are definitely positive. We’ll find a lot of really cool things being funded by family, friends, and extended circles because people have faith in the creator. We’ll find some projects being produced by talented professionals without any corporate tweaks being made because the fans were willing to pony up the cash. We’ll find some amazing new ideas being funded that no one else would have taken a risk on.
For the sake of innovation we should keep seeking these things out and backing them. We just need to keep a wary eye on big businesses muscling in and trying to use crowdfunding for their own ends.