The risks that face crowdfunded campaigns

It’s the quickest way to raise cash but should donors get a satisfaction guarantee?

M5ABJC Close-up Of Paper Cut Out Human Figure Surrounding Stacked Banknotes On Desk. Andriy Popov / Alamy Stock Photo

There's a great deal of nostalgic enthusiasm around the world for retro computer games. There's also a great deal of money to be made if you can supply them in an unusual and innovative way. This was demonstrated in early 2016, when some 5,000 people pledged more than half a million pounds towards a crowdfunding project for an LCD console called the Sinclair ZX Spectrum Vega Plus. This device, which promised 1980s-style arcade action in a sleek, handheld unit, was due to be delivered to backers of the project in September of the same year. But nearly two years on, the machines have failed to make an appearance.

The reasons for their non-­appearance are complex, and are outlined in great detail in various online arguments and legal documents – but one thing is clear: backers of the Vega Plus project either want their machine or their money back. However, many of them hold out little hope of ­receiving either. The episode has cast a faint shadow over crowdfunding, which for over a decade has offered a route into business for people with novel ideas, but no other way of sourcing investment.

The Pebble smartwatch, the Glowforge 3D laser printer and the video game Prison Architect are just three of countless successful projects that have reached (or ­surpassed) their funding target, come to fruition and delighted investors. But a fully funded project isn't necessarily a successful one. For entrepreneurs who are inexperienced in business – and manufacturing – it can be the start of an unpleasant saga characterised by delays, financial problems and furious backers demanding to receive something in return for their support.

Lack of transparency and accountability

In 2014, Australian film director Jason van Genderen contributed over US $6,500 (Dh23,871) on the crowdfunding platform Kickstarter towards a tablet computer called the Modbook Pro X. “Their pitch said that ­everything was ready to go,” he says, “and they just needed the funds to manufacture. But that was nearly four years ago.” The latest update on the product’s Kickstarter page, posted in March 2018, states that “things are starting to come together”, but this, perhaps ­understandably, doesn’t reassure van Genderen.

Indeed, the lack of transparency and accountability surrounding the crowdfunding process has led him to make a documentary film on the subject, Lost in the Crowd, which is currently in the final stages of editing. "Crowdfunding gives anyone access to a credible framework to promote their projects," he says, "but we don't know how honourable their intentions are."

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The roll call of crowdfunded projects that have ended in recrimination and failure makes for grim reading. In the summer of 2011, nearly $350,000 was raised to support Zioneyez, a pair of glasses with a built-in HD video camera. The glasses, however, never appeared; nor did any explanation. In 2015, a campaign to raise funds for the Laser Razor – a laser-­guided shaving solution – was halted by Kickstarter when the project's founders failed to produce a working prototype, but the project later resurfaced on competing site Indiegogo. Half a million ­dollars was subsequently raised, but the backers of the Laser Razor have received nothing. A ­product update, posted on ­Indiegogo last month, plaintively admitted that it has been "a time of many ups and downs, more downs than ups to be honest…"

"People's innovative enthusiasm can get the better of them," says Barry James, chief executive of The Crowdfunding Center, an organisation that assists and advises businesses with crowdfunding efforts. "A successful raising of funds can lead people to hubris, and they may try to overdo things. But there's a distinction between fraud and failure. Fraud is intentional, when people go out there to take people's money, and in comparison to the mainstream economy the incidences of this are vanishingly small. But when new entrepreneurs try innovative things we have to expect failure. Everything works on a Powerpoint slide, but ­making it work in practice is very different."

Learning about the inherent risks

Crowdfunding has opened the eyes of the public to certain perils of investment that would normally remain out of sight. Given the risky nature of entrepreneurial activity, van Genderen believes that the risks need to be made clearer when people are asked for money. “Adverts for projects appear on Instagram or Facebook,” he says, “and they’re highly emotive. ‘Shop now’, or ‘click here’. It’s the project creator’s ­responsibility to explain the risks, but doing that doesn’t get a project up and running. So we see something we think we can buy, and we buy it. Businesses are trading off that ignorant bliss.”

Crowdfunding websites are careful to use terms such as “pledge”, “backing” and “reward” to mark the distinction between investing in a product’s future and shopping for that product, but that distinction is lost on some people. In addition, the difficulty in legally defining words like “pledge” means that individual governments around the world find it difficult to legislate to protect consumers. Because of this, van Genderen believes that the onus is on platforms such as Indiegogo and Kickstarter to do more to warn people about the inherent risks.

“There’s currently no onus on them to ensure that the project they’ve already collected commission on will come to fruition,” he says. “But they can’t keep themselves at arms length from these problems when they endorse projects with ‘staff picks’ and ‘top 100’ badges. When people see those endorsements, they give money. It would be fairer if the platforms put their commission into an ­insurance fund to help backers if a project overstretches its delivery.”

Barry James is keen to put these failures in context, ­however. “People are quite right to cry foul if the project goes dark,” he says, “but that rarely happens.” Statistics from Kickstarter in 2015 indicate that 91 per cent of funded campaigns successfully delivered the final product. “Crowdfunding is far from perfect,” he continues, “but it’s a lot nearer to perfect than just about any other model I’ve yet seen.”

For his part, van Genderen will continue to speak up on behalf of ­disgruntled backers as his documentary nears completion. “Crowdfunding is a wonderful concept,” he says, “as long as it looks after everybody in the chain. But at the moment, nobody represents the little guy.”

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