John Mullins, an associate professor of management practice in marketing and entrepreneurship at London Business School, predicts that this year there will be a backlash against crowd-sourced fund-raising organisations such as Kickstarter. Here he explains why.
So crowdfunding organisations should come with a health warning?
A really big health warning - like on a cigarette packet.
What do you base this view on?
These fund-raising companies are new and quite exciting. They are a way for people to publicise an idea and get contributions to their business or innovation. That is particularly exciting because raising money is hard to do. But once you get the money, the challenge is doing what you said you were going to do. That challenge is far harder than the already difficult challenge of raising money. The risk is of disappointment among the people who sent money in when things don't come to fruition for whichever of many possible reasons.
But moving from the fund-raising stage to the company-building stage has always been difficult. Why is it any different with crowd-sourced funds?
That is true but when you raise money from knowledgeable investors they know about all the risks involved. And in some cases, they are prepared to help - angel investors help [start-ups] over bumps in the road. I am not sure the crowdfunding group knows that not all of these ideas are going to work.
What are the alternatives?
There aren't easy alternatives. There are good alternatives but they aren't easy. The most [common way] start-ups are funded are by family, friends and fools. They give you money because they love you - in the case of family and friends - and are relaxed about what happens. Here, it is third parties [who are providing cash] and they don't know you at all. I worry about their expectations about successful outcomes. Because we know start-ups so often fail.
What do you think about incubators - organisations that give a small amount of cash, plus a bunch of mentoring and access to useful networks?
I think these are helpful. And this type of set-up is appearing all over the world. They put you in contact with other people facing similar challenges and provide help during the difficult times. In my book Getting to Plan B, written with Randy Komisar, we point out that the initial plan any entrepreneur has almost always isn't quite right. The buzz word now is "pivoting". Almost all entrepreneurs go though one or many pivots before they get to what works. I am not sure the crowd-funding investors understand that, or that they would be particularly happy to write another cheque. That's a tough sale.
Any last thoughts?
The good thing is the [crowdfunding] people who invest in you are potential customers. And having customer validation is very important. But I think there is the potential for deep disappointment.