There was a time not long ago, when large funding organizations like banks pretty much called the shots on whether an entrepreneur’s dream made it to production.
Not any more. Crowdfunding sites like Kickstarter have made it possible for small projects to find funding without having to get a thumbs-up from multi-million-dollar financing corporations. For many indie entrepreneurs, crowdfunding makes perfect sense.
It does as well for many small investors. After all, the feeling of satisfaction one gets from being able to commit a small portion of a weekly paycheck to a worthwhile project is tremendously satisfying – especially when the project succeeds in going to market.
And, to know that with the right small investment, you’ll also get a limited edition of the book, film or special whizamagadget you helped fund is for some, almost better than shopping for bargains in a discount store.
Could the problem be in the comparison?
According to some news reports, as much as a quarter of the Kickstarter projects that reach their stated their funding goals never actually make it off the ground. Most projects that fail do so because of unexpected production problems, such as rising manufacturing costs, logistics or conceptual issues that don’t become apparent until after the project has been funded. Often, those problems can be chalked up to inexperience on the creator’s part, says Eric Markowitz, writing in Inc.
And often, it can be attributed to investor expectations as well. After all, Kickstarter’s true appeal is that anyone can be an investor. That extra $5, $20 or $50 sitting in your wallet may seem like a painless way to invest in someone’s dream, but what happens when the project hits a snag, and investors get nothing in return?
Are backers investing or purchasing?
Markowitz’s story of the Hanfree iPad accessory investors who lost out when the project had to be cancelled in mid-production highlighted one of the chief misconceptions that surround crowdfunding.
“Kickstarter is not a store,” says the crowdfunding site in its September 2012 update, after it became evident that some investors were disappointed when the project they backed didn’t make it and they did not get a “free” copy of the item they had backed.
Backers who are wowed by the thought of owning one of those one-of-a-kind inventions may not be realizing the risks, however, as they consider how cheaply they may be able to buy something just by investing in its potential success.
“Backers should look for creators who share a clear plan for how their project will be completed and who have a history of doing so,” explains Kickstarter on its Help page. In other words, the onus is on the backer to ensure that the creator has the credentials, the know-how and the invested hours of research to say the project will work.
But Alvaris Falcon, in the introduction to the blog, 10 Crowdfunding Sites to Fuel Your Dream Project, says it more succinctly.
“There’s a term that we commonly use to describe this money-giving action; it’s called a donation.”
In other words, although Falcon distinguishes between the kind of donations that we may give at say, a food bank and the investments we commit for crowdfunded private projects, the idea is still essentially the same. And Kickstarter’s Help pages back this up with a codicil stating that it isn’t responsible for ensuring that creators reimburse funds if the project doesn’t succeed past its funding goals.
How do investors safeguard against disappointment?
So what can investors do to make sure they aren’t left empty handed if the unforeseen happens?
Due diligence, says Kickstarter.
“If a creator has no demonstrable experience in doing something like their project or doesn’t share key information, backers should take that into consideration.”
While this advice may make some potential investors uncomfortable knowing that they are committing finances without any easy remedy should the project go belly-up, it does make us smarter, more careful investors. And that, I suppose, is why banks spend the time and the money to vet projects before deciding whether to back them.
Crowdfunding sites like Kickstarter place the onus on both the creator and the investor to do their background research and ensure that their individual expectations can be met. Despite this extra legwork, Kickstarter still sounds like a pretty good venue for promoting – or investing in – that dream project you always wanted to see get built.
Top image courtesy of V&A Steamworks.
Bottom image courtesy of musescore.