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7 things to know before you spend a dime on crowdfunding
You can find all kinds of cool products and projects to back on crowdfunding sites like Kickstarter and Indiegogo. But if something goes wrong — as has been known to happen — you're going to be left out to dry, without your money and without your reward.
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That's the risk of crowdfunding. Many investors are already aware of that risk, but plenty of others have been surprised by a campaign that seemed so appealing they didn't take time to analyze it.
Knowing exactly how to properly vet a campaign is an important skill. Tech Insider spoke with experts from the National Association of Consumer Advocates and the Consumer Federation of America and looked at the Federal Trade Commission's advice for doing your due diligence when evaluating a crowdfunding campaign.
Here's what to keep in mind when deciding whether you should contribute to a campaign or not.
Sometimes, people see a crowdfunding campaign for a device that's promising the incredible — flying ability and camera footage from a drone that would cost five times more from a traditional manufacturer or perhaps a device that makers claim will let the average person breathe underwater without a scuba tank.
But when a campaign is making incredible promises, that's when potential backers should take a step back. FTC Commissioner Terrell McSweeny wrote a guest post for the Huffington Post, advising potential backers to ask certain questions: "If the project involves the manufacture of a product or gadget, do the claims about the product and the technology involved seem plausible?"
The old adage "if something looks to good to be true, it probably is," applies here, says Ira Rheingold, executive director of the National Association of Consumer Advocates.
After certain noteworthy crowdfunding campaign failures, several project creators have realized (belatedly) that they never had the skills and expertise needed to accomplish what they'd hoped to achieve.
Steve Tan, the chief campaigner behind the Kreyos smartwatch, managed to raise $1.5 million on Indiegogo with the promise of a powerful, gesture-controlled, waterproof watch with weeklong battery life, all for about $150.
But the smartwatch failed to deliver, and Tan explained that failure in a Medium post. Their launch team, himself included, was comprised of marketers with very limited technical knowledge. They outsourced the watch design and production to a company in China that failed to deliver and — Tan writes — walked away with a good portion of their money.
"Don't give your money away because [something] sounds cool," says Rheingold. Remember to ask, he suggests: "Who are the people who’ve come up with this idea?"
If a project is going to require skilled, experienced engineers to deliver, make sure those engineers are working on the project.
Starting on May 16, "equity crowdfunding" is allowed by the Securities and Exchange Commission. Instead of contributing money to a campaign in hopes of getting a product or supporting a creative endeavor, investors will be able to contribute funding in order to get shares of a fledgling company.
"This is something that people are looking at as an investment to get a return on their money," says Barbara Roper, the director of investor protection with the Consumer Federation of America. Roper describes the process as similar to investing in a startup, hoping it takes off. "But the vast majority of small companies fail," she says.
Most venture capital investors know that most companies they invest in won't actually become profitable — they just hope to make enough successful investments to make up the difference.
For most casual crowdfunders, however, many who don't even have retirement savings, it'll be really hard to make any money speculating on early stage companies.
"Don't invest any money that you can't easily afford to lose," says Roper.
If someone has pulled off and delivered on a successful crowdfunding campaign in the past, it's a sign they know how to deal with the upcoming challenges.
When the team behind the Pebble smartwatch launched their first Kickstarter campaign, backers could see the working prototype that existed at the time. The watch had already received a certain amount of funding for development, and so it wasn't a total start from scratch. That went on to be the most funded Kickstarter ever (at the time).
Even so, there were still several delays getting the watch to backers. But the Pebble team pulled it off. And when they came back to Kickstarter to raise funds for another watch, that team set another fundraising record.
It's important to see that the team behind the project has given backers a reason to believe they can achieve their goals, says Rheingold. "Do these people have a background and resum you can trust?"
The qualifications of the people behind a crowdfunding campaign are crucial. But it's not just about who's planning the project — it's about what their plan actually is. That's why it's important to see if the people behind the campaign are ready to cope with whatever challenges they face when delivery time comes.
Fans of the television series "Veronica Mars" had good reason to be excited when the team behind the show announced a Kickstarter to raise funds for a "Veronica Mars" film.
Since the Kickstarter was launched by show creator Rob Thomas and lead actress Kristen Bell was involved with the project from the start, the key personnel were already there. And Thomas explained that they'd already come to an agreement with Warner Bros. — they just had to show that there was sufficient fan interest.
Even with a good team, distribution of a film is a challenge, something Thomas had explained from the start. This turned out to be the first film by a major studio that was simultaneously released theatrically and to streaming services.
If a crowdfunding campaign is raising money for a product or technological device, there are extra reasons to be cautious.
Kickstarter requires a prototype for any hardware device and they prohibit the use of photorealistic renderings that might confuse a backer into thinking there is a prototype when there isn't. That's because "[m]aking hardware is hard, so we want hardware creators to be extra-clear with backers about the state of their project and the work remaining," a Kickstarter spokesperson tells Tech Insider.
But many crowdfunding sites have no such requirements.
Creators can make a fair argument that they need funding before they can even make a prototype, so they might want to raise that funding on Indiegogo or another crowdfunding site. But an investor should know that a product without a prototype is even further from completion. That makes it potentially less likely to come to fruition.
This part should be clear. Companies like Kickstarter and Indiegogo clearly state that they aren't stores, and many backers know that they aren't making a purchase when they fund a campaign.
Yet as long as backers are the ones who are taking on all the risk for a campaign, it's worth pointing out that that risk is there. Lots of great creative projects and other products are created with crowdfunding, projects that wouldn't exist without that funding model.
But some things are just impossible, and it's up to crowdfunding backers to do their due diligence and decide whether or not a project is really worthwhile.
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