Essentially, this is a post about dead jellyfish.
Let me explain.
One of the most common questions I’m asked about crowdfunding is “How can I know I’m not giving my money to some scam artist?”. I can understand where this question is coming from. Many people have an understandable concern when giving away money on the internet; you don’t see the vendor, the product is intangible and presented in pixels. Therefore the procedure is obscure and somewhat disconcerting. But how big of a concern should fraud really be when it comes to crowdfunding?
If you ask me, it should be very little, if at all.
Don’t get me wrong. Where there is money, there will be unscrupulous people trying to get some of it in unlawful and/or immoral ways. There have been (allegedly) a few fraudulent projects on crowdfunding platforms, and I’m sure there will be more. What I’m saying is that in my opinion, fraudulent activity doesn’t pose any real risk to neither the crowdfunding model nor to backers.
A little over a month ago, the Kickstarter campaign MYTHIC: The Story Of Gods And Men was exposed as a scam and consequently canceled. Before that, 83 people pledged a total of $4,739 (an average of $57 per person), a little shy of 5% of the target goal. However, as suspicion grew, the folks at this Reddit thread tore the campaign to pieces, meticulously scrutinized each, and then ruled unequivocally that the project is a scam. No financial damage was caused, as funds were not charged anyhow since the campaign didn’t come to a finish. The only damage done is perhaps reputational: this incident might cause some people to be a little more suspicious and hesitate before contributing to the next project. There’s also a blow to the reputation of MYTHIC’s project creator, but he brought it on himself.
Another project worth mentioning here is The Tech-Sync Power System which raised almsot $28,000 from 419 backers prior to being canceled. There are some strong indications this project was scam as well (read here and here). Again, exposed and canceled before any damage was done.
What these two examples have in common is that in both cases the wisdom of the crowds did what it’s supposed to do. Eventually, whether it is after raising funds from 80 or 420 people, someone will raise his eyebrows and make his voice heard. Sure the wisdom of the crowd is far from perfect (e.g. http://www.facebookipodayclosingprice.com/) and can be gamed, yet at the end of the day I believe it will make the probability of a successful scam project minuscule. The bigger and more successful a scam project gets, the probability of calling it out increases. Moreover, imagine all the unheard of scam projects that didn’t make the news since nobody fell for it at the first place!
A more likely reason for backers not to get their money’s worth, and a reason harder to predict and expose, is incompetence.
As the saying goes, the road to hell is paved with good intentions. Anyone who ever managed a project knows there are no small projects. There are only relatively small projects. Even the seemingly simplest of projects sees unexpected bugs, errors, unplanned hurdles and so on. Things run over budget and fall behind schedule. Things that can go wrong ultimately do. Even the best intentioned creators can find themselves lagging behind, and yes – sometimes failing to deliver on what they promised.
Here are a few examples to consider:
Example 1: The i+Case (~$85,000 raised)
The i-Case is a cool iPhone case made from anodized aluminum. On the face of it, a pretty nifty housing to secure your precious iPhone. However, something funny happens when you put your mobile in an aluminum casing: it loses reception. The creators also miscalculated shipping and at some point requested more money to ship the units to the backers. In my and other’s view, the real fiasco here is the creator’s reaction to the problems with their product. This great post by Matt Haughey tells the story. If you have a couple of spare hours, the comments are pretty insightful as well, and you should have a look at the project’s page at comments and updates tabs. Mr. Haughey has kindly agreed to let me use this photo he took, which I guess tells the whole story:
I saw this tweet from Chris Anderson a few weeks ago:
Many project creators offer t-shirts as rewards to backers (usually lower tier). Seemingly, a t-shirt is a pretty simple thing to deliver. There’s no technological challenge to it, and millions are printed, pressed and sold everyday. That’s probably the frame of thought project creators have. However, when was the last time a software engineer, a product designer or a film creator had to print a custom made t-shirt? Or 5,000 of them? Yes, it’s pretty easy to figure out how to work with fulfillment centers and it’s something creators need to plan for ahead of time, but it’s easy to fall to the “oh, it’s such a simple thing” trap and get lost with all the work a successful project brings upon. Personally, I remember my surprise when shipping the rewards to a campaign I was involved with took about three times more time than expected (and there were only 20 packages to send!).
(Note: I chose not to reveal the project Chris Anderson was referring to. The general point here is what’s important).
Example 3: Coffee Joulies (~$307,000 raised)
Coffee Joulies work with your coffee to achieve two goals. First, they absorb extra thermal energy in your coffee when it’s served too hot, cooling it down to a drinkable temperature three times faster than normal. Next, they release that stored energy back into your coffee keeping it in the right temperature range twice as long.
(Taken from the campaign page, linked above)
The Joulies, a crowdfunding hall-of famer, should belong to a different list titled “Projects that went well, but…”. They do what they promise to do, are pleasing to the eye and were shipped on time. There is a but, however. According to some bloggers that carried small(est) sample controlled experiments, the Joulies work just a well as rocks taken from the garden (read all about it here).
Example 4: Desktop Jellyfish Tank (~$163,000 raised)
The project’s name says it all. A specially designed tank to keep small Jellyfish on your desktop (apparently, you can’t have Jellyfish in a standard fish tank because they have the unfortunate tendency to get sucked into the filtration intakes). I must say it looks pretty cool in the project’s page. I’d probably glaze at the tank myself for a good few hours had I had one. However, there seems to have been quite a few complaints from backers to the project. A blog post on BetaBeat describes that special design as a “Jellyfish deathtrap” (read all about it here).
These were just a few examples of good projects where something went wrong. The word incompetence was chosen to describe the phenomenon as a whole, and perhaps is a bit harsh for some of these (the Joulies in particular). The general idea still holds – sometimes things go wrong. It doesn’t mean the creators had ill intentions. The whole model of crowdfunding is based on is that funds are raised prior to the production of a product, in order to facilitate it. In the majority of product related projects, funds raised are actually pre-sales, and this makes the backers early adopters. And just like with any other product, early adopters accept some risk that the product they’re buying is not fully-baked. There’s little way for creators to anticipate the many things that can go wrong with the first version of their product when they become widespread without actually having them widespread.
I believe that with time, especially after the JOBS act comes into effect, we’ll see more and more businesses that will specialize in assisting and supporting the execution part of crowdfunding campaigns. Fulfillment centers specializing in handling the rewards, for example (I’m surprised I didn’t find any that do that already). Consulting agencies. Accountants. Lawyers. Manufacturers. We’ll also be seeing more and more “best practices” guides and dedicated websites from successful creators, along with support forums. The guys from the second example above are obviously clever but don’t know the first thing about t-shirts. They can get help with that. The Jellyfish Tank creator studied Marine Biology in Duke. I’m confident he’s brilliant and exceptionally talented. However, I’m not sure how much experience he has with large scale manufacturing.
To sum up this post, fraud is definitely not a threat to crowdfunding’s future. With time, and as the industry evolves, neither will incompetence be.
Next time I’ll write about ways to establish trust when setting up your crowdfunding campaign.
Update July 12, 2013: The guys behind the Kickstarted movie write
How We Uncovered the Biggest Fraud in Kickstarter History
and here’s the Hacker News discussion.