Why you should care
Because even though you paid for a certain product, it doesn’t mean you’re actually going to get it.
Craig Allebach is a gearhead. He’s owned every iPhone model and was among the first to get his hands on Google Glass, and he often hunts down tech accessories like newfangled charging docks, cable organizers and smart watches. Among his favorite places to find them? Crowdfunding sites like Kickstarter and Indiegogo, where he’s paid for nearly 60 new devices, spending anywhere from $15 to $100 apiece.
All told, he’s spent more than $2,600.
Allebach isn’t just a tech enthusiast — he’s a backer, so to speak. Unlike traditional investors, who typically earn an equity stake in a business when they put money forward, these backers give dough to companies through crowdfunding sites — for perks like a T-shirt or the promise of a new trinket — and never see a dime back. But while millions of people put in a few bucks here and there to help breathe life into fledgling startups through crowdfunding, Allebach and a select group of others are unique in that they give over and over again, even to companies they’ve previously supported.
So why should a business hang out a shingle when their hand will do? As crowdfunding has become a go-to source of money for aspiring entrepreneurs in recent years, it’s attracted more companies for every stage of growth, from research and development to sales and expansions into new markets. Sites like Indiegogo and Tilt have even developed new features to cater to this shift. As a result, entrepreneurs can sustain their companies for months — sometimes even years — without maxing out a credit card. And it’s an increasingly global opportunity: the World Bank projects that emerging markets will contribute $96 billion a year to crowdfunding platforms by 2025.
These companies haven’t proven they can ship anything. It’s a mistake for them to move so quickly.
Justin Mitchell of Kickscammed, which tracks potentially fraudulent fundraisers
That’s a good thing, some experts say, because many traditional funding sources have dried up since the recession. Crowdfunding also doesn’t require taking on debt or giving up a piece of the company. Plus, it helps with product development and marketing, since users are providing feedback and engaged through site pages that detail what a company plans to do next, which in turn helps companies confirm in advance whether anyone really wants their gizmo. Companies like Pebble, Ouya, and Oculus have sometimes raised millions of dollars that way.
But is crowdfunding actually a sustainable way to build a business? More than half of projects fail on Kickstarter, the largest site. And according to a widely cited study by Wharton’s Ethan Mollick, in general, 75 percent of funded projects face shipping delays. In fact, companies that beat their funding targets are more likely to stumble, because they don’t have the structure to meet the intense demand. Running back-to-back campaigns, it would seem, only increases the strain. “These companies haven’t proven they can ship anything,” says Justin Mitchell, who runs Kickscammed, a site that tracks potentially fraudulent fundraisers. “It’s a mistake for them to move so quickly.”
Now, some crowdfunding sites are releasing features to minimize issues like these. In January, Indiegogo launched InDemand so companies can continue accepting money even after initial fundraisers end. Evan Schwartz and his wife, Lynn Rosen, used it to raise more than $9,000 for Open Book Bookstore, near Philadelphia. With the extra funds they got, they’ve been able to host author events and add inventory much faster than they expected. “It’s not just about keeping the store open, but trying to make it the best it can be,” Schwartz says.
The feature is intended to help startups transition from fundraising to selling, says Danae Ringelmann, Indiegogo’s co-founder. But the launch comes amid increasing concerns about fraud — namely, companies that don’t intend to deliver products despite taking in thousands, if not millions, of dollars. (Ringelmann says fraud is a minimal concern but concedes that many people who raise funds aren’t prepared for the experience.)
To be sure, not all serial crowdfunders are struggling to eke out a living. Some have beaten the odds — around 1 in 3 crowdfunded projects survive long enough to become full-fledged businesses, according to a forthcoming study from MIT’s Sloan School of Management and the University of Toronto. Many entrepreneurs have also found other venues to sell their products before they ask for more money, like the founders of Fire & Bone. They were already selling their 3-D printed animal-skull jewelry in museums internationally when they launched a second Kickstarter campaign to fund a new collection and animal specimens for future lines. (An authentic T-Rex skull is at the top of the list.)
The campaign was also a way to thank Fire & Bone’s earliest backers, who received an early-bird discount. And those are the kinds of perks that keep drawing in folks like Allebach, along with the privilege of being an early adopter — which outweighs any risk a product may never appear. “I don’t really dig into the business model,” Allebach admits. “But I can’t say that I’ve ever been dissatisfied with a product.”