You’re scanning an article titled something similar to “7 Products You Can’t Live Without!” and, low and behold, there’s one that jumps right off the page to strike your fancy. You click the link to find out more, but instead of being taken to Amazon or another online store, you’re taken to Kickstarter, Indiegogo, GoFundMe, or another of the many popular crowdfunding platforms.
Maybe you’re still interested in making that purchase—even if the product is still in the inventive stages and won’t be available for some months to come. But, before you enter your credit card information to “back” a crowdfunded product, there are a few things you should know.
Because crowdfunded products have yet to be manufactured (typically only a prototype has been made), you run the risk of investing in something that might not work as promised, is delivered late, or never makes it at all. So, how to go about picking which crowdfunded products are worth forking over cash? We’ll share tips from inventors and consumers, alike. But first…
What’s Crowdfunding and How Does It Work?
Forbes describes crowdfunding as the practice of funding a project by raising many small amounts of money from a large number of people, typically via the internet. To help you learn a little more about the process, here’s some lingo that we’ll be using throughout the article:
- The funding goal is the amount of money that a creator needs to complete their project.
- A creator is the person or team behind the project idea, working to bring it to life.
- Backers are folks who pledge money to join creators in bringing projects to life.
- Rewards are a creator's chance to share a piece of their project with their backer community. (These are generally discounted products, one-of-a-kind experiences, or limited editions of the what’s being produced.)
For an entrepreneur, the many crowdfunding platforms available make it easier to showcase a project to a greater number of potential backers. Crowdfunding has become so popular that all sorts of niche platforms have started up, offering backers the chance to “get in early” on opportunities across industries. A few of the diverse crowdfunding platforms we’ve covered include:
- RealtyShares and Fundrise, both crowdfunding websites for investing in real estate developments.
- Booster.com claims to help you raise money for your project, cause, or organization through the sale of customized t-shirts.
- SmashFund, which is essentially a multi-level marketing scheme disguised as crowdfunding.
- Mosaic, an eco-conscious crowdfunding platform that focuses on solar projects.
While each platform has slightly different rules, crowdfunded campaigns typically have a funding goal, which will cover how much money they need to get started, and a cut-off date for their goal to be reached.
Image via Kickstarter
Pictured above is a screenshot of different Kickstarter projects. You can see that each has far exceeded their funding goals with multiple days to spare. However, not all campaigns are so lucky—the above image is from Kickstarter’s “What’s Popular” section, after all. (We’ll cover what happens when campaigns don’t meet their goals shortly.)
Just having a great idea isn’t enough to inspire folks like you and I to back a campaign. To capture the attention of would-be investors, crowdfunding campaigns offer rewards, sometimes called perks, that usually increase in value depending on how much an investor pledges.
I’ll use the reward tiers for one of the above campaigns, Bagel: The World’s Smartest Tape Measure, for an example:
- “Thank You” (pledge $1 or more): Receive a “Thank You” and access to all future updates.
- “Super Early Bird” (pledge $49 or more): Available to only 100 backers. Receive one Bagel Smart Tape Measure at 45% off the estimated retail price.
- “Very Early Bird” (pledge $59 or more): Available to only 900 backers. Receive one Bagel Smart Tape Measure at 34% off the estimated retail price.
- “Early Bird” (pledge $69 or more): Available to only 3000 backers. Receive one Bagel Smart Tape Measure at 23% off the estimated retail price.
I chose Bagel as an example because their reward tiers showcase two different strategies for inspiring pledges:
Offering steep discounts off the purchase price to “early bird” backers. This is in hopes of inspiring early pledges, therefore helping to get the product off the ground. You’ll notice that the discount decreases as time goes by.
Offering steep discounts for backers interested in pledging large amounts (the options exceed $7,500), therefore helping the project quickly reach their funding goal.
One thing to note is that the Bagel Smart Tape Measure isn’t set to ship until November 2016—meaning that, those interested in backing Bagel would be shelling out for a product that doesn’t yet exist.
Because the Bagel campaign has already exceeded their funding goals, it should be well on its way to production. But, what happens to your pledge if a Kickstarter campaign falls short of meeting their funding requirements? Or, worse, if the campaign is successfully funded, but the final product falls short of delivering on the creator’s promises?
What Happens When a Crowdfunding Campaign Falls Short
As we mentioned above, different crowdfunding platforms have different rules. There are essentially two variations that dictate what happens should a campaign’s funding goals not be met:
Some platforms, such as Kickstarter, only offer all-or-nothing campaigns. This means that if a campaign isn’t fully funded, your pledge will be refunded.
Others, such as Indiegogo, feature a mix of all-or-nothing and flexible funding campaigns. (Creators can choose which type of campaign they’d like to run.) If flexible funding, they’ll be allowed to keep all the pledges, even if funding falls short of their goal.
While all-or-nothing funding mitigates the risk to backers, should a campaign fall short of reaching their funding goals, flexible funding leaves backers at risk of never seeing a return on their investment.
That’s right; if a campaign doesn’t meet its goal by the deadline, you could get zip. However, that’s not the only thing that can go wrong.
The Risks of Backing: Products That are Late, Don’t Work, & Poor Customer Service
According to Jake Lane, creator of LawnStarter, Inc., the chance of actually receiving a product in a timely manner isn't very high.
Mr. Lane has both completed a successful Kickstarter campaign and backed other projects. His thoughts on why so many campaigns fall short come down to one thing: a lack of experience.
“Most individuals that run campaigns have never navigated through the world of product manufacturing. You’re pretty much guaranteed to run into problems in production, whether that's money, unit quality, or production delays.”
“Most individuals that run campaigns have never navigated through the world of product manufacturing.”
Nick Braun, founder and CEO of Pet Insurance Quotes, seconds Mr. Lane’s opinion, suggesting that many creators simply aren’t prepared to meet the increased interest in their product:
“The key to being a happy crowdfunding participant is to set appropriate expectations. These are small businesses and entrepreneurs and they are asking for money in exchange for goods or services. And for most of these folks, their crowdfunding efforts create a spike in demand.”
Setbacks in a production of a new product might be expected. However, some backers find that their long-awaited rewards don’t work as promised—a problem that can be compounded by poor customer service.
Case in point is Lumio, a crowdfunded reading light that received high accolades on the hit show Shark Tank.
Lumio had investors excited by the product’s elegant design and promise to deliver hours of soft, ambient lighting. However, HighYa reader Ron S. is among multiple reviewers who stated that the Lumio didn’t deliver as promised:
“Lumio stopped working. Light would not turn off. Contacted support and received a response 24 hours later. Response was worthless. Replied and asked for info to send unit back for repair. Never received another response. Great product when it worked. Now worthless.”
Luuup, another crowdfunded project that we’ve reviewed, might very well work as promised. However, backers won’t know for sure as it hasn’t shipped yet—their initial ship date of early summer has been pushed back by several months.
We’ve covered dozens of crowdfunded products here at HighYa. While some certainly ship without a hitch, it’s our experience that those two examples above represent the norm, rather than exceptions.
Questions to Ask Before Backing a Crowdfunding Campaign
Jake Lane states that he typically won't back a product unless he somewhat knows the people behind the project. Since that’s not always an option, he checks to see that the company or team behind the product has successfully run another campaign before.
“Knowing that a company is running a campaign means that it will generally be handled better than someone that's throwing up a side project in hopes of making it a full-time gig.”
Gayle Harper, author and successful Kickstarter entrepreneur, shares her tips for checking the quality of a crowdfunding campaign. She suggests that you ask yourself the following:
Is the product unique and does it capture your imagination?
Is it well thought out? Does the creator seem to have addressed the possible problems or pitfalls?
Does the time frame seem realistic? Have they suggested steps along the way to be completed by specific deadlines?
Have they researched the market for their product? Do they know how they will get it to market?
Do they have time and person-power resources to pull it off?
Do you have the sense that they are devoted to making it happen regardless of how this crowdfunding campaign goes—or does doing it completely depend on this succeeding?
Does the monetary goal they have set seem realistic to you?
If the crowdfunding platform is one that the creator receives the money whether or not the goal is met, are you comfortable that they can do it with the amount raised?
It’s vital that creators communicate frequently and sincerely. Backers should be invited to see “ínside” the process—successes and challenges. For many of the crowdfunding “failures” we’ve reviewed at HighYa, this often seems to be the biggest missing piece. These companies generally stop communicating once things go south, leaving backers completely on their own and in the dark.
Pulling from her own experience, Gail has an additional tip for crowdfunded project creators:
Knock yourself out to deliver the awards as promised and on time! Think of little extras that you can do to surprise them—anything that makes them feel included and special; i.e., give them special discounts or access or surprise them with something to celebrate a little success or achievement along the way. Do whatever you can to let them know it is a shared project and how much you appreciate them.
Bottom Line on Choosing to Back a Crowdfunded Product
Now that you have a better understanding of crowdfunding, you might be wondering if backing that product is worth the risk.
Kris Wheaton believes that it is—if you choose carefully. Kris has backed over 150 campaigns across several platforms. He also runs a project at Mercyhurst University called Quickstarter, which is designed to help entrepreneurs use crowdfunding sites to get their startups off the ground.
According to Mr. Wheaton, a campaign must pass muster in the following three areas before he’ll decide to provide backing:
1. Has the creator run successful projects in the past? Taking a quick look to see if the creator of the project has any experience with running projects and has successfully fulfilled his obligation in past campaigns is the number one thing to look for.
2. Has the creator backed other projects on the specific crowdfunding platform being used? Since Mr. Wheaton uses Kickstarter a lot, he always checks to see if the creator of the project has backed other projects on Kickstarter. If they haven't, it is a red flag that they don't understand crowdfunding or what backers expect.
3. How complicated is the project? Big product design projects and giant video games that have lots of promise, but also have lots of work left to do, seem to be the ones most likely to fail to deliver. This is often because the creators do not really understand how difficult or how expensive it is to do what they are trying to do. By the time they figure it out, it is too late—they have burned through all their cash.
If the project’s creator has successfully delivered on past projects, and this next venture isn’t so complicated as to likely blow their budget before completion, you might consider backing the product.
Despite thoroughly checking a creator’s history, there’s a small risk in all crowdfunding campaigns. Mr. Wheaton states that only approximately 10% of crowdfunding products deliver nothing at all. However, our experience leads us to warn potential backers that deliveries come late more often than not.
For that reason, our final word of advice is to only back something that you really believe in. According to Mr. Weaton, the best reason to help fund a project is that you get to see something come into being—however perfect or imperfect—that would never have made it without your support.
For Mr. Wheaton, it’s the intangible reward of helping create something new that provides his biggest motivation for backing a product. If you’re equally thrilled by the idea of helping fund an innovative new product, crowdfunding might bring you immense satisfaction.
On the other hand, if you’re simply hoping to be first in line to get your hands on cool gadget or product, consider that you might not be up for waiting months while creators work out last-minute bugs. Instead, use a website like Follow Up Then to occasionally keep an eye on the campaign’s progress and access to actual customer reviews when they start rolling out the first wave of shipments.