The Risks of Backing a Crowdfunding Campaign and How to Minimize Them
Image: iStockphoto/bonetta

According to the Fundly blog, crowdfunding is one of the most popular ways for individuals to raise money for a cause, project, or event. So popular, in fact, that more than $34 billion is currently raised each year through the global crowdfunding marketplace, and the industry is projected to grow to over $300 billion by 2025.

As a consumer, this fast-paced growth represents an exciting new way to get our hands on products that closely align with our interests, but that might otherwise never see the light day.

Backing a crowdfunding campaign isn’t risk-free, though. Here, we’ll discuss what these potential hazards are, and how you can minimize your chances of experiencing them.

To ensure everyone’s on the same page, let’s start by covering some step-by-step basics.

A Quick Q&A Introduction to Crowdfunding

Q: What is crowdfunding and what are some common terms used during campaigns?

A: From a consumer/entrepreneurial standpoint, people pledge money during crowdfunding campaigns in return for a discounted price on a product that isn’t set to be released for months—sometimes even years.

Common terms you’ll encounter include: ‘funding goal’ (the amount of money the creators are looking to raise); ‘backers’ (individuals who choose to make a pledge, or pay money, to support the project), and ‘rewards’ (the product that backers will receive in exchange for their pledge).

Q: How many crowdfunding sites are there?

A: While Kickstarter and Indiegogo tend to be the most popular consumer crowdfunding platforms, according to Entrepreneur, more than 600 global platforms are currently in operation. And to carve out their slice of this billion-dollar market, most sites are niche-specific (many span more than one category), such as:

  • Personal fundraising (Booster.com, GoFundMe, Fundly)
  • Business-focused (Fundable, Peerbackers)
  • Charitable organizations/nonprofits (Razoo, CrowdRise)
  • Application development (Quirky, AppBacker)
  • Accredited investors for startups (MicroVentures, SeedInvest)
  • Creative projects (writing, music, video, etc.): Kickstarter, Indiegogo, RocketHub,
  • Real estate (e.g., RealtyShares, Fundrise)
  • Peer-to-peer lending (Prosper, Lending Club) 
  • Equity (AngelList, MicroVentures)

Q: Are there a lot of crowdfunding projects available?

A: While we didn’t encounter industry-wide statistics revealing to the total number of crowdfunding projects, Kickstarter reported 3,500+ live projects at the time of our research, with nearly 137,000 funded projects to date, and more than 14 million backers.

Q: Ultimately, how many of these projects fail?

A: Business Insider’s Kevin Loria tells us that Kickstarter commissioned a study from the University of Pennsylvania back in 2015, which “found that 9% of projects fail to deliver their rewards.” Additionally, the Wharton professor behind the study also concluded that there “does not seem to be a systematic problem associated with failure (or fraud) on Kickstarter, and the vast majority of projects do seem to deliver.”

The 3 Biggest Differences Between Crowdfunding & Online Retail

Can you imagine if an independent study found that nearly 10 percent of Amazon orders went unfulfilled—despite keeping customers’ money? Consumers would be outraged, and rightly so.

After writing about many of the most popular platforms over the years, we think this is perhaps the most important distinction to understand before backing a campaign: crowdfunding is not retail. As a result, there are three fundamental differences that could represent a greater risk to your money:

1. Crowdfunding Websites Only Act As Intermediaries

In overly simplistic terms, a retailer (such as Amazon, to continue with our example above) purchases a product and then sells it to customers at a higher price, thereby making a profit in the process. Like most businesses, it’s in their best interests to ensure they deliver on their promises and keep their customers happy.

On the other hand, crowdfunding websites only facilitate fundraising—the actual transaction, or transfer of money—between the campaign’s founders and their prospective backers. They’re not the ones responsible for delivering on the promises made in campaigns hosted on their site.

2. You’re Not Buying a Finished, Ready-To-Sell Product

In fact, the individuals behind the campaign might not have a functional, production-ready prototype, as was the case with the Zano Drone, one of Kickstarter’s most prominent flame-outs to date. Others, such as the Triton artificial gills, could even violate the laws of physics and still go on to raise millions in pledges.

But it’s also a spectrum. For example, Coin and Vessyl ended up delivering products to some backers, but because customers complained they didn’t come close to meeting their marketing promises, they’re generally considered massive crowdfunding failures.

And while the Kickstarter study cited earlier indicated that the vast majority of failures aren’t due to outright fraud, other common reasons include insufficient business knowledge or experience on the part of the founders, as well as problems during manufacturing or distribution.

3. The Crowdfunding Industry Is Loosely Regulated

Continuing with this line of thought and citing the Business Insider article from above:

“The crowdfunding world isn't necessarily rife with fraud, which is technically forbidden by the major sites. But enforcement is difficult and sometimes nonexistent. Deceptive campaigns and irresponsible campaigners are most definitely out there, and for now, at least, there's little protection for consumers who are left out to dry.”

Crowdfund.co adds that, “There is no way for the sponsors to follow up on how their money was used, and neither can they follow up on promised rewards if the project owners choose to dishonor their promises.”

Because crowdfunding platforms occupy a fuzzy space between retailers and transactional facilitators, there aren’t many formal guidelines in place to safeguard consumers’ money.

However, you can file a formal complaint against the campaign’s organizer with the Federal Trade Commission and the Better Business Bureau, although there’s no guarantee of any specific outcome.

In the end, this means it’s largely up to consumers to learn how to identify which crowdfunding campaigns are worthy of their money, along with any associated risks.

How to Avoid Backing the Wrong Crowdfunding Campaign Project

Here’s how to perform your due diligence and minimize the chances that your hard-earned money will go to waste:

1. Make Sure You Can Do Without the Money

Even in a best-case scenario, when a product is delivered exactly as promised (which is a rarity, since delays are often inevitable), many months could have passed between the time you pledged and the time you receive your shipment. In other words, backing a crowdfunding campaign isn’t an ‘instant gratification’ sort of thing.

In fact, it’s best to consider the money spent on backing a campaign similar to money used for gambling; non-essential to your overall budget.

2. Read Through Each Campaign With a Critical Eye

Instead of making a retail purchase, backing a consumer-oriented crowdfunding campaign is better thought of as making a small investment in a company. And as an investor in a company, it’s up to you to critically study the business and learn whether or not they meet the muster.

Even if this is your first time backing a campaign, here are some straightforward questions to ask that can help you accomplish this:

  • Who’s behind the campaign? What’s the expertise of the team? Is it relevant to the product or service? What’s their staffing level? Do they have enough manpower to deliver?

  • Do they have a clear-cut business plan in place? Is it well thought out? Does the creator seem to have addressed the possible problems or pitfalls?

  • Do they provide a clear timeline? Where are they currently at as far as meeting that timeline (e.g., do they have a working prototype, or simply an idea)? After the campaign, do they clearly know which steps they need to take in order to reach the marketplace?

  • Although the text can often be boilerplate, what do the founders say about the “risks and challenges”? 

  • If toward the end of the campaign, have the founders frequently communicated with backers regarding updates, progress, and so forth?

Kris Wheaton, who runs a project at Mercyhurst University called Quickstarter and who’s personally backed more than 150 campaigns across several platforms, says he also won’t get involved unless the creators have run successful projects in the past; they’ve backed other projects on the specific platform, and if the project seems uncomplicated (after all, more complications could translate into a greater chance of delays).

Finally, many popular platforms like Indiegogo and Kickstarter offer specific advice for consumers to keep in mind before backing a campaign, such as asking the founders questions, reading what others are saying about the project, visiting any websites listed in the campaign, and searching third-party sites for more information about “the project, company, campaign owner, and/or team members.”

3. Learn More About the Crowdfunding Platform

Depending on the specific platform where your product is found, learn how they protect contributors and which safeguards they have in place, including their terms and conditions. For example: 

  • What quality control mechanisms do they have in place before any project goes live? After going live, are they constantly monitored to ensure they’re following guidelines?

  • Do they have a refund policy? What are the stipulations? How long do you have to request one?

  • What happens if a campaign doesn’t meet its goal? What happens if the campaign does raise enough money, but the founders fail to deliver a working product?

  • Do they have dedicated support staff in place to help quickly address any concerns that arise?

  • Using consumer advocacy websites like HighYa, what are backers saying about their experiences? Are there any common complaints?

The Bottom Line About Minimizing Your Risks as a Consumer When Backing a Crowdfunding Campaign

In the end, unlike in the online retail industry, just because a crowdfunding project is popular—or has passed the platform’s quality guidelines—doesn’t necessarily indicate that it’s realistic, the founders have the required business acumen to bring it to market, or that you won’t lose your money and have nothing to show for it by the time everything’s said and done.

After all, Barbara Roper, director of investor protection with the Consumer Federation of America, who was interviewed for the Business Insider article cited above, emphasized that, when it comes to crowdfunding, “you’ve got the wisdom of the crowd, but you’ve also got the madness of the crowd. And how you distinguish between those two is anybody’s guess.”

The good news is that you now have all the information you need at your fingertips to help discern between projects that are worth the money and the months-long wait, and those you might want to bypass.

Related: How to Tell If an Online Store Is Legit: 11 Steps to Check Any Website


Derek Lakin

With more than a decade of experience as a copywriter, Derek takes a detail-oriented, step-by-step approach to help you shop smarter. Whether it’s nutritional supplements or new scams, he believes an informed consumer is a happy customer. Connect with him on Twitter: @DALwrites


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