Kickstarter has taken off in the past year, raising big money for a wide variety of projects. Look at some of their stats: in June 2012, only seven projects raised more than a million dollars apiece; in the past nine months, another 16 projects have passed that threshold. Since the site began operations in 2009, several of the 38,000 funded projects have broken out as superstars, including Amanda Palmer’s music CD, the Pebble Watch, and even a new video gaming console. (Kickstarter anointed 2012 the “year of the game,” with more than $83 million pledged to projects in that category; one game raised a million dollars in a single day last spring.)
If that wasn’t enough, Kickstarter’s success has spawned a number of other crowdfunding sites—including Indiegogo, which uses a flexible funding mode; CircleUp for registered equity investors buying a stake in a company; and BountySource, which provides a bounty to those who complete certain GitHub projects.
“Crowdfunding works in two ways: you either have a base of users who love you already or you have a concept so good it inspires people, including the press,” said Jason Calacanis, a venture capitalist and early-stage investor who has donated to dozens of Kickstarter projects. “I like to go in and give the first dollar [to a project] to show that someone is listening.”
Chief Bit.ly scientist Hilary Mason has backed several projects for hackathons in Iraq and New York City. “Crowdfunding lets people test the market for an idea directly without relying on the possibly arbitrary taste of some intermediary,” she said via email.
With all this competition, has crowdfunding gotten, well, too crowded? Is Kickstarter peaking? Perhaps. As the dollar amounts have grown, so has the potential for abuse. Hidden amidst all these success stories and multi-million dollar payouts are some sadder tales.
The majority of the nearly 50,000 unfunded Kickstarter projects received less than 20 precent of their funding goals, with 11 percent never even getting a single pledge. One who has written about the issue is Jeanne Pi, who analyzed the entire Kickstarter universe last summer in order to find differences between failed and successful projects. She saw that successfully funded projects succeed by relatively small margins, while projects that fail tend to fail by bigger margins. Setting realistic funding goals also helps get projects funded. And “for every order of magnitude increase in Facebook friends, the chance of a project succeeding increases hugely.”
To that last point, the Website Kicksmarter.me has put together a tool that can analyze your Google and Facebook contact network to figure out which people may prove most receptive to a Kickstarter idea. Mason described the site as one with “some interesting algorithms behind it.”Another Website with tracking tools is Kicktraq.com, which can chart out the progress of a project’s backers over time and other funding statistics.
Kickstarter relies on a fixed funding model, in which the project creator decides on a funding goal. If the goal isn’t met, the project must return all the money it raised. But what happens if a project reaches its funding goal, and its creators don’t deliver anything? That’s a murkier area, full of frustration and more than a few legal questions.
Sometimes the Internet notices when a Kickstarter project goes awry. Take the example of a “new” computer game called Mythic: The Story of Gods and Men, a Kickstarter projecteventually cancelled by its creator and the $4,739 pledged to it returned to its backers. (Kickstarter doesn’t usually offer refunds.) Users from a number of different online communities, including Reddit, noticed that the artwork, photos and the poster advertising the project had all been copied from outside sources.
In another case, Tech-Sync Power Systems took $27,000 in pledges before being canceled under odd circumstances, with no money changing hands even though the project was oversubscribed. As one of the commenters posted on the project’s Kickstarter page, “You are backing somebody’s dream and hopefully they make good on it. It’s not Best Buy.”
These are just the more notable fails. There are hundreds (or maybe thousands) of projects where the backers have waited for months past a project’s completion date for their rewards or an actual product to be delivered. “Having this happen to your company can create a public relations nightmare and destroy your company’s credibility, which can be the death-knell for a startup,” Steven Bradford, a law professor at the University of Nebraska, wrote in his blog.
When a project is greatly oversubscribed, a backer has to produce tens or hundreds of t-shirts or other rewards promised. “Kickstarter doesn’t make it easy to resolve logistical problems, or what happens when shipping costs more than you expected, or when you’ve got to coordinate a lot of different moving pieces for your project,” said Debbie Weil, the CEO of Voxie Media. She helps book authors package and promote their works and has funded a number of Kickstarter projects.
To rectify these issues, another crowdfunding site called Crowd Supply offers pre-order management, warehouse fulfillment and other ecommerce options. “We let the project creators focus on their designs instead of packing and shipping,” said Lou Doctor, the CEO and cofounder of the site.
But even with projects that get an appropriate level of funding, delays can drag on. Last fall, a piece for NPR’s Morning Edition radio show covered the story about David Barnett, who had trouble finishing his PopSockets project, a snazzy iPhone case with a headphone cord wrap. Barnett decided to pay back forty of his 500 backers who were unhappy with waiting months for their case while he resolved manufacturing issues.
After his story ran on NPR, Kickstarter updated their accountability FAQ to include language specific to that sort of situation, as well as recommendations on how project backers should do more of their own due diligence research. Kickstarter encourages project creators to communicate via email often to their backers, and for the most part that happens: “Sharing the story, speed bumps and all, is crucial. Creators who are honest and transparent will usually find backers to be understanding.”
In addition to outright fraud, there are other legal issues, including false advertising, business practice and patent law. What happens if a project takes the backers’ monies and uses it to fund a completely different project? That could mean the project creator is liable for deceptive business practices, according to another blogger and lawyer James Johnson who also wrote: “If there is liability, would you be subject in your state, or in the state or states where your crowdfunders are located?”
Johnson also mentioned that, if your crowdfunding campaign involves the creation, development, or refinement of a patentable product, “The mere act of launching the campaign may trigger deadlines that you have to file patent or provisional applications by a certain date.”
With all these pitfalls, it is somewhat cheering to see the amount of money going into Kickstarter and equivalent crowdfunded projects. Perhaps that attests to the “do-gooder” aspect of human nature, whereby people want to seem cool or part of the action in their communities.
But even if Kickstarter continues to enhance its site, some storm clouds are on the horizon. This is because crowdfunding is moving into investing in actual businesses; something from which Kickstarter is steering clear, at least for the moment. Websites overseas (where securities laws are more permissive) are funneling millions of local currencies into startup businesses—and eventually, we’ll see the same sort of thing in the United States, once crowdfunding regulations are finalized.
When that time comes, people might actually need the services of something like Crowdcheck.com, a startup due-diligence firm that offers several different programs for crowdfunding project creators and investors to keep them on the right legal path. “You don’t want to be overstating or overpromising something. You might be making a statement that inadvertently is fraudulent under one of the federal securities laws,” said Sara Hanks, the firm’s CEO.
“These are going to be the success and failure stories of the future,” added Bill Frezza, a venture partner in Adams Capital Management. His firm has $800 million under management. “There will be many messy fiascoes. We quietly have buried our dead in the past, but I don’t think the crowdfunded ventures will go so quietly.”