The Crowdfunding Caveat: Most Campaigns Fail
For the minority of crowdfunded ventures that get financed, raising money is only the beginning.
Thu, September 26, 2013
PC World — In April 2013, Dustin Driver looked like a poster boy for Kickstarter success. His tech-savvy backpack venture, Packswell, exceeded its funding goal by 33 percent. He had done his homework in advance, lined up materials and local manufacturing, and produced a great prototype. With more than $13,000 raised in his 30-day Kickstarter campaign, he was ready to hit the ground running. Then reality set in.
Manufacturing delays and mistakes at the factory halted his progress. By late September, after several daunting and time-consuming rounds of quality-control efforts with the factory, only 35 bags out of 57 orders have made their way into customers' hands, and Driver's confidence in his new venture has taken a serious beating.
"It's been difficult and stressful, and I feel like I've let my backers down to a certain extent," says Driver. "I'm grateful for their support and I want to do everything I can to meet their expectations. As for Packswell, it's still too early to tell whether the company will take off."
The first backers to receive their packs waited two months past the initial delivery estimate, while 39 percent are still waiting. But given the standard set by other crowdfunded ventures, Packswell is doing pretty well.
The wisdom of crowdfunding
When someone needs cash for a new venture, there are lots of ways to get it. Traditionally, most people either dip into their personal savings account or borrow funds from friends and family. If their idea is more ambitious and they need more money than they can raise from their personal network, they can pitch their idea to venture capitalists. But VCs are a tough crowd, because they're keen to get their money back and turn a little profit. Crowdfunding offers an alternative that skips the traditional gatekeepers.
In principle, crowdfunding doesn't work like traditional financing. You're not borrowing the money, and there's generally no expectation that you'll pay it back or give up a slice of potential profits at any point. Instead, people are simply donating the cash--typically via online platforms like Kickstarter and Indiegogo--sometimes in return for the promise of a reward once the venture successfully launches. For instance, backers of the Pebble smartwatch received watches once the product was ready for market.
An emerging variant of crowdfunding making its way through legislative hurdles right now would offer more-traditional equity transactions, bringing crowdfunding more in line with traditional financing options by giving backers a share of the venture in exchange for their cash. Equity crowdfunding still faces substantial legal obstacles before it comes to the United States, because it opens up significant potential for fraud.