Crowd funding: How to limit the risk of getting ripped off

The Kickstarter website has moved crowd funding into mainstream media. There is virtually no news site, newspaper or TV network left out there that has not reported on recent funding success stories. You may have heard about Double Fine Adventure's million Dollar ride that got the ball rolling for some serious game funding on the site, or Pebble, the e-paper watch for iPhone and Android that managed to rake in more than $10 million.

People who pledge a certain amount of money often get something in return. In the case of Double Fine it is a copy of the adventure game that the developers want to produce with the money, and for Pebble, it is one of those iconic watches. Pledges can be retracted for as long as the funding has not ended. Afterwards, the money is only transferred if the funding has reached the desired goal. If that is not the case, backers are not charged a single dime. It gets fuzzy when a project has crossed the funding goal and reached the end of the funding stage. Once the money has been transferred, there is not really any transparency as to what happens with the money from that moment on forward.

Kickstarter's Role

Companies are not committed to keep the people that funded the project in the loop. While many post status updates and information on Kickstarter and a project website, some are not that forthcoming.

Kickstarter notes that it reviews projects before they are put on the site. The review process however only ensures that projects do not violate the site's project guidelines, which, among other things, prohibit certain types of content to be posted on the site. What Kickstarter does not review is the project itself, for instance if it is possible to produce a product for the amount of money or whether it is likely that the product can be shipped in the projected period, or even if a product like this can be created at all.

Kickstarter expects creators to keep backers in the loop through updates if projected delivery dates are missed. If creators do not post updates, backers are expected to contact the creators either by posting comments on the project message board or by sending private messages. At most, Kickstarter sends a wake-up email of their own to the creators to make them aware of the issue, but beyond that it is nothing that they want to be involved in:

If a creator isn't posting updates, backers should contact them, either by posting a public comment or sending a private message. In most cases, creators do respond to backers' inquiries. When we hear about a project that's stopped responding to backers we'll email the creator to try and wake them up. Beyond that, it's in the backers' hands to exert collective pressure. It's a creator's job to complete their project, satisfy backers, or refund backers' pledges.

Kickstarter doesn't issue refunds since transactions are between backers and creators, but we're prepared to work with backers as well as law enforcement in the prosecution of any fraudulent activity. Scammers are bad news for everyone, and we'll defend the goodwill of our community.

Kickstarter basically enters into passive mode once a project has been funded so that backers are left on their own to fight either for a refund or the rewards that were promised to them.

It gets worse for project backers:  According to Steve Bradford, a professor at University of Nebraska-Lincoln College of Law who specializes in crowdfunding, the Kickstarter model offers backers no entitlement to products they have supported on the site:

Kickstarter fits into both the pre-purchase and rewards models. This means if pledging users offer money to a project, they are not legally owed a final product in return; rather, in accordance with Kickstarter's rules they are simply promised a separate reward for their pledge. Backers have not entered into an investment contract by donating toward a project, and because contributors are offered no financial return of any kind the legal implications of an investment contract are non-existent, says Bradford.

One Example

The Eyez by ZionEyez HD Video Recording Glasses for Facebook was funded successfully on Kickstarter on July 31, 2011. The creators raked in $343,415, which was almost seven times the amount of the initial goal of $50k.

Back then, the reward items were promised to ship during the Winter 2011 season, about half a year after funding ended on Kickstarter. Backers on Dec. 30, 2011 received a message from the ZionEyez team that an initial prototype had been built. It lacked information about the delay, and offered no information on how the company intended to go forward with the development and the promised rewards:

Dear Kickstarter Backers,

We are extremely pleased with the progress we have made within the past 6 months in developming Eyez prototypes, establishing partnerships, and creating a road map that will supersede your expectations.

Below are links to an early prototype overview featured on Engadget and sample videos uploaded from our very own Eyez!
We are working diligently to produce Eyez. Thank you for your patience while we endeavor to fulfill our mission.
We will be sending a more comprehensive update within the next couple of weeks outlining Eyez development, production, and distribution.Once again, thank you for your patience and support!

-- The ZionEyez Team

The next message arrived on Jan. 27, 2012 where backers were told that the engineering process has taken longer than anticipated and that the company as a consequence had to postpone the target shipping date, again without information about projected dates.

Three months later another message arrived where the company told backers that the ZionEyez product  needed another 8-12 weeks of design and testing, and that it hoped to ship the first mass-produced batch of the product in 24-30 weeks from the time of writing:

We have an additional 8-12 weeks of designing and testing we need to conduct before our design will be ready to give to our manufacturers for mass production.  At this point, we need to make a very large investment with our manufacturing partner to build and buy the tools and equipment we need for mass production, as well as pay for the electrical parts (batteries, cameras, flash memory) for our first production run.  This is a significant cost (over US 1M), so we need to make sure we have the design 100% right before this important point in the project.

After we've kicked off our first mass production run, it will take our manufacturer an additional 12-16 weeks to get their assembly lines built, tuned-in, and up to speed.  During this time, we will be assembling small batches of Zeyez eyewear to test out the assembly lines as they come together.  We are planning on building these pre-production glasses for our Kickstarter fans, ensuring that you get your Zeyez eyewear as soon as possible and well before mass-market availability;  24-30 weeks from now, our manufacturer should be able to ship us the first mass produced batch of Zeyez eyewear ready for sale.  We can’t wait to get there, we’re working as fast as we can to build our team and get these glasses out to the world as soon possible.

From the outside it looks as if the creators of the project underestimated the costs, time and resources that it would take to create the project. And while that does not necessarily mean that backers won't receive their rewards after all or that the product won't go on sale in the not so distant future, many of the issues could have been resolved with better communication.

Limiting the Risks

It is important to research a project, to really understand the risks, before you fund it even if you are really passionate about it or are dying to get your hands on the final product.

1. Common sense. If someone promises you something that sounds too good to be true, it often is. When common sense tells you that something is not right with a project, you should either click on your browser's back button right away, or keep that nagging thought in mind while you investigate the project from different angles.

2. Track record. A company that has produced similar products in the past generally has the expertise necessary to create another product. If you deal with a new company that never created a product before, you should take that into account. Finding out that Tim Schafer and Brian Fargo have a track record of creating computer games for the last 10 or more years adds to the trust of a project.

3. Prototypes. Prototypes or demos increase the trust in a project.  This not only demonstrates that the company is capable of creating the item, but also that they already have experience doing so. They know how much they have paid to create the prototype, what it costs to produce it in a factory and are already in an advanced project state. This gives them a much better understanding of the money and time they need to complete the project.

4. Funding vs. Buying. On Kickstarter, you are funding projects. You are not shopping and buying future items. Risk is a natural part of the funding process and there is a chance that you will end up without money or product in the end.

5. Research. This falls somewhat in the track record category but since it is one of the most important steps you need to undertake before funding a project, it deserves to be mentioned separately. Research the company, its employees and the product on the Internet. This also includes making a judgment call on the projected goals, the expected rewards, and the time frame it takes to create and ship the final product.

Do you experience as a Kickstarter backer or creator? If so, feel free to share your experience and thoughts with comments below.

Photo Credit: Lou Oates/Shutterstock

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