[FAIL] Don't Get Burned By Crowdfailures

Category: Finance

Crowdfunding - the raising of capital through small contributions from many people - has grown from an Internet novelty into an SEC-sanctioned financial market. Many successful products have come to the market thanks entirely to crowdfunding. But for every success story there’s a horror story, it seems. Here are some high-profile “crowdfails" and some tips on how to avoid being a part of them…

What's Worse Than Failure? Crowdfailure

If you're new to the concept of crowdfunding, or need a refresher, my article What Is Crowdfunding? will give you the basics. For businesses, Are You Ready For Equity Crowdfunding? provides an introduction to government-regulated equity financing via “the crowd.”

On the positive side, Oculus Rift, the highly-touted virtual reality system, raised $2.5 million in a Kickstarter campaign in 2012. In March 2014, Facebook paid $2 billion for Oculus VR, Inc. One of my favorite Indiegogo successes is the Bug-A-Salt, a well-made plastic shotgun that uses ordinary table salt to kill pests. Truly, crowdfunding has enabled inventions to reach consumers that would otherwise have died for lack of capital!

But crowdfunded projects don't always have a happy ending. The leading scandal in U. S. crowdfunding is The Coolest Cooler, the geekiest beverage cooler on wheels ever invented. It would have everything, the principals promised: a built-in blender; a Bluetooth speaker; 55 quarts of chilling space; even a built-in bottle opener. Over 62,000 backers kicked in $13.2 million towards the development of this wonder. Most of them were promised one of the first coolers to be produced in exchange for their donations.

Crowdfunding and Crowdfailure

They’re still waiting for their coolers, even though the “Coolest Company” is selling the Coolest Cooler on Amazon to the general public. Somehow, the principals burned through all those crowdfunded millions and still had to raise capital by pre-selling to the public, just to keep the doors open. And now, the company is telling early backers they must pay another $97 to receive their coolers along with Amazon shoppers, or go to the end of the shipment line! Many backers are hopping mad, and rightfully so.

Personally, I am most disappointed by the seeming failure of the Skarp Laser Razor. I was really looking forward to shaving with a laser beam instead of a blade, and never having to buy overpriced blades again! Over 25,000 other people shared my hope, kicking in $4 million to the Kickstarter campaign. And then Kickstarter canceled Skarp’s campaign; the startup never saw a cent of the millions pledged.

Not So Sharp...

It seems Skarp did not have a “working prototype” of its invention, one of the few requirements that Kickstarter imposes upon fundraisers. Cnet got a hands-on demo of the Laser Razor in November, 2015, and it was pretty pathetic. The razor veeerrry sloooowwwly burned through just two hairs on the back of the editor’s hand!

Undaunted, Skarp has moved to Indiegogo, where apparently anything gogoes, and has raised over $477,000 to keep its campaign alive. The original ship date was March 30, 2016; no word now when this thing will materialize, if ever.

Airing, another high-profile Indiegogo project, promises to be the first hoseless, maskless, micro-CPAP. It has raised over $1.2 million, but there's no working protoype yet, and it won't be available until at least mid-2017. If this thing materializes, it will be hugely popular with sleep apnea sufferers. If not, all the investors will be the suffering ones.

Over in the UK, Rebus is the biggest crowdfailure so far. The company raised £816,790 (about $1.12 million USD) in an equity crowfunding campaign in 2015. Rebus Investment Group sold 6.3% of itself to 109 investors. Rebus has just declared bankruptcy. The irony is that Rebus’ principals claimed to be in the business of assisting “investors who were misled into buying ‘flawed complex financial solutions’.”

Some crowdfunding campaigns are blatant scams, even copycats of scams that thrived in the 1990s. Crystal Wash 2.0 is one such recycled scam; it claims to get clothes cleaner by altering the molecular structure of water. Nearly identical snake oil was quashed by the FTC decades ago. You can also find perpetual motion machines (though they aren’t called that any more). How about helping to fund a floating city that can be propelled and steered anywhere - assuming any country will let it resupply.

I've invested in a handful of Kickstarter and Indiegogo campaigns, and so far have not been burned. Most the the projects I've backed were started by people I know personally, which is one way to mitigate the risk of participating in crowdfunding.

Crowdfunding is a two-edged sword. Be careful what you invest in, and always remember that you are investing, not buying a sure thing. As with any investment, there is a possibility that you will get nothing in return for your money.

Your thoughts on this topic are welcome. Post your comment or question below...

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Most recent comments on "[FAIL] Don't Get Burned By Crowdfailures"

Posted by:

21 Apr 2016

I have participated in a couple of fundraising efforts on Kickstarter but I tend to fund personal projects rather than gadgets. A photographer taking photos of shelter animals to help them get homes was putting together a book. Another made a video of dogs riding in motorcycle side cars (I know it sounds stupid but there is hardly anything more joyful looking than a dog in goggles taking a trip with his or her person). In other words, I needed some connection with the item, and something that makes me feel good. I don't have much money so I contribute at a very modest level, and I don't have the expectation I'm going to be part of the next great thing. Electronic junk comes and goes so fast that it is impossible for an ignoramus like me to know what has value and what doesn't, so I don't bother.

Posted by:

21 Apr 2016

I am suspicious that the Bug-A-Salt is truly worth the price or another salty clean-up job. Does this thing really work around the house or best used outdoors?

Posted by:

21 Apr 2016

I really needed a good "wake up" laugh this morning. Thanks, Bob, for the Bug-A-Salt item. I'm still laughing.

The "Airing" project, though, does interest me a tad as I have sleep apnea. (I use an ASV machine instead of a CPAP.) My mask & hose combo seldom bother me; so I doubt if I'd put forth any $ for investment and/or purchase.

Still: your advice is "right on" about being careful with one's financial "investments."

Posted by:

21 Apr 2016

The very popular "Simon's Cat" animations on YouTube had a crowdfunding campaign on Indiegogo about a year ago. This was to raise enough money to allow Simon Tofield (the creator of Simon's Cat) to make a much longer animation in colour for his project "Off to the Vet". The Simon's Cat animations are quite brilliant, and I have been enjoying them free for years, so I contributed to this campaign partly because I wanted to show my appreciation for the hours of free entertainment Simon had already provided. I was not disappointed. For my contribution I got private access to the video when it was finished, and also a beautiful "Off to the Vet" book of drawings used in the project, signed by Simon.

I also contributed to another Indiegogo campaign, initiated by a musician friend and neighbour, to raise enough money to record a CD. Again, I was not disappointed, and received a great CD as my investor "perk".

So, for me, in both cases I would consider this money well spent, but I did have a more personal connection with both campaigns before I decided to contribute. I wouldn't contribute to some of the ones that sound a little too good to be true.

Posted by:

Granville Alley
21 Apr 2016

These are also great ways to assist small charities and to help fund or match fund people's mission trips. There although you are not expecting a product or a return on investment, it is still wise to try to vet the fundraiser to make sure their particular charitable purpose both matches your goals and that they are legitimate.

Posted by:

Granville Alley
21 Apr 2016

The good thing about this funding is that it usually goes 100% or very close to 100% for the charitable purpose while most charitable organizations only utilize a relatively small proportion of the funds they receive for charitable purposes with most funds going to more fundraising and to "overhead" (i.e. peoples salaries).

Posted by:

21 Apr 2016

I probably tend to be overly skeptical, but after a quick read, too many of the proposals look suspiciously like a flush for investors to keep the principals flush.

Lost connection when I hit the button. Hope this doesn't double-post.

Posted by:

Robert A.
21 Apr 2016

I can understand people wanting to contribute to someone in need for personal reasons, such as lack of funds for a medical situation or a funeral, but I can't understand why anyone would want to some stranger's business plan for some pie-in-the-sky product, that we have, up to this point, managed to survive without its existence.

What crowdfunding recipients seem to be saying is they are too lazy to do the grunt work to go through legal, proper and established channels to bring their concepts to fruition. The contributors have essentially no concept of the real intent or the honesty of the one with the open palm, other than a slick dog-and-pony presentation, designed to wow the crowd. There is no stock ownership involved nor legal promises of dividends to the contributors. People are better off waiting until there is a initial stock offering, with a published legal prospectus, in order to make a sound business decision, before parting with their hard-earned cash.

Posted by:

22 Apr 2016

Don't blame the little companies or individuals with big ideas and no prior mass market manufacturing experience not to be wrong in their estimation of "actual" costs.

A website is an informative and relatively cheap way to reach millions of potential buyers whom are happy to throw money at the conceptual masterpiece.

Taking orders is easy delivery is a bitch.
Big or small (Company)

Tesla Model 3 anyone?

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