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Is Crowdfunding legit or a scam?

Crowdfunding websites like Kickstarter or Indiegogo are growing and more and more people sign up and start backing a project. They like the idea of a product and want to have it. Often they back a project without even knowing what crowdfunding exactly means and as they are used to swift delivery times from online shops like Amazon, they get frustrated when it takes weeks, months or even years until the rewards are being shipped. You see them then rambling in the comments section about scam and that they want their money back. So let’s have a look into Crowdfunding. Is it a scam or something legit?

From idea to product

Let’s imagine that you have an amazing idea for a product. You are not particular an inventor and also have no sources for manufacturing. How can you bring this great idea of yours to life? How can you bring the product to the world? You manage somehow to create a working prototype with your own funds. As you have no reputation in the specific industry, no one will believe in your new product. What can you do now to make this all happen? How do you manage to get your product to the manufacturing state? The only solution seems to be here crowdfunding. On a crowdfunding platform you can present your product, open it up to a broad variety of people who would like to invest in your idea, your new product. You offer those investors no shares on your company, instead you offer them rewards for their investment, in most cases you offer as reward your new product on a special price.

The risks of crowdfunding

Sounds good, isn’t it? Yeah, if everything works out as planned, then everything is fine. But why are there so many reports about crowdfunding scams? Most reports of those scams on Indiegogo or Kickstarter are made by people who are not aware of how crowdfunding works. If you back a product, you pay when the campaign ends (Kickstarter) or a few days after you pledged (Indiegogo) and as consumers nowadays are spoiled by quick delivery times, they expect to receive the reward instantly.

But this is not how it works. With a crowdfunding campaign, creators are collecting funds to be able to manufacture the product. So when a campaign ends, the crowdfunding platform takes their fee off the collected amount and transfers the funds to the creator. The creator will then look into manufacturing facilities around the world, mostly China, and the product will be manufactured. If the production run was successful, ideally quality control will happen and in case all is well, the rewards will be shipped. This would be the perfect scenario and would assure that the rewards get shipped in the estimated time frame provided in the campaign.

It happens sometimes that during production something is going wrong. The product needs to be changed in design or functionality to bring it to life. Many backers do not agree in this and they claim again that this might be a scam as due to the product changes it is not the product they “bought”. Again a misunderstanding here, because in crowdfunding you are not buying anything, you invest into an idea.

Campaigners might not be able to deliver

Investing into something means always that you might lose your money. If you think about crowdfunding you could compare it with the stock market. If you buy company shares and the company goes down, your hard-earned cash is gone. The same can happen when you invest into an idea. There have been cases where creators ran a successful campaign but then the production of the product failed for some reasons. As the funds were used, they were not able to continue with the project and had to cancel it. The collected money was gone and a lot of investors were left standing in the rain, losing the pledged money. Those cases are rare, but if you want to support a project, you always have to be aware it might happen that you lose the money.

Let’s talk about delays

If you see campaigns on Indiegogo or Kickstarter you always see also an estimated shipping date. If you are new to crowdfunding, please never trust those dates. I have backed a lot of campaigns myself and it happened once, that a campaign finished early. All others were delayed. But why are those delays happening? To make a prototype is something else than mass-producing that same product. So in most cases delays are happening because designs or functionality of the new product needs to be altered to be able to mass-produce it in a costly efficient way.

Delays can also happen because backers have awesome ideas to make the product even better. These alterations also take some time to implement.

Most delays are happening, because creators get overwhelmed by the success of the campaign. For example, you start your campaign with a funding goal of 250 units. You think that this would be a great success and you even have your production in place already. But then a miracle is happening and your campaign goes through the roof and you finish it with a volume of 10.000 units. So everything you had planned falls apart and you need to find new directions.

Should I do it or not?

The answer to this question you can only answer yourself. If you are convinced of the product, if you like the presentation, if you think the creator is honest, then go for it! It can be really fun to be part of the creation of a new product, communicate with the creator, follow along of the development and production process and be then one of the first to have this new product. Then yes! You should do it!

However, if you are on a very tight budget or if you need the product in a certain time frame, then no! In that cases you should stay away from crowdfunding because there is the risk of losing the money if creators are not able to finish the project (refunds in those scenarios are not the normal case). It also might happen, that you will get your reward months or years after the estimated date.

Crowdfunding can be fun, but you have to be aware of the risks. In most cases crowdfunding is legit and not a scam.

2 Comments

  1. This is very interesting information. Mostly big-time venture capitalists get to look at business opportunities, and this opens up to more modest investor, with prudent evaluataion advice. It does seem prudent risk evaluation is called for and encouraged. Thank you for posting this amazingly relevant information. It helps in decision-making.

    • Hi Annie,

      Thank you for your comment and reading my post. 

      I hope it explained about about crowdfunding…it showed hopefully the potential risks but also the huge benefits of being part of creating something new!!!

      Have a wonderful Christmas!

      Joe

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