Estimated reading time: 4 minutes
Here’s the thing about startups: The odds of them working out are abysmally low. 55% of startups fail by year 5, and 40% of startup failures are due to incompetence. Check out this pretty chart.
This is enough of a problem for professionals who live inside the WTF world of finance and startup investing, but when you throw regular Joes and Janes into the hodgepodge world of crowdfunding you get a lot of angry regular Joes and Janes and very few happy ones.
Crowdfunding (via websites like Kickstarter and IndieGoGo) removes the usual barriers-of-entry for people wanting to invest in products they like. Here’s the premise: you browse a website looking at all kinds of startup projects, invest whatever amount of money you like (sometimes even as low as $1) and you’ll get something in return as defined by the creator (eg. stickers, the actual product once it goes into production, a thank you note). Sounds simple enough, right?
The premise falls apart very quickly once you shine a light on the pieces.
Raising money through the traditional process is a lengthy and arduous process. The primary reasons are:
- Investors are diligent folk. They want to know how it will work, when it will be ready to start returning on their investment, and how much will be returned. These people see thousands of startups and projects, thousands of proposals, and without being able to separate the home runs from the blunders they’d end up very broke very quickly. So they take their time to make sure all the questions are answered.
- Developers are very rarely able to secure funding and investments without a working prototype of some sort. So first, manufacturers and developers must build and test a prototype, then they can go and attempt to secure some funding. This accomplishes various goals, including smoothing out any kinks in the original proposal and idea, exposes weaknesses in the product or business plan, and lets investors take the prototype into their hands and play with it.
Even with these stringent structures in place, as we’ve seen before, less than half of startups make it past year five. What do you think happens once you lift this structure?
These two aspects of traditional fundraising have stood the test of time and saved investors and product developers money, time and headaches, but they are nonexistent in modern crowdfunding. In fact, if there’s one thing that the latest Kickstarter mishap (a 3D printer project that raised $1.5 million and then failed miserably) proves, is that not only are they nonexistent, but, to some extent, crowdfunding employs methods that are the exact opposite of these core fundraising values:
- Where investors are generally intelligent, professional, and diligent with their money, regular people browsing Kickstarter (or IndieGoGo or GoFundMe) are not. Not only are they not diligent, but most people pledge money because they feel some sort of emotional connection with the product. Except, this is not the product that they’re looking at, but a video of a guy explaining what the product will be. Wait, this isn’t even what the product will be–no–this is more like the developer’s idea of what the product might be. In fact, a Reddit user who received his 3D printer says, “[it] is also NOTHING LIKE what was promised in the campaign. It’s got no heated bed, only prints PLA, and is made from shitty plastic instead of aluminum.” This is a common issue with Kickstarter (and other crowdfunding) projects, and we’re gonna see why right now…
- In the crowdfunding process, manufacturers make promises before the prototype is developed. This is in contrast with the traditional fundraising process in which manufacturers and developers smooth out any kinks and issues with their plans first. Instead, with the crowdfunding model, companies first raise the funds and then hope that their plans are as flawless as they expect. This is rarely the case, to no-one’s surprise (except maybe those who actually pledged money), and sometimes these projects run out of money before the kinks can be smoothed out, resulting in yet another failed Kickstarter project.
If the crowdfunding model is to survive, these life-bleeding holes need to be plugged and quick. For every failed project that makes the news, people lose what little faith they have left in the process. I say this knowing full well of the paradoxical nature of my solution: crowdfunding exists to remove the so-called barriers of classical fundraising, the same “barriers” that I think crowdfunding should employ if it wants to live.
Look, I wish crowdfunding could become the thing it was meant to be. I truly believe that, in a perfect world, crowdfunding would be better than regular fundraising, especially when you consider that it opens the doors for startups from any part of the world to receive funds from anybody else in the world. It’s a beautiful dream.
But we don’t live in a perfect world, and this is one dream that’s bound to turn into a nightmare.