Why I’ll never use crowdfunding again, and why I suggest you don’t either.

How it is portrayed

Crowd funding sites are these fun sites.  They show a possible future.  They show all of these possible products that you could use.  If you just give $20-50, you get to make sure that this product gets made and you get something in return, right?

The Fine Print – You aren’t an investor.  You are donating.
The biggest problem with this beautiful vision is that you are giving money to a company that gives you nothing in return. There are the perks, but I’ll get to that later, since there are issues with that too. So essentially, you are donating money to someone who, a lot of the time, doesn’t need the money or does, but you would never give them that money if you were to meet them in real life.

If you were to compare it to the stock market, where if I were to invest $200 in a single company, i own $200 worth of a company. If the company is valued highly, this is not a large percentage, but for this example, let’s say it is 0.005% of the total company. If the company grows in value, you still own that much of the company and it worth more. If it shrinks in value, you still own that much of the company and it is worth less. Either way, you always own that much of the company.

In crowd funding, however, you don’t own any percentage of the company. For example, if you were to invest in a movie company, for every movie that makes money, so do you! In crowd funding world, this happened as well, but you know who got the profits? The projects themselves.

Point in reference, was the Veronica Mars movie. This isn’t the only movie out there, it’s just a really good example. This was put together as an idea to make another movie where there was a solid fan base. Sure, they couldn’t get studio funding, but maybe they could have tried elsewhere.  But, in the end they wanted to test out this crowd funding phenom.  After raising nearly $6 million to make the movie, the movie was made and eventually came out and grossed about $2 million – the first weekend!  If you were a Hollywood producer of some other film where you had invested $6 million, you’d be pretty happy, because you are going to make your money back in a matter of weeks, and then the rest is profit.  For the producers of this film… the fans donated the money.  So it’s ALL profit.  Yes, the people who put this project together made $2 million in profit the first weekend.

As long as you know, in this case, that you just donated to rich people, then you understand.

The Perks

“But wait!”, you say.  “I get something out of it – the perks!”

Yeah… about the perks.  The perks are a benefit that you receive in return for giving money to the product.  For example, if I were to support a video game, they promise me that I get one of the first run of the game with some fancy packaging or something like that.  For the low, low investment of $50.  Well… you think to yourself, and you usually spend about $50 on a video game, and this sounds like a really cool video game, so why not?

Well, turns out that there are some pretty big “why not”s.  This first and foremost, is that the company has to finish the game to give it to you.  If a company tries to create some game, and then one of the members goes off the rocker and for personal reasons decides to sue the other members and the game never gets done (this is a scenario from the documentary Indie Game: The Movie).  Then you know what you get?  Nothing.  Yup. Nothing.  Well, that bites a bit one, right?  What can you do about it?  Well, nothing.  Because it’s a risk that you are taking.  All of the crowd funding platforms make this abundantly clear.  If the project doesn’t get completed, that’s your loss.

In the case of the Veronica Mars movie, what was the fans benefit?  To have your name in some long list at the end of the credits.  Or if you spent $50+, you get a copy of a $20 movie.  Or better yet, to be able to pay for the movie again, since they have to pay $10-15 at a theater or $20 to buy it from Amazon when it comes out on DVD.  Seem pretty crazy to anyone else?

Wait, there’s more… Turns out that none of the big crowd funding sites will keep track of the Perks either.  They require it, legally speaking, that they give you the perks, but they leave that up to the project.  So, if a project does get completed, that’s between you and the company to handle the perk.  They usually allow messages to be sent to the project owners, but if they forget to send out the perks (this specific thing has happened to me), you get to deal with fighting with the project owner.  If they promised you something that’s no longer available because they gave it away already, you might not get it.  For example, if you ordered a numbered first run piece of art, and they don’t have any more… what can they do?  They aren’t going to refund your money.  That’s already been spent.

Now mind you, most of these project groups aren’t money grubbing (there are exceptions – such as Amanda Palmer), so they’ll usually try and do right by you and give you what you deserve.  But if they don’t, you have very little recourse.  Based on the Kickstarter blog, they are attempting to remedy this with legal speak; but Kickstarter have very specifically stated that “Kickstarter would not step in as a mediator”.  So, again, you are on your own to sue some company that you don’t even know their address.

Missed Deadlines and Failures
Since most of these groups have little experience in what they are doing, deadlines are missed very often and some projects never complete. As any investor knows, this comes with the territory. In any investment, you do your research to make sure that the person that you are investing in has a chance of getting things done. Even then, it depends on the project. Remember, a lot of the people doing this have full time jobs, and if they lose your investment money, they haven’t lost too much. They can always go back to their day job or retirement if things aren’t going well.

Problem here is that, usually in a structured investment, for example, if you were an angel investor, you would make sure they were hitting some sort of milestones. If they don’t hit those milestones, you don’t give them any more money. That way, you don’t lose your entire investment, and if you determine that it’s a good time to cut and run, you can.

Huffington post and NPR ran a story covering what happens to your money if the project fails, and it’s exactly what you’d think.  Basically, you lose.  Unfortunately, with some projects, like the ZPM Espresso machine, they keep trying and there’s never a “failure”.  It just delays forever.  This particular project was slated for March 2012.  They are still working on it.

And then the crooks…
There have already been complaints over people that just take your money and run. The crowd funding sites try and keep it quiet, but it is happening. Their response is that it is your risk, that they do the best due diligence that they can, but it is, in the end, your risk.

There have been a number of projects that have been shut down and forced to fight with the crowd funding sites, for example Michael Bunker and the film Shelby and the Bread Factory, which both had cancellations and were fighting with the crowd sourcing over issues of spent money, since the funding had already started.  I’m not going to cover those, as basically the sites have a general “we can cancel whatever we want, legally speaking” attitude.  It’s sketchy, and I don’t want to delve too much into those details.

Projects that were known to be just reselling things already on the market seems to be popping up all over the place.  There was a Free Roll Machines Gamers Dice and LED Strip that were just trying to “fund” things that can currently be bought from China for pennies on the dollar. In both these cases the project owners would have garnered a nice wad of cash for nearly no work at all.  There have been other issues with Money Laundering, in which thieves are starting additional accounts and donating to themselves.  Or fraud from people that just put in fake information.  From a kickstarter for a video game called Mythic: The Story of Gods and Men that was forced to shut down because they had detailed a game studio that didn’t exist and had stolen most of the artwork used in the project.

The best is in the 100% pure beer fed Kobe Beef in which the project owner nearly took of with $120,000 of the funders money.  This scam was exposed with a combination of user comments and with the investigation of a film documentary called “Kickstarted“.

Apparently the problem has gotten prevalent enough that Kickstarter has started a “Fraud Watch” for people to report it.  This is because, the people that think these things are interesting are the most likely to research and discover fraud.  Most of these crowd funding sites have very few staff to help out on this.  But truthfully, if some slip underneath the radar, would any of us ever know?

Reality

Like I mentioned, crowd funding sites are absolutely just donations.  If you feel like donating, that is your prerogative.  I also don’t knock the folks for giving $5 to a homeless man on the street.  However, in both cases, I argue that you have no idea where your money is going and could probably be used for more productive forms of charity.

I’m not going to lie, with some of the cool ideas on Kickstarter and IndieGogo, I will find myself investing, and at the same time happy that they very low ($10,000) investment maximums.  This makes for some cool ideas.  For example, I invested in the Baker Stoves on IndieGoGo, and I don’t care if those guys ever give me anything back.  That’s a donation that I just hope makes the world a better place.

Most of the time, though, I’d rather hedge my bet by letting the project successfully get funding and then when the product is finished, I’ll buy the product when it makes it to Amazon.com (which, will eventually be cheaper than the initial price anyways – thank you capitalism).

Alternatives

So, when folks at Lockitron tried to do a crowd funded project, they got denied by a bunch of sites.  Apparently the scams for Kobe beef looked like better investments.  So the folks at lockitron decided to make a pre-order platform that is free to the world.  That way, no matter what, you will get your product or your money back.  By making this free, anyone can grab the code and use it themselves to create a nice pre-order system that you can use for your own budding products.  With this form of pledge, you are still helping by priming the pump, but you aren’t giving your money away.  You are purchasing a product, which is protected by both your credit card and a plethora of laws.

Angel Investing.  Let’s admit it – It works, and you know what you get out of it. Sites like Mosaic allow you to buy shares in a company that you know is doing well.  In this case, it’s a company that installs solar panels on buildings and will give you a return on your investment, while also giving the purchaser a reasonable loan for saving on their energy.  Everybody wins!