To say crowdfunding is on the rise would be an understatement. Crowdfunding—raising small amounts of money from a large number of people in order to launch a product, service, or project of some sort—is virtually exploding, with the total volume of money raised from backers doubling year over year since 2012. According to marketing company Massolution's 2015CF report, the global crowdfunding industry was expected to grow to approximately $34.4 billion by the end of 2015.
Considering such popularity, it's no wonder there are so many crowdfunding success stories. For one, the Veronica Mars Movie Project raised $5.7 million on Kickstarter and was able to produce and release a movie based on the cult-favorite TV show in 2014. And the inventors of a better beehive called the Flow Hive raised more than $12 million on Indiegogo in 2015 and are now selling the product to the general public.
The Dark Side of Crowdfunding
But not all campaigns succeed. Many don't even reach their funding goals, and others flounder when it's time to deliver promised perks for investors—particularly when it comes to product launches.
Crowdfunding products have unique challenges. Josh Belzman, a Seattle-based digital media specialist, knows this all too well. He's backed several high-profile crowdfunding campaigns, including the original Pebble watch, the Coolest Cooler, and the Kreyos smartwatch. All three suffered from manufacturing delays. The Kreyos endured the most setbacks, although it eventually shipped faulty products to some backers. "I actually got out of that one. I got a refund before the final product shipped," Josh said.
The Pebble Watch was delayed only a few months and went on to become a successful product line, but the Coolest Cooler, a cooler with built-in speakers, a blender, and other tech, still hasn't delivered to all of its backers. Its 2014 Kickstarter campaign broke records—62,642 backers pledged $13,285,226—and went viral, which is how Josh discovered it. "It felt like a safer bet at the time, but in hindsight, just because they have that scale or over-popularity doesn't mean that everything is polished up, and there really were no guarantees," he said.
The cooler's unprecedented fundraising success was great news for the company—until founder Ryan Grepper realized that the cost to ship coolers to backers all over the world exceeded what had been raised and had to delay reward fulfillment. (Kickstarter now enables inventors to choose the countries to which they're willing to ship rewards.) His goal had been to raise only $50,000, and many backers were getting a deeply discounted cooler as a Kickstarter reward. In late 2015, in a bid to raise money in order to fulfill those rewards, the company started selling the cooler at its retail price ($499) to the general public, which greatly frustrated its backers, who were still waiting for their coolers.
Doing It Right
So how can an entrepreneur avoid this kind of pitfall? "I think the most important thing for an entrepreneur to know is that they won't be doing it alone," said Indiegogo CEO David Mandelbrot. "In a variety of ways they'll be doing it in partnership with other entities, whether it's in those that are helping them with design, with manufacturing, shipping, with retail." In other words—find partners before you raise funds.
"There are a million and one details you need to get figured out, and if you don't go into it without all of those things ironed out, then you're going to get yourself in trouble," said Peter Dering, co-founder of Peak Design, a gear company that has used Kickstarter to launch more than 20 products. The company's first five campaigns raised $7,130,163 from more than 42,000 backers; its latest campaign for the Everyday Backpack, Tote, and Sling alone raised $6,565,782 from 26,359 backers. Dering recommends that creators have their product ready for mass production before even launching a campaign.
You can't expect product launches to be perfect every time. One of Peak Design's products, a camera accessory, initially shipped with a flaw that rendered it useless. But the company was able to come up with a cost-effective solution and avoided dealing with reshipping fees. "It would have been a blow to business," Dering said.
So You're Funded—Now What?
It's clear that the real work begins once you reach your campaign goal, especially if you don't have experience launching a product. Kickstarter and Indiegogo each offer a wealth of online resources for crowdfunders, though the companies have different approaches.
"There is now this whole ecosystem of companies that basically exist to help creators get their devices and such out the door, " said David Gallagher, Director of Media Relations for Design, Tech, and Games at Kickstarter. The company has a resources page that creators can use to find manufacturing, shipping, and other potential partners, although Kickstarter doesn't have a direct relationship with them. Kickstarter also requires that product creators have a working prototype, with pictures and video as backup before a campaign launches. Incidentally, one of the issues that surfaced with the Kreyos smartwatch was that the company hadn't actually created a fully functioning prototype before embarking on its Indiegogo campaign.
Indiegogo has branched out into the post-funding realm with two products: InDemand and Marketplace. The former enables crowdfunders to continue raising funds even after a campaign is over; it's a place to gather pre-orders. The Marketplace is an e-commerce solution that can be used to sell finished products. Both are open to Indiegogo users but also to those who raised funds on other crowdfunding platforms.
The company also has a number of manufacturing and distribution partners, including Brookstone. Indiegogo mines its data to find Brookstone-compatible products and then pitches them to the company. Brookstone has the infrastructure to take on manufacturing and the retail experience to sell products.
Entrepreneurs can also approach Brookstone directly via Brookstone Launch. And Amazon Launchpad is an alternative that handles inventory management, fulfillment, customer service, and more; in fact, Coolest Cooler has used that service.
Backers Beware
"I do think Kickstarter and Indiegogo can do a better job of really being clear with people that this is not a marketplace, that you're investing in an idea and not a product," said Coolest Cooler backer Josh Belzman. Both sites do offer trust and safety pages that outline their terms of use, which includes what happens when a campaign goes south. Each also has guides for prospective backers about what to expect and how to vet a campaign.
Additionally, all Kickstarter campaigns have a risks and challenges section, and they are a must-read. Creators are encouraged to share potential hurdles they may come across throughout the process and to be clear about their background and experience. "The most important role of that chunk of the page is to remind everyone that this is a project and not a product yet," Gallagher said. "This is an idea that this person has."
Both Indiegogo and Kickstarter stress the importance of researching that person before backing a project. "Focus on the track-record of the entrepreneur. Do they have experience in developing a product like this?" Mandelbrot said.
Neither company offers refunds. Creators can set up their own rules for refunds and returns, so be sure to read the fine print. Ask questions, read the comments, and gauge how quickly and effectively the campaign responds. If something seems amiss, report the project to the crowdfunding platform, which will trigger an investigation. If violation of the terms of use, such as fraud, is suspected, the companies will intervene.
As for Josh, he did finally get his cooler after waiting nearly a year and a half. It arrived just in time for the July Fourth weekend. He and thousands of other backers took Coolest up on its offer to pay an additional $97 for expedited shipping. Josh is happy with his cooler but leery of crowdfunding tech products. "I think I might be done with these for a while," he said.