This is a guest post by Elena Mikhaylova, the CEO of CrowdfundProductions, a company that puts on crowdfunding events and helps entrepreneurs launch crowdfunding campaigns.
Last week the crowdfunding world was shaken up by a new scandal. Kreyos, a smart watch project, which raised $1.5 million on Indiegogo, was called out for being a scam by backers and media publications. Thousands of the backers are angry and promise to never again support new campaigns.
Unfortunately, it seems to be happening more and more often. The delivery rates are low for crowdfunding campaigns. For example, according to our research of 300 wearable technology projects earlier this year, only 18% of flexible funding campaigns on Indiegogo have resulted in the products being delivered to the backers.
Another problem is the delays in delivery. The more complex the project – the higher the probability of it being shipped late. For 176 home and garden automation campaigns on Kickstarter, which we researched last spring, an average delay was more than 6 months. Another research study for Kickstarter campaigns shows that for almost 20% of successful projects, the delays were 10 months or longer.
Finally, there is a common problem with a quality of the delivered products. At least 30% of the projects in our 2013 research delivered products that were hugely disappointing to the backers.
Backers are the core of the crowdfunding eco-system. Without them, neither tens of thousands of successful projects nor crowdfunding platforms would exist. At the same time, they are not protected by these platforms and growing pains can result in crowdfunding fatigue. Many insiders have already noticed this trend in the game category. Next will be technology and product design.
Frustration among backers is on the rise. I’ve seen hundreds of messages like these two: “This was my first attempt at Kick Starter after hearing so much about it… After this, I will not be participating in other projects. I should have investigated further and seen that we have no protections from something like this”.
“[This is the] Second Kickstarter I’ve been burned on, sucks for the worthy products out there and creators that actually fulfill their obligations. I’m done with this website.”
Coming back to the last week’s scandal, I’d like to quote a Gizmodo article about the Kreyos case: “crowdfunding is dangerous. You’re not buying products, you’re betting on an idea and some (often random) stranger’s ability to have planned it well and to follow through.”
We are not professional investors and don’t have the expertise/time/desire to do a due diligence check. Still, how can we avoid con artists or just those who don’t have the skills and expertise to bring the product to the market? I’ve created a list of the red flags to watch for and would love to hear your feedback and addition to it.
1. The project creator doesn’t have presence in Google search or major social networks. How can he/she prove their expertise to bring the product to the market? Don’t hesitate to ask questions about their life prior to the campaign. Do they have a track record of successful projects in the field? Check out if they had previous campaigns on the same or other platforms and if so, have they delivered the product?
2. The company running the campaign was created just a month or so prior to it. Check out the company’s website. Does it have a physical address? Does it show the profiles of the management team and their previous accomplishments? Can you verify any of this information?
3. The creator’s social accounts are full of fake fans/followers. Anyone can buy thousands of Twitter followers or hundreds of Facebook fans on Fiverr for just $5. They are not real supporters of the project. Usually you can see no activity on the pages like that and lots of photos of teenagers with strange names. So, if the creator starts a campaign from fake social accounts, why should you trust him to deliver real results?
4. Bad presentation of the product (especially in a video) and no clear explanation of the budget. Do they have an existing prototype? Can you understand the functionality by reading the project description? Do they show the prototype in action in the video? Do they explain how they are going to use the money and does it sound reasonable to you? For flexible funding campaigns, the main question is “what if you don’t reach your funding goal? How are you going to deliver the product then?”.
5. Changes in the project description like a city or the location, which is different from the real one. I’ve seen projects that changed their location multiple times during the campaign. By doing so, the creators hope to attract more backers. But do you want to deal with someone who doesn’t mind lying about the basics?
Another problem is that creators from certain parts of the world prefer to hide their real location. So, they use other places, often the most popular in crowdfunding, like San Francisco, Los Angeles or New York. Unfortunately, if something goes wrong, you wouldn’t be able to find them or to make them responsible for delivering the product. So, don’t hesitate to ask for the exact address and check it out (at least, using the Yellow Pages or Google maps).
6. Changes in the founding team during the campaign. Very often the people that lack credibility try to use well known names as the team members. Usually these experts do not participate in the company’s operations and wouldn’t take responsibility if something goes wrong. Another case is when the team had been built just prior to the campaign launch and doesn’t have an agreement about the goals. They can change the management several times and end up with people who have a completely different vision about the product after it already has been funded.
7. Significant changes in the amount of pledges or pledges for thousands of dollars made by a small number of people at the beginning or just before the end of the campaign. Unfortunately, they are usually done through fake accounts to imitate activity and to attract additional backers. The creators do this to trick the Kickstarter algorithm and to be placed higher up in the search results. Before the end of a campaign, it is done to reach the goal. Very often it is used by companies whose real goal is not crowdfunding, but a proof of market demand for venture capitalists and business angels in order to get millions of dollars in private investments.
8. Too many changes on the campaign page. It is normal for a creator to listen to backers’ feedback and to add more information, create additional perks or show the media coverage of the campaign. But when the creator keeps changing the page design or rewards based on every person’s feedback, it shows lack of planning and a strong personality. It’s up to you to decide if you trust this person’s ability to follow through on the product design, manufacturing and global shipping.
9. The perks look too good to be true. Usually that means bad budgeting or simply a scam. Don’t pledge on a product without understanding its functionality. Check out campaigns for similar products and compare the funding goals, perk prices, etc. Remember, Rolex watches you buy on a street for $10 can’t be genuine. So, don’t expect a quality of Apple or Samsung for a price of a cheap Chinese counterfeit. Otherwise, consider it as an act of support of a person you like and a learning experience for the future.
10. Lack of communications with backers or vague and confusing answers. Don’t hesitate to ask questions and read the answers to other people’s questions. Does the creator respond at least on a daily basis? Do his responses sound reasonable and trustworthy? Does he show expertise in the subject or does he try to hide behind “trade secrets?” In most cases things will not go according to the plan, but the creator should always keep the backers in a loop and be transparent when sharing information. It is a process of co-creation and involvement in the exciting process of innovation. Make sure the creator sees you as partners, not just money cows.
Conclusion
These are some of the common red flags I’ve spotted over the two years I’ve been in the crowdfunding industry. Not each of them means the creator is a con artist, but if you see several of them in one campaign, proceed at your own risk.
I would appreciate your comments and links to specific cases (especially for live campaigns). Let’s keep the ball rolling and use the crowd wisdom to protect crowdfunding from scammers.
About the Author
Elena Mikhaylova is a serial entrepreneur with twenty years of experience in diverse industries including crowdfunding, PR, and social media marketing. She is an internationally published author of hundreds of articles, several research papers and two books.
Elena has been a speaker at a number of international conventions and conferences and an instructor at Colorado Free University. She was also an organizer of one of the top ten largest crowdfunding meetups in the United States and was recognized as Top 1% on LinkedIn in 2012.
