Why Technology/Design Crowdfunding Projects are Extra Risky

There’s no denying that crowdfunding gets a lot of attention and can raise funds at the level of a series A round. When looking at the successful funding – Pebble Time and the Coolest Cooler, both raised more than $10 million in under 60 days.

Platforms like Kickstarter and Indiegogo also allow creators to get that “first to market” brand awareness, which can be a massive advantage as long as the creator delivers a quality product and great customer support. Crowdfunding also builds a strong community of loyal backers that become the voice for the brand, and gives the company the opportunity to use funds without the interference of investors.

The allure of being first is also toxic for the platform and creators. In an effort to claim first to market awareness in the fast-paced field of technology, creators may be launching increasingly risky projects - unknowingly - in a kind of accidental marketing “ponzi scheme.” They want to offer massive value to compete, but end up giving away product at near cost, hoping to recoup the value later with orders that may never come. Then they never get investment or recurring sales, and realise the costs are much greater than they thought due to the complexities of R&D and manufacturing. The end result is the failure we’ve seen with recent multi-million dollar failures like with the Zano Drone, Coolest Cooler, and Tiko3D.

In addition, project creators in these categories are often great designers, or perfectionistic technologists, but they aren’t necessarily good at running a business. Because competition is fierce, margins are tight, and any issues that come up increase the chance of failure. The average failure rate of projects is stated to be 9% on Kickstarter, but the hyper-funded and technology/design categories have significantly higher failure rates.

The crowdfunding platforms do little to support businesses after getting funded. The value they provide mainly includes access to non-refundable pre-orders funding and greater visibility or amplification of their product launch marketing efforts. For complex projects like those in the technology and design categories, this can contribute to their failure. Traditionally these types of businesses were supported by strategic investors, but without them, creators have nowhere to turn for help, whether it’s for advice or deeper pockets to sustain the business when things don’t go according to plan. So the allure of removing investors from the business plan increases their chance of failure.

With outcomes like these becoming increasingly visible, more crowdfunding “super-backers” – those who repeatedly support projects and create the majority of the revenue for platforms like Kickstarter – are getting vocal. Many are commenting that they have “learned their lesson,” “my wife won’t let me back any more projects,” or that this is “the last project they’ll back.”

The problem is the crowdfunding platforms themselves. The platforms have no due diligence on important factors like cost of goods or technical feasibility. They mainly require that a project has a working prototype. Thus they are setting projects up for failure as projects aim for lower price points with no limitations.

In the end, the reputations of crowdfunding platforms are suffering. Platforms like Kickstarter, who have been around the longest have the greatest “trust debt” because they’ve had the most time for projects to mature or fail. In some ways it’s become a wild-west, discount platform because it takes a portion of the proceeds in exchange for access, which doing little to vet the projects before launch or support them after a successful round of funding.

In order for crowdfunding to become a viable platform for emerging technology companies, it’s critical that trust is restored. Trust is the most valuable commodity in today’s market, where loyalty is at an all time minimum. Thus the companies that create a movement by having a strong purpose, and vision that aligns with their customer will be the winners. Along these lines what help defines trust is transparency, congruency, and honesty, which are often lacking on platforms because creators are not required by law to provide full transparency.

And lastly, platforms need to re-affirm what made them amazing in the first place - that is democratising the way economies work by allowing the people to vote for which products should exist with their dollars, rather than having big companies dictate how it should be done. These are people who value, believe in, or simply admire innovation and want to be part of the process by communicating as a group, donating their time, and backing with their dollars. And they deserve a platform that shows it cares by reducing the risk of getting involved.

Written by Michael Armani, reposted from The TCT Magazine.

Posted in From the CEO, Crowdfunding on May 15, 2017

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