The pitfalls of crowd funding

Financing their dreams has gotten easier for entrepreneurs, but it's not without risk

Jenna Wortham / New York Times News Service /

Published Sep 19, 2012 at 05:00AM

PORTLAND —

An effort to build a sleek aluminum charging dock for the iPhone generated fervor online when it was announced in December. The project's creators raised close to $1.5 million through Kickstarter, a crowd-funding website, and promised to start shipping their Elevation Dock in April to those who had backed the project.

But last week Apple announced a redesigned iPhone that is not compatible with the dock — and because of manufacturing delays, some of the project's original backers were still waiting to receive theirs. The designers are now scrambling to make an adapter and update the product.

Crowd-funding sites like Kickstarter, IndieGogo and Quirky are letting designers and other creative people connect with audiences who want to finance their dreams, and they are becoming increasingly popular. Nearly 3 million people have helped a total of 30,000 projects meet their fundraising goals on Kickstarter, the largest such site, to the tune of $300 million in pledges.

But for the creators of these projects, getting the money is sometimes the easy part.

They then have to turn their dreams into reality, with a crowd keeping an eye on their progress.

This new model comes with a host of potential pitfalls that are often difficult for project creators to anticipate, and hard for the armchair philanthropists who back them to grasp. Backers are essentially putting their trust in the project creators, giving them cash in return for the promise of a future reward. Those who give a few dollars to a moviemaking project might get their names in the credits, while someone who puts up $100 to support development of a smart wristwatch might be promised one of the finished items.

Much of the time this works out. But some projects, including several high-profile and in-demand ones, have run into glitches and lengthy delays. The permits for a new food truck might not come through. Or a gadget like the Elevation Dock might be harder than expected to manufacture and ship.

The rise of crowd funding came up often over the weekend here at the debut of the XOXO Festival, a conference that focused on new models and outlets for creativity on the Internet. The conference was co-founded by an early Kickstarter employee, Andy Baio, who sold $400 tickets on Kickstarter itself to gauge interest in and raise money for the event.

The relationship between creators and backers on crowd-funding sites is still being worked out. The backers play the role of philanthropists, investors, customers — or all of the above. And when promised rewards are slow to materialize, eager backers can get cranky.

“It's definitely a lot of pressure,” said Eric Migicovsky, whose Kickstarter project to create a line of “Pebble” wristwatches with innovative displays raised more than $10 million — more than 10 times what he had hoped to get. “There are 65,000 people who have preordered a watch that doesn't yet exist.”

Migicovsky hired someone to help manage his in-box — nearly 9,000 people have emailed him about the project — and to post updates. He originally hoped to start shipping the watches in September, a date that he has had to push back, although he declined to say by how much.

A study by Ethan Mollick, a professor of management at the Wharton School of the University of Pennsylvania, found that 75 percent of design- and technology-related projects on Kickstarter, most of which involve physical products, failed to meet their promised deadlines. In general, project backers seem to be understanding of hiccups and willing to wait as long as they are kept in the loop.

“The honeymoon period that we are experiencing around crowd funding is beginning to come to a close,” said Wil Schroeter, co-founder and chief executive of Fundable, a company that is applying crowd funding to the venture capital process. “People realize there is real risk involved in investing in anything early-stage, whether it's an idea, a charity or a product, and they're starting to understand they aren't buying off of Amazon.”

Kickstarter says it is not responsible for making sure a project is completed on time, or at all. It says project creators are legally obligated to fulfill their promises, but if they do not, Kickstarter has no mechanism for refunding the money that was pledged. The company says it is working on clarifying its policies. Sometimes project creators can end up being overwhelmed by the success of a crowd-funding campaign.

The four college students behind Diaspora, a project that aimed to build an open alternative to Facebook, began with the modest goal of $10,000. They raised $200,000 from around 6,500 people. But after three years, they still did not have a version to release publicly and turned the code over to anyone who might want to keep working on it.