Clouds brewing with Crowdfunding?

Kickstarter.com is probably the best known of what has become a large array of crowdfunding websites. As most people know, these sites allow aspiring artists, writers, musicians, and inventors to introduce their ideas to the public in the hopes of being funded.  Big success stories over the past several months, with inventors raising millions of dollars to get their businesses going, have fueled intense interest in this type of funding.

Kickstarter and similar sites (though I don’t see near as much funding going to other sites), offer a fantastic opportunity for independent product innovators.  If you’ve got a new product idea that you can prototype and demonstrate well in a short video, then crowdfunding opens up some big possibilities.  Of course, this assumes that your innovative new product is actually something that people want.  Specifically, through crowdfunding, it’s possible to fund a first production run without giving up a significant percentage of ownership.  Note though, that the law on this is evolving, and it may be possible to offer equity in your company through crowdfunding in coming months or years.

Beyond raising funds without selling equity, crowdfunding allows entrepreneurs access to funding for a new product business that is too small for venture capital to take notice of.  In many instances, it’s easier to get millions of dollars in venture funding for high tech programs, than it is to get smaller amounts of funding for lower technology enterprises, even if the probable margin of return is similar.  Crowdfunding fills that need for new enterprises, and makes it possible to achieve funding goals in the tens of thousands, or hundreds of thousands of dollars range.

So, crowdfunding is a great opportunity for innovators looking to launch new product businesses.  But, it’s also a well that is in danger of being poisoned.  Success stories tend to get a good deal of press, such as the electronic watch concept that raised millions of dollars, but little is said when these projects take far longer to complete than forecast, or when they are never completed.  In the end, backers/funders of such projects end up waiting by their mailbox for an exciting new product that may never come.  Too many bad stories like this, and the excitement of crowdfunding could fade, and the innovator/entrepreneur community could lose a fantastic funding resource.

Unfortunately, the crowdfunding universe is a little bit ripe for fraud.  It’s not a stretch to imagine that there are unscrupulous people in the world that would create projects, take the money, and disappear without ever intending to deliver on their promises.  Sadly, even those who do have good intentions face many risks and may find themselves unable to deliver the great new things they promise their backers.  For the person waiting by their mailbox, the end result is the same: no exciting new product!

Based on my experience with manufacturing and product development, I have to be a little suspicious about some of the projects and funding goals that I see on Kickstarter and similar sites.  Sometimes, it’s obvious to me that the project owners are not setting funding goals high enough to cover the promises they are making.  Perhaps they set a funding goal of $50,000 and figure that they will get a thousand backers at $50 a piece, and each backer will get one of their products.  But, they fail to realize that at 1000 units, it may cost them much more than $50 each to produce, package, and ship the products.  Then, when they get funded, they start to realize the difficulty that they’ve created for themselves.  The money just won’t cover what they are trying to do.

Due diligence is vital for anyone seeking to launch a product through crowdfunding.  Take the time to understand manufacturing costs and timelines, or at least seek the advice or support of someone who does.   Explore different scenarios and understand that costs and timelines vary widely based on the scale of your manufacturing order.  Understand that there will be problems along the way and that those problems will have to be managed and navigated, at some cost.

I love Kickstarter and the whole concept of crowdfunding, and I don’t want to see it damaged by bad projects.  It has a huge potential to help spur the creation of business, but we need to protect it.