What is ‘Crowdfunding’ ?

‘Crowdfunding’ is a phenomenon that has gained popularity in this new digital age. With the advent of the internet’s website-companies like Kickstarter, Indiegogo, and other websites, anybody with a computer has the ability to expose their idea to the world, and ask for funds. (Aside: ‘website-company’ is a term which refers to companies whose sole product or service is their website and/or website-based-business which bears the same name as the company, e.g. Kickstarter — the company, owns Kickstarter.com — the website.)

Though crowdfunding has become popular recently because of its online presence/accessibility; anyone from around the globe (with access to a computer) can put their idea out there, for the mass-public of our globalized world to adjudicate upon — by electronically giving the idea’s creator their own money. The average person has little to no money for advertising, and probably little to no time for setting up hundreds of meetings with potential investors in order to fund his/her/appropriate-pronoun’s idea. Crowdfunding allows the average person to support their new, innovative, or specialized idea, or else it would be very difficult, if not near impossible, to lift it off the ground/runway. How it usually works, is that the idea-creator(s) make(s) an entry — usually called a ‘project’ or ‘campaign’, into their chosen crowdfunding website(s), where amongst other requirements (each website has their own set of requirements) the creator(s) have to input a certain amount of money that they hope to raise; if the money is raised, then the project/campaign is considered successful. Though, it is important to note, because crowdfunding is an emerging, growing and ever-evolving phenomenon and thus, its meaning is very loosely bound and ever-changing — any company that takes pre-orders (through the internet) for a product, service, or an idea that is not yet developed, is also considered ‘crowdfunding’.

Crowdfunding today is being used not just for the realization of ideas regarding business products and business services, but in fact, it is also being used for the realization and fulfillment of ideas regarding personal projects, community projects, charities, and social/cultural/political/welfare/educational/religious causes (Falcon). Thus, crowdfunding is also used to fund projects which aim to not make money for capitalist reasons, but aim to help others, themselves or the/a community. Crowdfunding is also a great marketing-and-publicity tool, and thus, this ‘help-focused-crowdfunding’ also crucially raises awareness about social, communal and personal causes (Resnick, 2016). While Websites like Kickstarter and Indiegogo are the go-to websites for online crowdfunding and advertising for businesses, other websites like GoFundMe, Mightycuase, and Crowdrise, (amongst others) are more dedicated to raising crowd-sourced funds towards personal/communal/cause-based projects whose sole purpose is not making money, or a profit at the very least.

The Problem with Crowdfunding

The term ‘crowdfunding’ is an amalgamation of the two words: ‘crowd’ and ‘funding’; both words put together simply mean that funding for anything (be it a product, company, charity, cause, etc.) is drawn from ‘multiple persons’ i.e. a crowd; thus, technically one can even consider all traditional routes of fund-seeking such as investments from venture capital firms, banks, investment agencies, families, friends, neighbours, one’s local community, etc., as ‘crowdfunding’. However, it is important to draw a distinction between this present-age/new-age/digital-age crowdfunding, and traditional crowdfunding, especially in respect to ‘early-stage creative products and ventures’ (which are products and services that exist just as ideas, prototypes or as businesses without much traction and revenue). The distinction, although a bit sinister (and rightly so), is summed up perfectly in the article Some Simple Economics of Crowdfunding:

It is not surprising that the financing of early-stage creative projects and ventures is typically geographically localized since these types of funding decision are usually predicated on personal relationships and due diligence requiring face-to-face interactions in response to high levels of risk, uncertainty, and information asymmetry. So, to economists, the recent rise of crowdfunding — raising capital from many people through an online platform — which offers little opportunity for careful due diligence and involves not only friends and family but also many strangers from near and far, is initially startling. (Agrawal, Catalini, Goldfarb, 2014)

Crowdfunding allows for the breakdown of the elitist notion that you (the non-wealthy-enough-to-fund-your-idea-but-have-the-intellect-to-come-up-with-a-great-solution-in-the-form-of-a-business/service/product individual) need to be in a certain geographic location and have “personal relationships” (Agrawal et al., 2014) with people in order to fund your company, business, product, service or idea.

Traditionally, one could only get their idea funded if they had “personal relationships” with wealthy enough people, or with regular people who had connections with wealthy people; or one would have to do a lot of legwork and jump through a lot of hoops of convincing banks, venture capital assessors, due-diligence officers, meeting/scouting/convincing potential early-customers/users and investors, or, even try strategically befriending/getting-into-conversation with the right wealthy investor by hanging around places or events they frequent. This traditional way of funding your idea is very tedious (also represented by the style of my previous sentence)!!

Crowdfunding, on the other hand: brings customers (and early adopters/users) directly to you; validates the potential size of the market and types of customers; promotes and advertises your idea for free; and, even brings money right to the idea’s creator, all at the click of a button! Thus, the number of hoops to jump through, and, the amount of legwork needed has been reduced.

However, as Agrawal et al. pointed out, this isn’t the best of options. Due-diligence is a very important facet of funding. The biggest advantage of traditional investment options is the amount of due diligence that the investors do. Through due diligence, the investors themselves act as regulators that determine the validity, accuracy and true-efficacy of the product, service, and/or the business’s: claims, technology, quality, effectiveness, usefulness, and, ability to deliver the product to customers/retailers, amongst other criterion. This due-diligence process seems to be very important since more than 75% of successfully crowdfunded projects don’t deliver their product(s) or service(s) on time, and many end up delivering eight months later than the proposed schedule, if at all (Mollick, 2014). While there have been quite a few successfully crowdfunded companies and products like Pebble, Exploding Kittens and Occulus, there have been quite a few big failures like the Lily Drone and Zano Drone (two products that put their respective companies through lawsuits regarding: false advertising, lying to consumers, misuse-of or mismanaged finances, bankruptcy, and liquidation). These failures make potential and future customers/backers/pre-orderers/money-givers worried, and the previously stated statistic regarding delayed product deliveries doesn’t inspire confidence, trust, or hope, in new and emerging crowd-funding companies campaigns either!

By the time the consumers may receive their crowdfunded product, its tech and promise may already be old-news, and may even be dwarfed by the big corporations producing, marketing and shipping a competitive product quickly, cheaply, and with a warranty.

Just look at what happened to Doppler Labs — they crowdfunded successfully, and even delivered their first product, but by the time their wireless earbuds were out, Apple, Samsung and Bose (amongst other major audio-technology-companies) had already seen the traction and popularity of wireless-earbuds online, and capitalized on it. Doppler labs’ competitors were shipping out their far better, more refined, and less-glitchy wireless earbuds, before Doppler Labs even finished their first production run — which as the stats predicted, had gotten delayed(Matney, 2017).

Examples of Crowdfunding Fraudsters: Zano Drone and Lily Drone

Zano Drone’s company Torquing Group raised 2.3 million Pounds ($3.4 million US Dollars) through Kickstarter. They posted their campaign and advertising video to Kickstarter on November 24th, 2014. Their campaign video went viral. Their target for raising money was 125,000 Pounds, which they achieved within 10 days of their launch. By the end of their Kickstarter-mandated-campaign-duration on January 8th, 2015, the company had brought on a total of 2,335,119 Pound-Sterling — making them to this day, one of the most successful (in terms of raising capital/funds) Kickstarter campaigns ever, especially in the drone category. Later in the year, the company would set up their own pre-ordering website as well, allowing them to crowdfund even more orders and bring even more money into the company — they raised an additional 1.2 million Pound-Sterling through this route.

Torquing Group promised to deliver a product called Zano, which was promised to be an “ultra-portable, personal aerial photography and HD video capture platform, Small enough to fit in the palm of your hand and intelligent enough to fly all by itself!”, along with the tag line: “instantly begin capturing and sharing moments like never before” (Kickstarter, 2015, “ZANO”). However, after getting the money, the company was only able to deliver non-operational/not-functioning-as-advertised drones to 600 out of the 12,000+ supporters/backers/pre-orderers/money-givers who had contributed to the campaign through Kickstarter and the product’s personal website. They were unable deliver even a single drone with the basic features that their advertising video and campaign web-page/home-page promised, let alone the customized versions of the drone that they promised the supporters who financially backed them on Kickstarter.

The company filed for bankruptcy and liquidation in its native Wales by November of 2015. After an exhaustive investigative piece on the company by tech-investigative journalist Mark Harris (2016), it was found that the creators of the campaign had little to no knowledge about building properly functioning drones. They had previously gained and then lost favour with BCB International Ltd. (bcbin.com), a defence contractor for the UK’s Ministry of Defence, when they promised them revolutionary, autonomous, self-flying drones but failed to deliver after taking in “hundreds of thousands of pounds” over the span of three years, and ended up delivering a product that underperformed and did not deliver on any of the promised features. BCB says that they were lied to and led on to believe that production of their drone was going as planned, despite several missed deadlines and poor performance tests by the prototypes that were irregularly shown. However they didn’t stop with their drone project then. Harris suggests, that after failing to commercialize a sustained deal with the BCB regarding their drone, they rebranded that very product/drone, shot an advertising video and 18 months after their contract ended with BCB, they launched it on Kickstarter as Zano.

Due to manufacturing delays, along with the lacking software development skills/intellect — despite having had worked on an ‘autonomous’ drone for 5 years (3 with the BCB, 2 with ZANO) — the company was unable to deliver a product. The company according to Harris’ interviews and report, seems to have falsified depictions/contents of their advertising video, promising features that they knew the drone couldn’t perform, despite having sunk the past 5 years into developing those features; the developers were hoping to overcome those barriers by the time the drones started shipping, however, that was just not the case. The creators were in over their heads due to their inability to solve the problems with even the most basic functions of the drone, and poor manufacturing and management decisions just compounded their woes. This is where criticisms regarding due diligence chime loudest. At the end of the day, only 600 supporters received a drone, while none received a functioning drone, let alone a ‘functioning-as-advertised’ drone — the drones that were delivered even had difficulties with literally just getting off the ground. One more thing to mention: not all those who gave money to the campaign received refunds either — they didn’t invest that money, they expected a product in return, but never got one. With investments, one expects to gain or lose some, but this was not an investment — and in fact governments are starting to take note of this too. It is also important to note that what made them able to take in all this crowdfunded money was their advertising video going viral, which drew people to their crowdfunded home-page/web-page. Thus, if the video had not gone viral, their campaign (or any other crowdfunding campaigns for that matter) would be unable to lure financial backers their way.

Lily Drone had a very similar story as well. They made a slick advertising video that went viral, in May of 2015. They were so confident in the viral power/potential of their video that they chose to bypass the nowadays-common path of crowdfunding through one of the already-established crowdfunding websites. Established crowdfunding websites, like Kickstarter and Indiegogo, have immense marketing and advertising power/engines, yet, they chose to forego them and crowdfunded by taking pre-orders on their website, which brought in $34 million US dollars.

The company was started by two Berkeley Graduate students while they were still completing their undergraduate degrees in 2014, and by January of 2017, the company had shut down without delivering a single unit to any of its customers, and providing refunds to some but not all customers. In this campaign as well, the creators were too optimistic about what they could achieve in terms of technology and features. Their drone (called the Lily Drone) was also supposed to be an ‘autonomous’ video capturing drone. The features and camera-video footage that they show in their advertising video misrepresented the true abilities of the drone, and presented it in such a way that it deceived customers into thinking that they could make/do the same shots with their Lily Drone - posits the San Francisco District Attorney’s Office, who is suing the company for “false advertising”. The San Francisco District Attorney’s Office, also alleges that the whole video is fake, but, the founders claim that atleast some, if not most, of the footage that is included in their original advertising video — which helped the campaign go viral and elicit most, if not all of the $34 million US Dollars — is from their Lily Drone.

The creators simply did not have the skills, the intellect, nor the experience to build and market such a product. It is a shame that so many people lost so much regarding this product — they lost their: dreams, hopes, optimism, and most importantly their hard-earned cash. Thus, once again, the common theme emerges, that viral marketing and viral video advertising made it possible for mal-educated, misinformed, and finance-mismanaging creators (who did not go through a strict enough due diligence process) to lose consumers’ hard-earned money and time. (Pishko et.al, 2017)

Final Words

What makes it interesting is that the crowdfunding space is very saturated, and to stand out, you need to do a lot of things right. Not all crowdfunded campaigns get funded; globally, the average success rate is 50%. There also hundreds of thousands new crowdfunding campaigns that go live each year. The struggle and art of standing out, and successfully closing out a crowdfunding campaign is very unique. Success of a crowdfunding campaign, especially from a technological-marketing-communications perspective, comes down to the ‘virality’ of a campaign’s advertising/promotional video. (The term virality is drawn from the term ‘viral’, which according to the Oxford Online Dictionaries, refers to the wide and mass sharing circulation and propagation of any information like videos, images, webpages, advertisements, etc., through one internet user to another; one can also consider it as ‘mass sharing’ of online content). No longer do webpages and even dry text-only crowdfunding web-pages suffice, “Having a well-produced video and good illustrations are mandatory today” (2017).

Scholarly articles like “The Effects of the Social Structure of Digital Networks on Viral Marketing Performance” (2008), and “Internet-induced marketing techniques: Critical factors in viral marketing campaigns” (2008), confirm that hypothesis too, though they may take exception to the word “mandatory” as they would argue that a product’s/idea’s promised value, may very well be a more important deciding factor than “a well-produced video and good illustrations”. However, it is safe to assume that, generally, for crowdfunding success, a viral video is necessary! And as long as someone knows how to make these viral videos, anybody, no matter how honest or dishonest, can take advantage of the unsuspecting public — which is becoming easier and easier, as now there are whole agencies that specialize in getting projects successfully crowdfunded!

Thus, crowdfunding sites offer an easy path towards going ‘viral’ online, and insidious companies (like the parents of Lily and Zano)use those websites, and just the hype/buzz around crowdfunding in general, to pose as if they are legitimate businesses who face only one obstacle to providing a great product — what is that obstacle? Funds. Yet, these insidious companies just have a slick advertising video (made either by themselves or by mass-marketing professionals) attached to the hype/buzzword of/around crowdfunding, which fools/blinds the public into forking over massive amounts of money.

Some may even argue that crowdfunding is/was about small-time creator(s), whose only challenge/obstacle is funding — just read these stories from 2013 and 2015 to give you a general idea. But it seems, that now it is being turned into simply a mass-marketing online tool, for poorly thought-out and inexcusable ideas. I would go as far as saying that, in our technologically- and internet-driven world, crowdfunding is becoming sensationalist and populist — because sensationalism and populism sells on the internet.