The dark side of crowdfunding - YouTube

- To be really honest with you, I don't even remember

how I found it, all the signs were like,

this should be a product that will pan out,

but that really quickly changed.

- We treated Kickstarter as a tool to see

hey, we wanna get an energized group of backers

who really wanna see this new concept come to life.

Even so, the campaign ended at the end of 2014

and it was mid-2018 that we finally

started fulfilling the Kickstarter and the pre-orders.

- Hardware is notoriously hard

and fulfillment there is particularly challenging, right.

There's just way more complexity to the manufacturing

of a complex gadget and then shipping it then there is

to publishing a book or producing a board game.

- Creating a gadget cost a lot of money

so creators often turn to crowdfunding to raise cash.

But even if they raise all the money

they could've ever wanted, if they aren't fully ready

to make their product it could end up being delayed

for months, years, or worst of all,

it might not ship at all.

Crowdfunding companies like Kickstarter and Indiegogo

are aware of this possibility and are changing

their business so that supporters don't end up empty handed.

But the ultimate question is who's responsible

when a product doesn't ship, the founders

who pitched their dream or the crowdfunding platforms

that gave them the money-making tools.

This is In the Making. (upbeat music)

- We were grad students together

at the University of Illinois in electrical engineering

and we wanted to do a robot and I have four cats,

Dave had a cat and we were really interested

in doing a product where you could launch it right now.

- [Ashley] Mouser is an anonymous cat toy that bounces back

when cats knock it over, the team successfully funded

the product on Kickstarter in 2014.

- The terminology we kind of use is Kickstarter classic.

So back when we launched the whole idea

was hey, here's this thing that's never gonna exist

unless a bunch of people get behind it.

And you set this limit that we've gotta get

to this much money or we can't even build it.

- Okay, so let's pause for a second and run through

how crowdfunding works, there are a ton of platforms

but for the sake of this video we're just gonna talk

about the two most-known in the U.S.,

Kickstarter and Indiegogo.

Kickstarter requires campaigns to be completely new

and never seen before, creators only get to keep their cash

if they reach their goal, Indiegogo however,

lets creators come over from other crowdfunding platforms

and sometimes they can keep their money

even if they haven't reached their goal.

- I think we originally said 18 months

and this was, actually I need to check,

but this was the strategy, high goal, long timeline.

- We had really supportive backers and it's kind of amazing

and I think there's two reasons for that.

One was our communication style which we tried

to be very open and we didn't give really constant updates.

That just seemed false because we were looking

at big milestones and giving this false sense

of positivity when there are unknowns.

- I think the saddest part for us was the total span

of our project development was 20, 25% of cat's lifespan

so when you have a thousand backers, it's gonna happen

where cats pass away that were hoping to play with this.

- Mousr took four years to ship their product

which is a really long time, but that's the risk

with Crowdfunding and actually, these backers

are lucky they received their product at all.

Sometimes campaigns raise their cash

and then disappear, like iBackPack.

- The very first complaint that people had

was he retroactively decided to make a iBackPack 2.0

and and at that point I was like is the 1.0 even done,

like what's even going on.

How do we even know that the first product was even done,

are we all getting upgraded, what's going on.

So it was just a lot of uncertainty

and he was going back and forth with his stories a lot.

He also added some upgrades for new backers

that he wasn't going to allow for people

that had already backed it, was so there was an uproar

about that and it seemed like every single time

there as a story that changed people

would call Doug out on it, Doug of course is the founder.

And he would respond with extremely derogatory

and rude comments, this is like his quote.

"What is wrong with some of you, have you not read the post,

there are 160 of them, we kept everybody up to date

at every second of the way," which he didn't by the way.

"We are making the iBackPack sensational in every way,

regardless of what the whiners say, you know full well

that this project is a work in progress.

Nobody bought a bag or any product here,

you pledged to fund this project regardless

of how long it takes, go ahead and read

the licensing agreement, if you want to whine

and moan and groan, call me."

So now it seems like oh, he's just hiding behind

the terms of service that Indiegogo has.

- These backers created a Facebook group

to try to figure out what happened to their money

and to iBackPack, the founder occasionally wrote them

with minimal and hostile updates but eventually went silent

after blaming battery issues for the delays.

The backers still don't have answers

but this past summer the FTC began investigating iBackPack.

The government agency only once previously fined

a crowdfunding campaign and at the time

it said it would only prosecute if there seemed

to be outright frauds, so without the help

of a government agency, backers have nowhere else to turn

but the crowdfunding platforms themselves.

And Hao thinks they should take responsibility

in situations like iBackPack.

- I do feel like in a perfect world

they should be responsible and they should

protect their backers and protect the users of the product

because they're taking money for it, right.

That's basically the service that they're providing.

They're saying okay, we're allowing future merchants

to promote their product and we're advertising it to people

on our website but for them to say,

okay, well if the product doesn't pan out,

it's not our problem, I don't think that's right.

- Kickstarter and Indiegogo have traditionally said

that investments come with risks,

but that pressure from backers hasn't gone unnoticed

and it's even forced a fundamental change

in Indiegogo's business model.

- So what we're now doing is for a subset of campaigns

on Indiegogo, we're actually guaranteeing

that that product will ultimately be delivered.

Actually you were the first person we talked to

about guaranteed shipping, we're now calling that

guaranteed delivery, and so the backers

that back those projects can back those projects

with the confidence that that product will be delivered

or they will get their money back.

I think realistically it's next to impossible

for a platform to be able to fully protect the backers

on the platform, in large part because it would

be impossible for any platform to be able to fully evaluate

that entrepreneur's ability to ship that product.

We've had entrepreneur's that have raised

over $10 million and we've had questions

on whether they can actually ship $10 million

worth of product like the FlowHive

is good example of a product we had a few years ago

which was a beehive and it was

very inexperienced entrepreneurs frankly, from Australia

and sure enough they shipped every FlowHive to every backer.

It's almost impossible or us to be able

to really know whether an entrepreneur's gonna ship or not.

- Where to do you think Kickstarter's responsibility lies

to backers, because what I've seen a lot of

is the backers get angry at the platform,

they're angry at the creator, they're just angry.

So how do you think about Kickstarter's role

and responsibility in this?

- Yeah, Kickstarter's obligation is we're gonna be stewards

I think of this system and we can have the most influence

honestly at the outset of the campaign.

Before the transaction takes place is much better

than winding up in a situation than after the campaign.

So we put a lot of emphasis on putting mechanisms in place

to make sure that the creator's are being transparent.

We've verified their identity that they are publicly visible

as individuals, not being able to hide behind a pseudonym

or a corporate name or anything like that.

And having rules in place and mechanisms in place

so that backers can really vet the campaigns right.

We assist them where it's really the backer's decision,

discretion to evaluate these campaigns

and understand the risks involved.

And our responsibility there is to make sure

that backers, creating a fair system that is transparent,

where backers do understand the risks.

- Both Kickstarter and Indiegogo have also

started partnering with third parties like Avnet,

Dragon Innovation and Aero Electronics

to make sure creators have the support

they need to get through the manufacturing process.

- What an entrepreneur can really do to help

with manufacturing is really think through exactly

what's needed in the bill of materials for that product.

And to think through both how that product

is gonna be manufactured and shipped before the entrepreneur

sets the price for that product in their campaign.

- Manufacturing is just hard, even if you do

some of that upfront homework, factories go out of business

or they change, quotes change, and so you can be

on top of a shifting landscape, often you're getting

components that aren't up to quality specifications.

And so you have to go back and do it again.

Entrepreneurs tend to be optimistic people

'cause you have to be a little bit crazy

to be an entrepreneur and delusionally optimistic.

And so it requires really thinking through

how each of those components, each of those steps

could go wrong a little bit to really understand

the challenges of the space, but there's a lot

that can go wrong or there's challenges

that you'll have to overcome that you can't foresee

at the beginning with hardware.

- After four years of delays Mousr has shipped

to all its backers and is even working

on new products, they're on Amazon and even

some physical retail stores like Best Buy, overall,

they're a crowdfunding success story.

- You can't even fathom how much energy and thought

and time and passion goes into every detail, right.

The mouse itself, the software, the app,

everything, and then to have somebody condense it down,

just be like, software sucks. (laughs)

I think you just have to develop a way to handle that

'cause they're taking years of your hard work

and condensing it to a really short, really negative,

not well thought out commentary,

but if you can laugh at that you'll be fine.

- We just really wanted to put something

that was ours, we weren't a part of a big company

and we did this little thing where every detail,

how it looked, its personality, how it sounded,

the video we shot to promote it.

Everything was ours and for us

it was like a rock and roll album.

It was a piece of art that we put together.

Not matter what happens in the future we did that,

and if you kind of have that attitude it helps sustain you.

- Crowdfunding really does give independent creators

the power to launch their own companies.

And oftentimes, it wasn't their intention

not to ship, the crowdfunding platforms

are on the right track to take some of that responsibility

but ultimately it's on the creators to ensure

that their products end up in backers hands.

So before pitching your dreams to backers,

make sure it's grounded in reality.

So who do you think is responsible

for products that don't ship?

Let us know in the comments below and of course,

stay tuned for more episodes of In The Making, bye.