Why Crowdfunding Is Not a Substitute for a Healthy Business Model
The key difference between consumers and investors
One of the rising methods of building a startup over the last 4–5 years has been crowdfunding, the strategy of pitching your idea on website with a video and landing page, and having people back your project and invest in your company.
I’ve backed several projects on Kickstarter, some that I have personal interest in, and others that I just want to see succeed.
One of the projects I backed at the beginning of the year is facing an incredible amount of backlash at the moment. The project was the creation of alternative Apple Watch adapters, so you could use any standard watch band with the Apple Watch. It was a clever idea, and they raised $216,436.
They had a delivery date scheduled for June 2015. It’s now December 2015, and they are getting hit hard from their backers who are crying foul and threatening class action lawsuits for not delivering on what the company had promised.
Whether or not these threats are founded or will actually happen is irrelevant. These reactions are the symptoms of a deeper problem with crowdfunding.
Consumers pay money expecting to receive something in return. This is how the market works: you exchange value for something of equal or greater value.
Investment is completely different: you give value in order in the hope that you’ll see greater return as a result of the success of what you’re investing in.
Kickstarter (and other crowdfunding methods) is an investment website. It is not a store or shopping website.
This is where the disconnect happens.
The typical user of Kickstarter has the mindset of being consumer, not an investor. They put their money into the slot because they expect to get exactly what they “ordered”.
An investor knows there is risk and accepts they may lose their money. A consumer wants immediate gratification, and when they don’t get what they paid for in a reasonable amount of time, they turn hostile.
Crowdfunding stifles and postpones gratification that consumers demand.
This small startup is creating a now behind-the-times Apple Watch adapter now has the steepest of uphill battles. They have a tarnished brand perception, have damaged their relationship with their 5,500 backers, and now face many implications that will likely result in closing down their company as soon as all the orders are fulfilled.
This could have been prevented by bootstrapping or acquiring investment behind the scenes. It would have given them the time to build their product, develop it well, work out the manufacturing issues, and once they had a product to sell, they could have shipped it to the consumer.
Be wary when seeking crowdfunding for your project or business. If you don’t have a sustainable business model and know how to make money from a sustainable product, you will see the same results as many of the failed projects on Kickstarter, but you’ll also have a legion of angry consumers who “didn’t get what they paid for”.