The Crowdfunding Conspiracy
To the uninitiated, it sounds like a straightforward, simple deal. Invest some money in a growing business through a fundraising website in exchange for equity in the company, to be returned many times over with the success of the venture, or to be bought out of the stake at the end of the campaign. This model is followed by many startups, and investors of all sorts put money into such companies, only to see their efforts and their money wasted when the startup fails.
The companies come and go. Some of them achieve media coverage and grow even bigger, achieving the coveted “unicorn” status, and attracting more investors along the way. Some appear to genuinely have good ideas but never quite come together. Others are shown to be very blatant scams.
Why does this happen so often?
It’s become its own trope in many ways, right down to the standard Medium post that the founders of the failed write, allegedly in hopes of sharing their stories and warning others of the pitfalls they fell into. Meanwhile, the money that was invested in their companies, sometimes adding up to millions of dollars, has disappeared, either used up in the failed attempt or simply unable to be accounted for. Most often, the founders walk away, absolved of responsibility, instead cast as victims of their own ambition.
The structure lends itself to fraud. Aside from the content posted to the crowdfunding site, consisting of a video and a brief description, and potential media coverage for the more visible ideas, the actual company and its operations are opaque, giving very little clue to where the money they raise is truly being spent. In some cases, the idea simply isn’t sustainable, no matter how original it is. One famous example is Snap Inc, the parent company of the photography app Snapchat. While clearly not a scam, its business model is not scalable, and its popularity is based mostly on the ability for marketers to make use of the platform, which itself is a limited concept.
Other crowdfunding ventures are less honest. Various founders, with ideas spanning from card games to razors to smart devices, accept donations through crowdfunding sites over a span of months while providing updates via the crowdfunding site, and then ultimately close the project down, calling it an unfortunate failure. The crowdfunding sites offer little oversight and do not lend themselves to transparency and two-way communication with investors, leaving even the most perceptive venture capitalists and savvy startup supporters guessing at what is going on behind the scenes until after the idea fails. Some lawsuits have been successful in chastising wayward founders. Others have disappeared with the money they raised, their plans never brought to production.
There are a few ways to spot potential scams, none of which are entirely foolproof. A search for the company and especially the founder’s background can yield important information. There are many red flags that can appear, such as if a founder has a history of bad startups, or if the person and company don’t have an online footprint at all, meaning that they may not actually exist. Research on the idea upon which the startup is based can also yield details on whether such a project is really viable, or conversely if the idea already exists and is being done, which may affect the success of the crowdfunding campaign if there is a sense of competition or of copyright being broken.
Some crowdfunding platforms make efforts to combat the most fraudulent types of campaigns, usually by offering conflict resolution or at least stating in their Terms of Service that such attempts at defrauding investors is against their policy, providing a basis for a lawsuit between the investors and the founders. However, these steps do not go far enough. Crowdfunding platforms such as Indiegogo, Kickstarter, and GoFundMe must begin offering more transparency, by vetting campaigns or allowing more direct communication on both sides. Because the atmosphere in which these scams are perpetrated rely heavily on hiding behind these crowfdunding sites, they must shoulder some of the responsibility as well, and take further steps to protect investors from scams and provide oversight regarding the most vulnerable types of ideas, enabling security and trust between investors and the projects they have interest in supporting.