Crowdsourcing, risk and the new rules required

or what to do when crowdfunding goes wrong?

If anyone has seen the news over the last 12 months, there has been a raise in a new phenomenon – crowd sourcing. This is where the power of the crowd is used to help fund projects, that often conventional funding would not support, or for people without the connections to conventional funding.

Definition of CROWDSOURCING

: the practice of obtaining needed services, ideas, or content by soliciting contributions from a large group of people and especially from the online community rather than from traditional employees or suppliers –

Source: http://www.merriam-webster.com/dictionary/crowdsourcing

The types of projects that have been funded under this approach are diverse. they range from school children raising funds for a science project in a local town, through to theatre productions, music recordings, comics, book publishing, new software and of course the latest gadgets and technology.

There are dozens of sites which support this approach and allow individuals to connect with others. Unlike conventional capital fundraising, this does not result in shareholding. Often just the kudos of having been involved, through to money back plus interest or early versions of products being produced.

The reason for people supporting a project are as diverse as the projects themselves.

The key lesion here folks is simple – these sites are not shops – and with lead times of many months, any security you are used to with your credit-card are gone.

NEVER PACK A PROJECT UNLESS YOU ARE PREPARED TO LOSE ALL THAT ‘INVESTMENT’

Short answer to the initial question – what to do when crowdfunding goes wrong?

Nothing, really unless:

a) The time frame is less than 3 months from payment to failure

b) It’s a really high value project. If its low its not worth the cost!

It’s a risk

You need to do some basic due diligence on the person asking for the money, and make a judgement call – if it seems too good to be true.. It is too good to be true.

My experience

Over the last 6-8 months I have experimented with this backing a small number of projects. The biggest one of $1500 has recently taught me a valuable lesson – neither the site which promotes the project (in my case Kickstarter), your credit card company (its over 3 months time frame) or project owner is under ANY liability – it’s like the wild west.

What does a good crowdfund site look, like

From my experience here are some things I would like to see many of the crowdsourcing sites offer

These could be optional that a project owner “buys into” or not – the more they buy into, the more we can trust the project

1. Offer an escrow service for the money deposited
2. Offer milestone payments based on the project hitting deadlines, rather than all money given at the start – this gives backers the option of pulling out if ANY target is not reached
3. Require all projects to post updates at least weekly – poor communication fuels frustration. If weekly updates are not made, milestones are frozen
4. Project failure insurance – offering 20,50,75 or 100% returns of investments
5. ‘Champions’ other independent people who put their name & reputation supporting the project – people that know the project team personally (reputation protection)
6. Show netrep of ALL involved on the project – Twitter stats, Facebook KRED, KLOUT, ebay score etc – help participants by putting some key information front & centre, help people to do their diligence.
7. List professionals advisers – accountants, solicitors, business advisers/ mentors etc..
8. [new] When targets are met, the project needs to justify additional pledges will not change the cost model (i.e. bigger projects often make more money, but cost more to fulfill!)

All of these things will cost the websites that facilitate these (and take a percentage of your money, next to nothing, they can be factored into the cost of the project

Examples of good practice

Whilst no project that I know of is adopting all of these, a couple of projects worth highlighting that are providing excellent communications are:

Memoto (now get narrative)

Eventorbot

Both doing different things, but doing them well – Unfortunately for one of my investments I chose a competitor to one of these – and sadly communication and poor project management turned the project sour for many involved.

Is crowdsourcing the future?

Yes, I believe it is.

Until very recently, the majority of firms in society were larger organizations. Now the average firm is small, with many firms growing not in the conventional way of increasing employees, but by outsourcing and subcontracting.

People are offering the skills that have to other small firms. They are building portfolios of sets of skills, rather than portfolios of clients. For example one training consultant I know is now also using her expertise to build websites. But the people she is currently doing this for are people in her network. People that trust her, rather than trust her marketing material.

Challenge to the industry – adopt some of these ideas to help protect investors.

Encourage “good business” rather than taint the concept

Where are these sites?

Some crowdsourcing sites or crowdsourcing platforms to explore:

www.kickstarter.com – http://wefund.com/

• 40Billion
• PeerBackers
• IndieGoGo
• InvestedIn
• FundersClub
• Cofundit
• Crowdbackers,
• GoGetFunding
• Rockethub
• Quirky
• Fundbreak au
• Catwalkgenius
• fansnextdoor
• cofundos
• spot.us
• 33needs
• Profounder
• Microplace
• Crowdrise
• Firstgiving
• DonorsChoose
• ioby

These top crowdsourcing sites are listed for convenience. We do not recommend any and suggest before you invest you know that you can afford to lose all your money, and do all the due diligence you can.

IF A CROWDFUNDING PROJECT LOOKS TOO GOOD TO BE TRUE – WALK AWAY

If you cannot afford to lose it – do not invest… simples

UPDATE June 2015

I was prompted by more KickStarter project failures to look back at this post. Much of what was written above is just as valid today. maybe more so.

TechCrunch announce this interesting piece of US legal action “The FTC Goes After Its First Failed Crowdfunding Campaign“. It looks like it may be an interesting start for change. Most current crowdfunding sites are US centric, so will have a significant impact.

Crowdsourcing websites, risk & new rules, as a new way of investing is increasing, who protects who? Can escrow and project milestones protect investors?