Kickstarter

 

The truth about Kickstarter.

 

According to Kickstarter, the platform is “a new model for bringing creative projects to life”. Having watched (and participated in) the growth of Kickstarter, I can tell you that it was originally sold as something like this:

 

Me: Wow, I sure wish I could have bought Google (or other tech giant) stock before it went public

Friend: Yeah, but before it was public, you had to be an investor.

Me: How do I become an investor?

Friend: Either join a fund or you have to find something to bet on, and they usually want

a lot of money – and if the company doesn’t make it, you’re out of your investment.

 

Then Kickstarter comes along. Suddenly you don’t need to be an angel investor – you can back small projects with the promise that if the project is successful, you’ll get some kind of return (more about that later). Kickstarter lowers the bar for both investors and for creators – it’s a win-win situation, right?

 

According to the Kickstarter Stats page, as of this writing, nearly 3.8 Billion dollars have been raised for almost 150,000 projects. Former successful projects include: The return of Reading Rainbow, The Pebble Watch, and the Oculus Rift. In several cases, Kickstarter has done just what its name implies – “kick started” companies into business. So why is this such a bad deal for “investors”? There are several reasons that potential investors should be aware of:

Failure rate.

Kickstarter likes to tout the independent study that was done in 2015 that says that about 1 in 10 projects collect money and fail to deliver.

https://www.kickstarter.com/fulfillment

There are some problems with this study. First off, consider when the study was done: 2015. The company started in mid 2009 – but did not start opening to foreign markets until much later. At the time of the study, they had not yet opened to countries like Singapore, Hong-Kong and Mexico. To understand how the study is inaccurate, you must look at it critically.

The study was performed by polling random investors. Around 50,000 investors were polled about their backing experience. They had the option to reply that they had either received the product, or that they were still expecting it, or that the project had failed to deliver– and that’s where most of the problem lies.

In my experience, almost without exception, projects do not deliver by the original plan date. The originator typically posts updates to explain why they are delayed, and how they are taking steps to reduce the delay. A typical project may take a year or more beyond the expected completion date to deliver. Since Kickstarter has only been in business for a relatively short period of time, and since it has been recently expanding its market globally, a random study will be biased towards projects that are newer (and hence the respondent will answer “still waiting”).

In other words, if the same study were done in 2010, it would have shown a nearly 100% fulfillment rate – because at that point, very few projects had run long enough without giving a reward to be considered failed. (Considering that even the original proposed date is often around a year after funds are collected). In 2011, only the projects that started in 2009 would have been around long enough to count against fulfillment (projects started in 2010 and 2011 would show close to a100% fulfillment rate using the random sample method) and so forth. Since the number of projects has increased year over year, any randomly selected study would have to discount any recent projects (that have not been in the works long enough to be considered a failure). In my personal experience, the real failure rate is closer to about 1/3 of projects fail to deliver – but of the 1/3, even a few of the projects that are 2+ years late, the originator claims they are still working to deliver (so if they made it to the survey they would not count against Kickstarter as “failed to deliver”).

Another thing to keep in mind is that Kickstarter gets paid even if you get scammed. Between 5 and 7 percent of your investment is skimmed off the top – whether you get your reward or not.

 

Rewards

The other reason why Kickstarter is often a bad deal for investors is that the rewards are typically an early version of the final product – usually at a discount from the release price. The problems with this are that the early versions may have problems that the originator resolves over time. Nearly every product that has even been produced (Kickstarter or not) has gone through “versioning”, with later versions being improved over earlier. Kickstarter backers wind up being the “guinea pigs” for later users. The benefit for the originator is great – backers are basically unpaid testers (even worse, they backed the project when there was no guarantee of any product). As the originator improves the product, backers are left with the “original versions”.

 

In my experience, backers receive products for their pledges at a discount - typically offered at typically between 15%-50% of the “expected” retail price. I’ve never actually seen a product initially sold at more than the “expected” retail price – more often, originators lower the retail price soon after the Kickstarter pledges are fulfilled, which reduces the value of backing a project in Kickstarter. Sure, you got it first – but you had to wait far longer – your money was at risk, and tied up in Kickstarter for potentially an extended period of time. Think about it this way: If a car manufacturer offered to sell you a car at a 30% discount for paying up front and waiting a year, then when the car actually came out was only 10% more than what you paid, you might be a little upset at the fact that your money had been tied up for so long with such a small return on your investment.

 

Shenanigans.

Even after a successful release, backers are often left with a product that did not meet the original Kickstarter goals.

Here are some examples:

The Underwater Flash Light, Car Jump Starter and Powerbank – works well, except backers report that the battery does not hold a charge for more than a month. The idea was that you could keep this in your car to jumpstart the car, but if you put this in your trunk, a month later, the battery would be self-drained.

 

Backbone posture support – the initial product was delivered – and seemed to have promise, however the company has gone out of business, and the promise features were never delivered.

 

Uwear smartwatch – the product delivered, however according to comments, users are less than impressed – primarily because the watch is missing features and has other technical problems. The originator seemed to have been trying to support this and meet the original goals for a while (posted multiple firmware and software updates), but has gradually faded away, and now does not participate in the discussion (and has not updated the product in over 6 months).

This one is a little funny, and worth reading this update post by the originator. Backers who weren’t lucky enough to be part of the first wave of shipments have been given a giant middle finger and lost thousands of dollars.

 

If you do a web search for “kickstarter failure to deliver”, you’ll see countless examples of news articles and forum discussions about cases where investors lost every penny of their investment – and things will only get worse…

Criminal Enterprises:

As Kickstarter has grown, it has attracted criminal enterprises, who have discovered that it is a risk-free way to make large amounts of money. Kickstarter terms are vague, which spell out nothing much more than “you should try”.  Based on these terms, it’s difficult to prove malfeasance on the part of a creator who failed to deliver. In 2015, one creator was successfully sued for failure to deliver on over $120,000 worth of pledges, however, judgement was suspended based on the creator’s “inability to pay” (in other words, “Neener Neener Neener”, I spent your money, you spent money suing me and won, yet you still get nothing).

An interesting example is that case of the ”Rebel: World’s 1st Cetified Tri-Connector Charging Cable” which started in July of 2017. The slick-looking campaign was the product of “Ana Yarina”. The project includes professional quality technical specifications and animated graphics. This was the 5th campaign started by Ana. According to the Kickstarter page, Ana Yarina is from Sydney Australia, and also known as “Anastasia Sawyer”.

Anastasia Sawyer is an alias for Anastasia Ivanenko, who has a warrant for committing  Postal Fraud. She successfully bilked backers for around $20,000 in the Rebel campaign (previous campaigns show that Ana delivered some of the promised rewards, however most backers found the delivered products to be substandard). After defrauding Kickstarter, she started a “gofundme” campaign and successfully raised another almost $12,000. After successfully defrauding people for over $30,000, do you think Ana Sawyer will stop? All she has to do is generate another identity with another email account, and start a new campaign (assuming that she has not already done this – and likely many times over).

As fraudsters discover Kickstarter, there is likely to be a “Gold Rush” mentality – meaning that as time goes by, the number of frauds on Kickstarter will increase.

 

Kickstarter advertising existing businesses.

The idea of Kickstarter is to provide funds for inventors who have an idea, but lack the means to develop it and bring it to market. To be fair, there are examples of products that have fulfilled this promise – but there is nothing in the Kickstarter terms of service that requires anything like this from originators. What if a company has a current product line, and wants to develop something new to add to this product line? Since Kickstarter has no real protection for backers, nothing prevents this.

But wouldn’t running a successful business mean that you have a better chance of receiving a quality project? Well, yes and no. If your business is successful, and you have a valid business plan, you’ll have no trouble generating capital from investors. If you don’t want to go through the process of creating a business plan, or if your business is in trouble, you can use Kickstarter as a shortcut. In multiple cases, a creator launches “one more project”, never delvers, then disappears.

Take the Oscilloscope watch, for example. Heavily hyped by tech industry publications like Gizmag (Now NewAtlas), geek.com and many others, This was no new Rodeo for Gabriel Anzziani. Gabriel runs Gabotronics.com  and sells miniaturized test equipment. Mr Anzziani still  makes money from his website (his product line was essentially launched from Kickstarter), yet the backers of his last product got nothing for their $70,000 investment they paid 4 years ago. So past success is no guarantee of future results…

 

Conclusion

What you’re doing with Kickstarter is investing in relatively high risk enterprise. As I’ve shown, the risk is understated by Kickstarter (they have a vested interest in underplaying the risk). At the level of risk you’re assuming even when projects deliver they don’t justify the investment spent. If you put your money in Stock instead, if you invested in a company and they succeeded, you’d walk away with some small percentage of the value of the company. To paraphrase a popular meme, my investor put money in Kickstarter, and all I got was this T-shirt.