A Problem with Kickstarter

Kickstarter has been an unquestionable leader in crowdfunding for several years. For many people, Kickstarter is the only platform they’ve heard of, so Kickstarter IS crowdfunding. This is why I think the issue with this particular portal is not just its own business. The backers supporting thousands of campaigns on Kickstarter believe that the platform offers at least a basic level of protection by vetting the projects. It has nothing to do with the reality.

As most of the readers know, Kickstarter is available for projects posted by the residents of the US, UK and Canada. I was born overseas and have many friends around the globe, so I would love for people in Europe, Asia and Africa to be able to use this popular tool to raise money for their projects. Unfortunately, Kickstarter does not officially allow that.

Actually, anybody can post a project on Kickstarter by employing one of two methods: creating a company in the US/UK/Canada or by finding a person who would “lend” his SSN and other identity information for a significant monetary reward. The current situation has created a whole industry of “experts” helping potential creators break the rules and we, the backers, are paying for their services because they increase a project’s overhead costs.

Officially, it is prohibited by Kickstarter rules, but you can find many requests on Facebook from people looking (and eventually finding) “an American friend for hire.” Another option is even worse. It is relatively inexpensive to start an LLC with a bank account and a tax ID.  Then this company registers an Amazon payments account and applies to start a campaign on Kickstarter. After finishing a campaign, the company transfers the money to the bank account in its own country. The problem is that, in this case, the backers have absolutely no way to prosecute the creator in case of fraud. They simply wouldn’t find a company to go after or it would be too expensive to file the papers for international lawsuit.

I've been working on an article titled "How Kickstarter influences national crowdfunding in different countries" and was shocked by the data I've discovered. In some countries the amount of money raised through Kickstarter is higher than money raised through major local crowdfunding platforms.

In my opinion, it would make perfect sense for crowdfunding companies that have an approval process to at least request a proof of the basic information provided by campaign creators. I read an interview with a president of one PR agency specializing in crowdfunding who shared a "professional secret”:  they change a location of a project several times during a campaign to bring more backers on board.

Can Kickstarter catch that? Absolutely. So why doesn’t it do it? Because it doesn’t care about the interests of the people who fuel its existence. It took me two days (not even full time) to find projects that raised millions of dollars (combined) with creators who either had fake identities or companies and websites created just for a Kickstarter projectObviously, based on current laws, the backers have no protection. This is the only explanation why we don't have hundreds of lawsuits. But does it mean there is no fraud? Well, sometimes it is not about fraud but about lack of accountability. If creators knew they would be responsible for keeping their promises, we would have much better data on projects delivered on time and with reasonable quality.

I looked through 1,000 Kickstarter campaigns that were active in December 2012-January 2013, and here is what I’ve found out:

•    Almost none delivered the perks on time

•    Approx. 20 percent still haven’t shipped the perks (a delay of 8-10 months)

•    In approx. 10-12 percent of the cases the creators have stopped responding to the backers messages, which probably means the backers have no chance of getting the product or a refund

•    In at least 30 percent of the cases where the backers have received their perks the quality was significantly below the promises

Let’s look into a couple of the cases:

“Magic Wallet” is a Kickstarter project that has raised over $34,000 from almost 600 backers last February (http://www.kickstarter.com/projects/259704821/the-magic-wallet-slim-and-unique-design-rfid-prote). It has managed to deliver the product to the backers eventually, but here are some of the comments from the “happy” owners of the Magic Wallet:

Another case from the “Food” category (it’s not a rocket science, is it?): A “Garlic Sauce” that was funded almost 450% of the initial goal on January 25^th with the perks supposed to be delivered in February/March 2013 (http://www.kickstarter.com/projects/301887521/garlic-heat-a-garlic-forward-hot-sauce-looking-to). These are the recent comments from the backers:

Here is an example of a campaign currently raising money on Kickstarter: http://www.kickstarter.com/projects/576456616/imotion-3d-motion-controller-with-haptic-feedback?ref=search. Contrary to what it said, it is located not in Los Angeles but in Singapore. The company's website says it is a part of another company, Intellect Motion. Unfortunately, the link provided gets you nowhere with a "web address is not found." I contacted them directly to find out that they have a company registered in Delaware. There is no explanation why they have their location posted in California. I have failed to receive any response to my question about where in the US the backers can contact them in case of any problems.

And look at the funding story of the project (from Kicktraq.com):

We see a typical dynamics in pledges for the first 10 days. The project got over 50% of the funding goal from 478 backers with an avg. pledge being $110 and the most popular perk worth $49. Then it lost momentum,  gaining an average 2-3 backers a day and on some days actually loosing money instead of raising it. But there is an interesting phenomen: While the largest perk costs only $3,500, on day 15^th the project got almost $17,000 from just two backers, on day 20^th another $10,000 from three backers, followed by two days of losses and then another $10,000 from three backers (and loss again on the next day).

I am not going to insist on any conclusions, but it looks like a typical attempt to trick the system by using different Amazon accounts to pledge on their own project (which is strictly prohibited by Kickstarter rules, by the way). What’s wrong with that, you may ask?

There are three possibilities:

There is a growing need for public due diligence for crowdfunding projects. It is expected in the case of equity crowdfunding, but it is also necessary to provide reliable information for backers in rewards crowdfunding to help them choose the best projects. CrowdsUnite.com is trying to create an analog of Yelp for crowdfunding platforms. We need to have a similar forum for project creators. 

We're talking about the democratization of the financial industry. But it will be impossible without transparency. It is my belief that crowdfunding platforms should be advocating and enforcing their rules to make this "a fair game" for all participants. Right now I don't see a real partnership between the parties at this table. I can’t agree more with my colleague from Canada Diana Yazidjian: “Let the crowd decide what's to be funded but let Kickstarter start acting as a business. It's time for these platforms to become accountable of their actions (or lack of), start caring for their customers like a normal business would. Their customers are those that publish a project as well as those that give to a project”.  Kickstarter has earned more than $35 Million in the platform’s fee from successful projects. It’s time for the company to start spending some of this money on protecting its clients.