Crowdfunding Scams and the 5 Red Flags to Watch Out For

Although the discussion of fraud inside crowdfunding is gaining precedence—with the clever term “scampaign” rising from the ashes of lost dollars—there is some disconnect between what crowdfunding backers determine a scam, and what the creators, and the platforms running the campaign deem as such. To put it simply, are failed campaigns scams or just trainwrecks?

To answer this question, we firstly need to differentiate between the types of crowdfunding fraud. There are some, albeit very few, crowdfunding campaigns like Kickstarter’s Air Umbrella, that are set up with the sole intention of raising funds, never delivering, and pocketing the money. However, an overwhelming majority of campaigns that result in backers crying scampaign, are projects that according to their creators, simply crashed and burned.

This gray area is filled with projects like ZPM Espresso and Kreyos—projects who crowdfunded successfully (raising $369K and $1.5M respectively), and folded without delivering their promised rewards.

To illustrate, after postponing their ship date by two years, the ZPM Espresso team eventually announced they’d be throwing in the towel, saying, “we are deeply and truly sorry that despite our best efforts, we were not able to get this machine across the finish line.”

Similarly, after a series of production and management mishaps, the angel invested and $1.5M crowdfunded project, Kreyos, announced they too would never be shipping anything. Like ZPM, Kreyos spent all crowdfunded dollars—plus hundreds of thousands more—to bring their smartwatch to market, and couldn’t afford to refund the majority of backers. In founder Steve Tan’s final backer update he apologized, saying “I wish we could provide further remedies, fixes and refunds, but the lack of available funds wouldn’t allow us to do so.”

According to Kickstarter, crowdfunding campaigns that have honest intentions, but fail to deliver like ZPM Espresso and Kreyos aren’t scammers. In fact, like an angel investor, it’s entirely up to backers to assess a project’s worthiness for investment, and absorb the loss in case of failure.

Kickstarter does not guarantee projects or investigate a creator's ability to complete their project. On Kickstarter, backers (you!) ultimately decide the validity and worthiness of a project by whether they decide to fund it…There’s a chance something could happen that prevents the creator from being able to finish the project as promise.”

Ultimately, it’s up to the crowdfunding backer to mitigate their own risk. A great line of defense is watching out for 5 key crowdfunding campaign red flags—indicators of impending disaster that the Celery team has observed after monitoring thousands of successfully funded campaigns.

5 Red Flags Indicators of “Trainwreck” Crowdfunds

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1. Doesn’t Have a Working Prototype

Photoshop is a magical thing, but don’t be fooled by illusion in campaign videos and photos. A sign of projects that are destined for failure—or extremely late shipping—are those that don’t have an actual working prototype. The amount of time and iterations required to take a hardware gadget from the blueprint stage into a polished, shippable product is lengthy and often underestimated.

No one knows this better than Savannah Peterson, the creator of Instacube, the $690K backed Instagram picture frame that started shipping more than a year late. In a talk she gave at South by SouthWest entitled, “I Ran an Extremely Successful Crowdfunding Scam,” she said “The product development cycle is a lot longer than people think. Most of the devices you have in your hand were thought up two or three years ago...It's really hard to get something into people’s hands in six months."

Takeaway: If the project you’re considering backing only has blueprint images, and a makeshift video with a cardboard cutout of the product, the opportunity for disaster becomes exponential. For better odds, back projects that have been iterated upon, exist in some capacity, and are more than just an idea.

2. Doesn’t Have Makers That Actually Make

Beyond gaining capital with the goal to pull a project through the finish the line, crowdfunding is becoming a popular marketing means. With the potential of generating enormous media coverage and converting buyers into brand advocates, it’s no wonder crowdfunding is so appealing to cutting-edge marketers. However, as proven by Kreyos, the self-described “marketing team with very limited hardware experience", strong marketing skills with no manufacturing expertise can be a recipe for disaster.

Projects driven by teams that lack diversity and manufacturing experience should be approached with caution. For hardware gadgets, a team without any manufacturing expertise will need to outsource these duties, inviting additional complications and blind decision-making. This is exactly what the Kreyos team blamed for their demise. Steven Tan admitted to making some poor decisions throughout the projects 2 year run, but ultimately blamed handing over manufacturing and production to an illegitimate solutions company as what did them in. Tan explains, “Kreyos itself along with our backers and customers all fell victim to an elaborate white collar crime perpetrated by Viewcooper”.

Takeaway: Back projects initiated by diverse teams or individuals with a wealth of knowledge. Research the projector creator to find out more about their story and experience. Get a feel for whether or not they have what it takes to pull of the inevitable challenges ahead.

3. Zero Trusted Seals of Approval

The more eyes on a project, and the greater the quality and quantity of the “seals of approval” backing a crowdfund, the better. Projects that have gone through hardware incubators or accelerators, have received investments from reputable players, or are endorsed brands or individuals that tend to know what they’re doing, are generally safe bets.

One of the best seals of approval within the crowdfunding scene, is Dragon Certification. Dragon Certification means that a crowdfunding project has been fully ripped apart by a team of first-class engineers who’ve performed a mechanical tear-down, a Design for Manufacture and Assembly (DFM) analysis, fully reviewed potential restraints, and assessed the project timeline. Notable certified crowdfunding projects include Pebble, Mooshimeter, Hammerhead, Tessel, and WunderBar.

Takeaway: The more people who have had the opportunity to scrutinize a project, and still support it, the better. If a project has gone through an incubator, garnered support for major industry players, and been certified by third-party knit-picking engineers, it’s been subject to a lot of criticism. If these groups still say “yay”, chances are it’s safe for you to do the same.

4. Poor Comm-uni-cat-ion.

When it comes to crowdfunding, walking the walk and actually fulfilling orders is the most important thing. However, talking the talk can be a clear indication of just how the walk will go. Some communication red flags are: multiple grammatical errors in project description, FAQs, or backer communications; inconsistencies in team and company information (such as location); lack of disclosure with backers; and poor response rates.

In fact, crowdfunding researcher Richard Swart, of the University of California, found that campaigns that successfully raised $100,000 spent at least 200 hours preparing for their crowdfund. In addition, these same campaign creators spent an average of 136 hours managing it. If project creators aren’t properly communicating with their backers, or have poorly written campaign pages, it could be a sign they’re not putting in the time required for success. Put your money where your backer’s mouth is!

Takeaway: Majority of successful crowdfunding campaigns result from months of preparation. If a project creator can’t find the time to answer their backers or spell-check a public campaign page, the odds that they’ll turnout a polished product are shaky.

5. Too Good to be True.

It’s a bird that does the dishes, it’s a plane that parks itself in your single-car garage, it’s a super-scam! Really innovative, ambitious projects and ideas are undeniably exciting, but when you’re backing with your dollars, it’s important that they can become a reality in the timeline you’re singing on for. If the campaign project requires technology that has yet to be produced, or seems overly ambitious, sometimes it’s better to walk away than take a gamble on a cool idea.

A good example of an ambitious project with an intimidating number of moving parts is the $13M, 2014 record-breaker, the Coolest Cooler. The prototype for the Coolest, shown in the campaign video was a cooler with 9 different customized parts, ranging from a removeable bluetooth speakers to a portable blender.

Despite underestimating their ship time, the Coolest has managed to stay afloat since their campaign by doing everything right. Notably, they raised no red flags during their campaign. At the time of their campaign, the Coolest had a working prototype and manufacturing underway; the project was managed by a well-balanced team of serial entrepreneurs and operations specialists; the product was endorsed by countless media channels, innovators, and celebrities (even team Kickstarter ordered one); and their public-facing content was expertly crafted, with backer updates provided throughout the entire process.

Takeaway: Support the ambitious, but avoid the ludicrous. If a project seems overly complicated or advanced, only back it if the creators have everything else working towards them. A cool idea that can’t materialize, shouldn’t have to be bought--I’m sure you have plenty of free million dollar ideas yourself!

Backing crowdfunding projects is exciting, and part of this excitement lies in unknown of being an early-adopter. For the most part, the unknown leads to the great reward you signed on for, but it’s important to avoid red-flag campaigns.

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