When it emerged, crowdfunding provided an excellent alternative to the traditional bank loan or venture capital route to receiving funding.
But the crowdfunding model has run into some problems that has led to a loss of trust among people, who are essentially the source of funding in this model.
Anyone who has sought to set up a business on the back of a big idea has largely received funding by three methods. The most common option has been the bank loan. But for out-of-the-box ideas, entrepreneurs found it difficult to secure bank loans and, therefore, veered towards venture capital (VC) financing. Under the VC method, firms or funds offered finances to small, emerging entities with high growth potential. However, not everyone could secure VC funding, especially if the ideas were very unique. So, a third form of funding emerged: crowdfunding.
Crowdfunding, as the name suggests, involves an individual or a group of individuals pitching their idea to the public and receiving funding from individual members of the public.
According to Anshulika Dubey, co-founder of an Indian crowdfunding platform WishBerry, crowdfunding can be described as philanthropy 2.0. It helps individuals source funding from a large group of people without having to go to individual sponsors or donors.
Most crowdfunded campaigns also offer something in return. Consider the case of the Filipo Loretti luxury watch, a product being funded through Kickstarter. It has raised €4.8 million as compared to its request for a modest €20,000 for the production of watches. Among the funders, those who offered a donation of over €139 were eligible to receive a watch in return. In contrast, individuals who would purchase the watch through retail channels after the campaign had ended would have to pay €299.
In addition to regular businesses, even some artists have warmed up to crowdfunding, whether it is to produce a music album or a feature-length film. In this case, they offer their donors either the album, a copy of the film or even a ticket to the film’s premier in return.
Crowdfunding has existed for some time now, and may continue to be an alternative source of funding for many; however, of late, a few cracks have come to be visible in this model.
Possibly the biggest success of crowdfunding till date, the Pebble Smartwatch, raised over $10 million in little over a month in 2012. By 2014, Pebble had sold one million devices, making it a grand success of the crowdfunded economy.
Naturally, Pebble’s subsequent product, the Pebble Time, was also launched through Kickstarter and made it big. Pebble then became established as one of the leaders of wearable technology.
Then, other crowdfunded products such as Pal Strap, a crowdfunded GPS strap for Pebble watches, also made their appearance on Kickstarter, making Pebble a benchmark in the crowdfunded ecosystem.
However, the bubble ultimately burst. In the first week of December, Pebble announced that it was shutting down as an independent company, with its “key assets” being transferred to rival company Fitbit. The biggest problem with this ‘shutdown’? Pebble announced that it would no longer honour any warranties, leaving thousands of people who became their customers in the past year in the lurch.
Pebble did announce in a blog post that the Pebble brand may not be killed in entirety, and that Fitbit would offer support for Pebble devices in the near future. It is unclear if Fitbit would continue offering Pebble as an independent brand, as is the case with Lenovo offering Motorola as a standalone brand after it purchased it from Google in 2014. While Pebble’s ecosystem has remained relatively open, allowing users to create their own ‘apps’ and ‘watchfaces’, it remains to be seem how this ecosystem would survive beyond the near future.
Pebble has announced a refund to its Kickstarter backers who funded its newer products and for those whose products haven’t been shipped yet.
Now, consider the case of the Filippo Loretti watch, on which there is a 10-year warranty. While the project has got close to €5 million, and one may expect the company to remain profitable in the near future, people may now begin to think twice before buying a Kickstarter-backed product.
While not exactly a success in the crowdfunding sphere, Stikbox did get its share of attention, and for the wrong reasons.
Conceptualised by an Israeli entrepreneur Yekutiel Sherman in 2016, it was a simple product: a smartphone case that could unfold itself and double up as a selfie stick. Sherman, who spent his time designing the product, managed to raise some money from family and friends before launching his campaign on Kickstarter to get more funds for his idea.
Brilliant, no doubt, but Sherman was in for a rude shock. A factory in China had learnt about his idea, quickly managed to get it in production, and had it on sale on Alibaba, a week after his campaign started. A week was all it took for the Chinese to copy the design and then manufacture and sell it at one-third the price it was to have originally. They even stole his name for the product.
Now, imagine the same thing happening elsewhere. Someone gets a bright idea to create a product, something of value, and decides to crowdfund it. But before they know it, the product is already on sale in China, and there is nothing the original designer can do about it. Patenting a design is not feasible because small-time entrepreneurs may not have the wherewithal to go all across the world to register a patent.
In the case of someone, say, taking the crowdfunding route for their film, what if someone steals the script and produces said film? It doesn’t have to go all the way to China; it can be done by someone in the same country who has access to internet. Unless a script is registered with a union or some such (as is the case in India), nothing can be done about it.
Crowdfunding isn’t dead. But it is dying, at least for those who would have otherwise benefitted tremendously from it. People are now better off finding an investor or advertiser to back them up financially, or risk being robbed of their own creation, either by a Chinese factory, or when filing for bankruptcy.