How to Avoid Scams and Fraud in Crowdfunding

How to Avoid Scams and Fraud in Crowdfunding
Zack Miller, About.com Crowdfunding Expert

 In many ways, the crowdfunding gold rush is on.

Winners are winning big and raising millions of dollars online to fund their projects and companies. Service companies are playing an increasingly stronger role in helping entrepreneurs manufacture crowdfunded hardware and actually ship products to their backers. New leading crowdfunding platforms are growing in popularity, leading the industry to the next level.

Crowdfunding is expected to expected to do over $34 billion in 2015.

Of course, along the way, there have been bumps (and there will be bumps). Scamming and fraud ​has been a minor, but serious, issue all along for the crowdfunding industry. 

Kickstart deals with and battles copyright fraud

To this end, Kickstarter just published the Kickstarter Transparency Report 2014. While most entrepreneurs take their crowdfunding campaigns seriously and run them professionally, a minority resort to stealing ideas, images, videos, and copy from other campaigns -- the Transparency Report is Kickstarter's attempt to provide a public view into what the leading crowdfunding platform is doing to right some of these wrongs.

Kickstarter's mission is to help bring creative projects to life. As part of that mission, we work to foster creativity and artistic expression, while always striving to be clear and transparent about our policies.

Today we’re reinforcing our commitment to those values by releasing this transparency report. It details requests and claims we received in 2014 about projects and members of our community, from people and companies with copyright or trademark complaints, and from law enforcement and government entities. Transparency around these requests can help to ensure that they are being made for the right reasons.

It's safe to say that there are relatively few bad apples amongst crowdfunding entrepreneurs. To put things in perspective, only 0.3% of all projects (240) have received a formal complaint. In some of these cases, the crowdfunding platform took action to request a change to the content to continue crowdfunding.

Engadget notes:

The company only took action against 44 percent of them, but that still means that it had to scrub content (or in some cases, whole projects) in 123 campaigns.

Inexperience: A bigger problem for crowdfunding campaigns

More prevalent than outright copyright infringement or fraud is the problem of overpromising and underdelivering.

The problem goes like this: an entrepreneurial group of people plan, launch, and execute a successful crowdfunding campaign. Problem is, that's just the beginning of the whole process. Now, this team needs to manufacture and ship its product and that can literally take years to happen.

This is exactly how Kreyos imploded. Calling this crowdfunding campaign "a cautionary tale", Wired recently wrote published an article entitled The Quest to Save Crowdfunding From Scammers and Flakes.

In 2013, the company raised over $1.5 million on the crowdfunding site Indie GoGo to fund the creation of a more sophisticated smartwatch. A year later, a few customers received their watches. But many other didn’t, and, well, they weren’t too happy. The company closed down at the end of last year.

Kreyos CEO Steve Tan tried to place the blame on the manufacturing company he partnered with, but he admitted that Kreyos had practically no technical or manufacturing experience in house. “We are a marketing team with very limited hardware experience,” he wrote in a blog post about the affair.

Unfortunately, this isn't an isolated incident -- there are numerous examples of crowdfunding projects failing at the manufacturing stage and even more that ship seriously late.

2 ways to assure the crowdfunding campaigns you back actually ship

There are 2 main ways that backers of crowdfunding campaigns can help assure that the projects they decide to back will ship and ship on time:

  1. team experience: Explore the team section of the project you're interested in backing. See if there are people involved in the crowdfunding campaign with experience in designing and manufacturing real life products.
  2. manufacturing partnerships: See if the project you're backing has a relationship with service companies like Dragon Innovation or CrowdSupply. These companies help crowdfunded products with manufacturing, so even if the founding team doesn't have experience in this realm, a good partnership can go a long way.

    If a crowdfunding campaign doesn't have internal or external experience with manufacturing, ask a question about how the entrepreneurs plan to build out their project.

    You'll be glad you did.