Design, CG Graphics & Inspiration

What Happens, When The Project That Received Funding On Kickstarter Fails?

I became interested in the above mentioned question, when the company, I’m working for remotely, started not only making plans, but also taking some real steps to launch its own project on Kickstarter. The employer’s mood was more than optimistic. Having read the success stories, the perspective to receive funding “now” and to think about commitments “later” dulls your mind and attracts any entrepreneur.

Being a person, whose main responsibility is an engineering content of the project, having talked to our potential contractors (both European and Chinese), and deeper understanding of our possibilities and project implementation details, one essential factor worried my mind – risks. Of course, I am a “team player”, “focused on the aims”, and I can light up the eyes and hold myself upright at the proper time, but the issue is that I really like the company I work for and my job is quite interesting, that is why I don’t enjoy the prospect of the project that can kill the business, which I feel comfortable to work in (even being a small screw in a big mechanism). At first desultory remarks and afterwards more and more persevering highlighting of the potential risks at last had its effect on the management (may be this is its adequacy that I like in my workplace?) and facing the problem there was made a decision to figure out, what is going to happen, if the company, having received funding, is not able to meet its liabilities towards the sponsors?

Common fraud

And there have already been such cases.
Eyez by ZionEyez HD Video Recording Glasses for Facebook — the project of glasses that can record the video of what a user see (like a famous Google Glass) and upload recorded video on Facebook. The project gained $343,415 (that was 624% from the requested amount of $55000). Each of 2059 backers that had given more than $150, was to receive a device sample in “winter 2011”. Now it is already 2013, but still nobody saw the promised devices. Moreover, since April 2012, when the design team made the last announcement that they would need 12 more weeks to develop and test the glasses and 12 or 16 weeks to produce the first lot, the designers have stopped their activity. They stopped making announcements on the project page or answering letters – they’ve just disappeared.

Some of the displeased backers even encouraged to gather and “hire a killer to find Joe Taylor (a founder) and his friend to raze them to the ground”.

Position of Kickstarter was quite clear: the company does not grant emoluments for a failed startups and “only society itself can exert pressure on the creators of the project, who have gone rogue”. Some backers try to get the compensation individually from their banks, justifying this request by necessity to cancel the money transfer to ZionEyez account, but still nothing have been heard about successful outcomes.

More than just foolishness

Another example is Hanfree iPad Accessory — the project of a comfortable holder for iPad. The project creators Seth Quest and his partner Juan Cespedes received $35,004 from 440 people, aiming to gain $15,000 (233%). Seth Quest (project founder) was a professional product designer, but had no experience in promotion of a company and wasn’t engaged in producing something material. The project got stuck and on 28 November 2011 the creator officially recognized that the project failed and promised to return money to the backers within a week. The sponsors didn’t receive their money either after a week or later. Unfortunately, for the project creator, one of the backers (Neil Singh) turned out to be a lawyer. His investment was only $70, but the situation with the failed project cut him to the heart and having the aim and possibility to realize it, he lodged a complaint against the project creator. Since Seth Quest didn’t have time to establish a company for Handfree project, he was personally responsible for the project’s debts. It was simply impossible to carry out the desire to return money to the backers, as it had already been spent on engineers, contracts with producers and other objectives. Seth Quest was declared bankrupt by the trial. In view of the destroyed reputation he had to move to Brookline and find a job “unrelated to the industrial design”. He started to do yoga and go to gym to deal with neurasthenia and hypertension, which appeared during the legal proceedings.

This case is the result of foolishness rather than malicious intent that had been acknowledged by the project creator himself. At the same time it was the first and show trial against the failed project on Kickstarter, which caused a big stir in the USA and made the service add another obligatory for any project section that names risks of the project and relieves Kickstarter of the responsibility for similar failures. Also, the manuals for technical projects completion were rewritten and updated, and the rules for selection of technical projects before their kick-off were tightened.

Big money – big problems

Flint and Tinder: Premium Men’s Underwear project raised $291,493, aiming to raise only $30,000 (971%). For a casual observer it looked as a raving success, but for Jake Bronstein (project creator) production and logistics process turned into a complete disaster. The producers, he worked with, said that they couldn’t observe the specified terms with such number of new “clients”. They managed to deliver the promised clothes only three months later after $1 000 000 of venture capital had been attracted.

Kickstarter remains aloof

Kickstarter management is well aware of mentioned above problems and is doing its utmost to get rid of any responsibility in case of project failure. Reading the working conditions of Kickstarter, it is easy to see how the company builds up the relationships directly between backers and project creators with an objective to ensure itself from any legal implications in case launched projects will not be able to grant promised rewards:

“By creating a fundraising campaign on Kickstarter, you as the Project Creator are offering the public the opportunity to enter into a contract with you. By backing a fundraising campaign on Kickstarter, you as the Backer accept that offer and the contract between Backer and Project Creator is formed. Kickstarter is not a party to that agreement between the Backer and Project Creator. All dealings are solely between Users.”

At the same time Kickstarter gets 5% from any launched project, whether the backers get the rewards mentioned in the project or not. According to Kickstarter rules, inability to grant promised reward or refund “may injure your reputation or even lead to legal prosecution by backers.”

I would like to observe that the above mentioned examples are not a reason to give up and back down from your plans. This is only a sobering view on capabilities and peculiarities of the financial model, which is called now “crowdfunding”. Kickstarter is not a store and both project creators and those, who invest money for their support, must understand this. The model itself is based solely on trust and it seems that only a high entrance threshold and Kickstarter personnel’s efforts in moderation of projects is a barrier from the widespread prevalence of fraud on this platform. But the relationship model does not have “the safety” either from fraud or losses, sustained by project creators or backers. Crowdfunding is not an Eldorado, but one of the alternatives to get funding, which should be treated cautiously and your efforts and potential risks must be weighed, or you can take a chance on Fortune, if you are “a player” in heart.

  • Matviy Ilyashenko,
  • June 4, 2013

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