Many business owners, startup founders, inventors and entrepreneurs I talk to need and want funding for their product. Actually not just many of them, probably all of them.
It’s usually the resource that they feel holds them back from achieving what they believe they can achieve. It’s the silver bullet that will solve all of their problems.
In the right scenario, the wise investor has the wisdom to know when an investment will deliver a return, and the great businessman/businesswoman will deliver, 9 times out of 10.
This is where the problem with crowdfunding comes in. It’s a system riddled with flaws for both backers and campaign owners.
The Crowd are not Investors
The majority of the “crowd” are not investors. They wouldn’t be able to tell you the difference between a bond and a stock. They are spenders and consumers. All they really want is to get their hands on what you’re proposing to sell…they don’t really want to back you as a person.
As for the “crowdfundees”, or campaign owners, they are most likely inexperienced dreamers, all vision and great marketing skills. The “pros” know what to say, how to say it and can put together a great video showing it all. In reality, they are oblivious to the downfall they are setting themselves up for.
After all, if they had a strong investment proposition, wouldn’t they put their own money in (bootstrap) or go to an investor or bank for funding?
I have a particular bone to pick with those pitching a physical product for the first time, with the plan to mass manufacture their first batch of products, most likely from China. This is asking for trouble, especially when they have never manufactured anything before or have never run or operated a business in the same space.
So why is this so bad?
Who pays for the business assets?
To mass manufacture a market-ready product, one that is new to market and unique, capital is needed to setup and fund everything from the equipment and tooling, to package design, IP protection, business licenses etc etc.
Crowdfunding campaigns typically promise a single or multiple units when you back the campaign at a certain dollar amount. If anything, one would expect that by backing the product early on, they would get access to a special discounted price, meaning there’s only a small margin (if any at all) above the cost of goods. The hope here is that if the campaign reaches or exceeds the target, the total margin will be enough to fund all business assets needed to start delivering product.
If we assume for a second that a 20% return can be achieved (which, mind you, is a very good return for most businesses), on a $20,000 campaign only $4,000 is available to fund the business assets needed to deliver $16,000 worth of goods. If you were that good at making a profit, you wouldn’t turn to crowdfunding and instead you would have investors knocking on your door.
In the real world of commerce, business people front the capital to buy the assets, make sales and amortise the capital investment one sale at a time over months if not years, in turn receiving a reward for the risk they’ve taken.
Made simply, would you pay an Uber driver for a trip if they didn’t have a car to drive you?
Mistakes are Costly!
In a perfect world, a campaigner would pay a manufacturer to make the product at a super low cost, slap on a nice brand and make a decent profit to sustain and grow, leaving everyone smiling and happy.
In a realistic world, the factory receives some but not all technical specs, or misunderstand the requirements. They fill in the gaps while squeezing every last cent out to cut costs. Production batches don’t meet expectations or get lost, and most likely don’t meet customer quality standards.
If you have backed a product and delivery is “overdue”, this is probably the reason why. If you decide to back a crowdfunding campaign, you might want to consider if you are really just paying for an expensive lesson in business, of which you receive no benefit.
Under Resourced, Under Prepared
Some will tell you crowdfunding is not just about the funding, but the scalability and reach to thousands of new customers. It’s a fair point, until you think about what it takes to deliver at scale. Scalability is the greatest buzz word in the startup community that assumes the product they are building has little or no barriers to entry for mass market domination.
Realistically all business ventures need the right people, expertise and resources in place. Going back to the point above about business assets, do you really think a campaign can fund all of this?
This is highly unlikely, and once again, those that know how to truly scale would not be crowdfunding their product.
Don’t be surprised if you are promised a product by a certain date, and it does’t arrive on time.
It may be Illegal!
In Australia, and I’m sure in many other countries across the world, there is a law protecting consumers against misleading and deceptive conduct. This basically means that the business has to be honest and truthful to you.
Specifically outlined is that a business should not “offer goods or services without a reasonable basis for believing you can deliver them.”
So what constitutes a “reasonable basis”? This is of course up for interpretation, however I would not be surprised if a campaigner had no basis at all, or just a theoretical plan on how they will actually deliver.
If it was me, I would want proof that they can deliver based on past product sales, or experience in the field.
If you need evidence, all you need to do is take a look at the comment section of many campaigns and read the complaints made by the thousands of unhappy backers.
What do I do then?
For those thinking about crowdfunding, my advice to you is to start small and bootstrap a business you can afford, then finding ways to fund the next stage of your company once you’re confident you can do it with other people’s money.
There are also many ways you can move forward without funding, for example through strategic partnerships, joint ventures, vendor financing, licensing and using your existing assets to your advantage in new and creative ways.