By Arthur Hardy-Doubleday
Kickstarter has validated online crowdfunding. Over $200 million in capital has been raised for 20,000 projects by over 1 million users. For a company that was started in 2009, these are eye-popping numbers. Conception Fund, an equity crowdfunding platform I co-founded, owes much to Kickstarter for validating crowdfunding. That said Kickstarter could destroy the very market it has worked so hard to create.
Recently BostInno reported a small Kickstarter campaign was unable to deliver on its promised game. Star Command raised over $36,000 from 1,167 backers. While the capital was transferred to the development team after the funding campaign ended, not all the promised products (mainly the game) has been transferred to the backers as promised. As the BostInno article points out, the team has explained that they have run out of capital due to poor planning.
This is completely unacceptable. I wrote about this risk back in February when Kickstarter had two campaigns surpass the $1 million mark on the same day. As I pointed out back then, it would be unacceptable for Amazon to not accept any responsibility if a merchant using it’s storefront did not actually ship the product purchased on Amazon’s platform. The same is true of Kickstarter.
When a person “funds” a project on Kickstarter in exchange for a product to be delivered in the future, they are making a purchase, a legally binding contractual obligation. Kickstarter is facilitating this transaction, and therefore should accept responsibility for making sure the product is delivered as promised. But they don’t. Setting the crowdfunding industry up for fraud.
Star Command is a small project. Hopefully the team can raise more funds from other sources and finish their project as promised and the funders get their game. However, as Kickstarter continues to grow, the raises get larger and larger. Start Command could be the first of many teams to fall short of their promises.
A week ago I discussed how Pebble’s campaign is changing how Venture Capital will approach product development. At the time, the team had raised $3.5 million. Over the weekend the New York Times reported they are up to over $7 million from nearly 50,000 people. Does Kickstarter really think that if Pebble fails to perform as promised the platform will have no liability?
In Massachusetts, our consumer protection law is 93A. Without going into much detail, it basically states a merchant has a responsibility to act in good faith. Arguably, if Kickstarter keeps having teams like Start Command over promise and not deliver, the platform is in violation of 93A. Regardless of what Kickstarter’s Term of Use police is, the platform has a responsibility to the 1 million users to vet the teams that publish projects on it platform. Additionally, it should ensure the promised products are delivered as represented.
In Kickstarter’s defense, the platform does have a vetting process to protect its users against fraud. Over the weekend, a project named Mythic was taken down reportedly because it was not clear if the team developing the project was real or not. Or if the team was taking credit for work that did not belong to them. Mythic attempted to raise $80,000 but was canceled after a few hours and $5,000 had been pledged. The Mythic debacle is presently being discussed in the Y Combinator hacker news forum. Kickstarter caught this one, but will they stand behind their brand when a team trips over its own inexperience as Start Command has.
Kickstarter has done so much to validate the crowdfunding market. We at Conception Fund think there are still many more applications of crowdfunding that have yet to be tried. We are looking forward to providing equity crowdfunding as a means of growing small businesses in the United States. That said, we must ask the very company that put the word “crowdfunding” into the popular vernacular, to better protect its users. If not, the platform that started it all, could severely damage the market it has worked so hard to create.