Flies in the ointment: Will fraudsters kill crowdfunding?

The IndieGoGo campaign looked fantastic. A friend had shared it on her Facebook feed last fall, and I clicked through, intrigued. It was an advance-fund crowdsource model, whereby an entrepreneur raises production capital by accepting pre-orders to ensure a minimum quantity. The product idea sounded brilliant, simple and well thought out. On video, the founder came across as smart, enthusiastic and passionate. I hit “fund” almost immediately.

A year later, and I still haven’t received my product. The founder’s Facebook page and IndieGoGo campaign site is full of similar angry complaints from other backers demanding refunds. Slow shipping, product delays, poor communication. And so on, and so forth. IndieGoGo won’t get involved — it’s not their policy to do so. There’s a chance I’ll still get the product eventually, but I’ve basically written it off at this point. I took a risk. It didn’t pay off. And I’m hardly the only one.

From Kobe Beef Jerky to the GoBe wristband, the media abounds with stories of crowdfunding fraud. Some of these projects are blatant scams, with the intent all along to defraud backers. Others fall into a bit more of a grey area, starting off with good intentions on behalf of the initiators, but turning sour when the project hits a few speedbumps. It’s enough to make everyone a little wary of crowdfunding, even — or especially — when a project sounds really, really great.

It’s hard to remember this now, but many of the roads to fraudtown were paved with the best of intentions. Once upon a time, Craigslist was an idealistic way to share local event listings, Couchsurfing was filled with intrepid-minded folks genuinely offering up their free couch to backpackers. And eBay was merely a place for people to sell off old trinkets to clear the clutter.

All of these communities were founded on similar principles: A sharing economy, decentralized management, trust, and the notion that most people are generally good and decent. And, for a while, they worked. Because most people are generally good and decent.

Trouble is, it only takes a few bad apples to ruin a batch. And as these business models took off and grew, inevitably the bad apples found them and discovered ways to exploit them.

So is crowdfunding headed down a similar path? Sites like Kickstarter, IndieGoGo and GoFundMe have all been plagued with a rash of large-scale scam and fraud stories over the past couple of years. Crowdfunded projects have resulted in lawsuits, accusations, BBB complaints, and disappearing cash. Crowdfund Insider is collecting cases of fraud in an attempt to gauge the true scale of the problem.

Is crowdfunding — which helped startups, charities and projects raise billions of dollars last year — doomed to fail? Or will it evolve to solve some of these issues and emerge as a stable, long-term business model?

Ultimately it comes down to trust. How much can you trust someone you only know online?

A decade ago, this was precisely the problem that retailers were grappling with as they looked to move their businesses online. Online shopping was the Wild West, with few rules, widespread fraud by anyone savvy enough to put up a webpage and accept a credit card, and very low levels of consumer trust. “The online mall will never replace the store!” people declared in a huff.

Well, we all know how that turned out. Companies like Amazon led the way to redefine the business model, and millions of other companies — both bricks-and-mortar and online-only — followed suit. Banks and credit card companies got on board, improving payment processing security and offering widespread fraud protection guarantees to help instill consumer trust. Governments belatedly got into the game, clarifying the regulatory environment to improve consumer protection, transparency, and recourse against digital fraudsters. Online shopping isn’t the Wild West anymore; it’s solidly in the mainstream.

My guess is that this is where crowdfunding will go. The first crop of sites like Kickstarter and Indiegogo currently disavow responsibility for most of what gets posted on their platform — a sort of ‘buyer beware’ policy that benefits nobody. My guess is that market forces will ultimately force them — or a savvy competitor — to offer a more protected experience with more guarantees. I think we’ll also see the regulatory environment catch up, too, to make it easier to go after crowdfunding fraudsters. The general idea of crowdfunding is solid, but the execution has a bit of a way to go.