Some Lessons Learned From Crowdfunded Catastrophes 1

Melissa is a mother of 2, lives in Utah, and writes for a multitude of sites. She is currently the EIC of HarcourtHealth.com and writes about health, wellness, and business topics.

Are you considering financing your next venture using one of the crowdfunding sites like Kickstarter or IndieGogo? Before you put out your hat for contributions, make sure you don’t end up on this list of embarrassing crowdfunding failures. Backers invested millions of dollars in these projects, and many will never see that money again, not only hurting them but scarring the reputations of the entrepreneurs who took their money and then flopped. Some crowdfunding failures appear to have been operated by scammers, but others were just doomed by unforeseen troubles made worse by gross overreach. It’s these latter cases that we want to consider here as object lessons on how not to launch and run a crowdfunded business, and thereby mitigate some risk factors that are peculiar to the crowdfunding model of finance.

Central Standard Timing wanted to make the world’s thinnest watch, but after taking in more than $1 million, it ended up just thinning out the wallets of its backers. The main problem stemmed from delays from the manufacturer of its ultra-thin e-ink materials.

Lesson: Vet your vendors’ technical capacity to deliver, and build a working, viable prototype before seeking major funding and promising products to customers.

Torquing Group Ltd called its palm-sized drone ZANO and said it would be able to fly autonomously and swarm, but it never got off the ground. Even though the company raised over $3 million, its “intelligent” drone couldn’t turn like any off-the-shelf $40 drone can.

Lesson: Drones are nothing new, but this company sought to offer new features without even meeting basic requirements. Seeking to satisfy a market desire by advertising a dream gadget is not enough; make sure the product delivers on the promise. Crowdfunded projects may succeed in getting money just because their advertisements excite a group of consumers, but those backers lack the due diligence of traditional investors. When financing through crowdfunding, make sure you do your own due diligence to make sure you’re not fooling yourself.

iBackPack apparently stuffed over $700,000 from backers into its bag and then ran without delivering a product. They were trying to make a backpack specially-made for mobile devices, but then had trouble with their “ultra-thin & powerful batteries.”

Lesson: Don’t take risks on unproven technologies, such as those in the battery space. Again, with crowdfunding, it’s largely up to the project managers themselves to make sure they’re not creating vaporware.

Elio Motors may sound kind of like Elon Musk, but after almost nine years of development and nearly $17 million in crowdfunded investment, this electric vehicle company has yet to deliver its first 3-wheeled Elio. “Bringing new kinds of cars to market is fraught with pitfalls, many of them due to the high capital investment and regulatory requirements,” says Jason Baril of Wreck Into a Check, the Law Offices of Ogle, Elrod and Baril, PLLC.

Lesson: Understand the scale of automaker ventures. Even an enormously successful investment round by crowdsourcing standards on the order of $17 million probably isn’t even close to the funds needed to finance a new automaker.

Skarp Technologies has shown that people really want a razor that can shave as close as a blade — using lasers. After bringing in $4 million from more than 200,000 backers, exceeding its funding goal by 2,503% but failing to meet a single production goal, the company was found in violation of Kickstarter’s rule that physical products must have a working prototype. After they moved the project to IndieGogo, the company took in over $500,000 from backers, but they’re still failing to show that their razor can shave more than a few hairs.

Lesson: Getting cash up-front through crowdfunding is a very attractive proposition for entrepreneurs, but it’s the very thing that can get your company into deep water before it’s able to swim. A more prudent approach is to solve crucial technical problems in a small first round of private investment, enabling you to build a functional prototype, and then crowdfund the first production run.

FND Films was started by a popular comedy trio who wanted to make an independent film called It’s All Good. After getting over $75,000, they proceeded to share videos of themselves on vacation in Europe and Mexico, and then backers learned that the plot of their film is about some independent filmmakers who get about $75,000 from a crowdfunding site and then blow it all on partying around the world. While this stunt may have been technically successful, its backers aren’t very happy about it.

Lesson: Don’t exploit your fans and investors. The big idea behind crowdfunding is to satisfy your backers by delivering products directly to them first, but this group decided to troll them instead. That strategy may work, once, and then never again.

CIA, Inc. is a Japanese company that’s supposed to produce Project Phoenix, a video game that mixes two popular genres of role-playing games, but its $1 million investment from almost 16,000 backers has gone nowhere. This group advertised around their “AAA talent,” focused mostly on a single famous game developer whom they were unable to retain after all.

Lesson: Secure your development talent, along with contingency plans.

Protecting its own multi-billion dollar industry, Kickstarter and other crowdfunding sites are now hiring investigators and taking legal action against projects that seem to fail due to negligence or fraud. Projects still fall through the cracks, though, so the whole crowdfunding idea is constantly haunted by the possibility that these projects will fail to deliver a single cent of return on investment, or even a consolation prize like a baseball cap with the product logo embroidered on the front.

But don’t let this article dampen your hopes for crowdfunding your next venture. Many Kickstarter campaigns inspire hope through innovation and succeed where others fail. Rather, let these examples of bad crowdfunding campaigns lead you to plan and prepare for the challenges you may face.