Crowdfunding Is Big In China And You Will Never Believe Why

Submitted by bdanza on Tue, 05/28/2019 - 09:28

Indiegogo Kickstarter logo

 

Stop giving to crowdfunding campaigns. No seriously, just stop. They are all scams— every single one.

Ok maybe this is an exaggeration. But how much of an exaggeration? We really have no idea, and that’s the entire point. Yes, there have been very successful crowdfunding campaigns, I can think of Boosted board, Flow Hive, Pebble and maybe a handful more. But for each success, how many have failed? More importantly, who benefits from crowdfunding campaigns? As far as I can tell, it’s not genuine creators or consumers.

I can see how this post comes across as self serving, since we advise most of our clients to stay away from crowdfunding their products. But we have legitimate reasons for giving this advice. Let me outline a few of them.

Accountability.

This one is fairly simple and likely the largest anecdotal complaint I’ve heard. When a project fails to deliver the promised product to its backers, nobody is held accountable. This one is so large, in fact, that Indiegogo has begun guaranteeing some of it’s projects so that consumers don’t get screwed for backing a scam. Yes, the sites feature warnings about the possibility of failure, successfully passing responsibility on to the creators. “We’re just the platform,” they say, conveniently omitting the part in which they get 5% of your money whether you get your product or not.

Data Transparency.

How many projects fail? Where is my money actually going? Why is the campaign asking for this seemingly random goal? You would think that after a decade of existence each, the two main crowdfunding sites would have reams of data on how likely a given project is to be worth your time and money. Kickstarter is better about this than Indiegogo, with a dedicated stats page and a four-year-old independent report on fulfillment rates. But with the diversity of projects available, there needs to be some breakdown on what causes a project to fail. Conventional wisdom says that artistic efforts are more likely to succeed on Kickstarter. Is that true? You will never know.

Project Owner Transparency.

Who created the creators? We tend to know nothing about the shady people or groups of people actually behind these projects, and the platforms are incentivized to keep that information secret. Too often consumers are fed a story of a poor college student coming up with an awesome idea for a revolutionary product. Reality, however, is far different. If you dig deeper, you will find many ventures are backed by large companies trying to push risk off to the consumer—or worse, some dude who decided he could make more money by “investing” it in bitcoin.

How Do I Know This?

Over the last few months Jack and I have talked to many manufacturers and sellers in China who have been convinced by crowdfunding platforms that launching through them is a good idea.

These reps pitched companies and creators with a simple three-step idea: (1) come up with a semi-novel concept, (2) make up some story about how innovative it is, (3) profit. And best of all, the risk gets passed off to stupid customers overseas.

The problem here is that ideas are really not that novel, the story behind the product isn’t real, and the only people who profit are the platforms. Usually the companies were going to make the product no matter what, which guarantees Kickstarter and Indiegogo a cut of the proceeds. Notably, Indiegogo even allows for a “flexible funding” option: The creator keeps your money and Indiegogo gets a fee, while you get promised nothing.

The crowdfunding platforms have had a surprisingly easy time convincing the Chinese manufacturing, in part due to the issue that Jack wrote about last week. When companies like Amazon pull out of a market like China, other e-commerce platforms fill the void with false promises of huge profits with little work. Indiegogo and Kickstarter  have done just that. Venture over to Indiegogo.com where you will find a China-specific page that touts all the special services they offer to Chinese companies (spoiler alert: it’s the same junk they offer everywhere else). The front page of Kickstarter.com, meanwhile, displays the celebratory announcement that the platform can now be fully used in Chinese.

Amazon is largely agnostic to the many, many Chinese sellers trying to grow their market presence in the States. The Chinese, like everyone else, appreciate being courted.

Indiegogo front
The main "Indiegogo for Entrepreneurs" page announces event in Shenzhen

Unfortunately for the Chinese manufacturers, the crowdfunding agents aren’t exactly being truthful. Or at least they are omitting important information. A lie by omission is still a lie.

While I have not been in any of these meetings, I am fairly certain I can piece the pitch together by the number of secondhand pitches I have heard:

  • Indiegogo China rep walks into Shenzhen office to look at a product.

  • Rep tells the seller that the product is amazing but needs a story.

  • Rep goes back to the office to create story.

  • Rep returns to seller with story and GREAT news: the Indiegogo bosses are now very interested in the product and offer the seller dedicated staff to set up the campaign for a Western market.

  • Indiegogo promises complete protection from a failed campaign.

  • Not in the pitch deck—the percentage of failed campaigns.

More worrisome for consumers are the companies who understand that the pitch is BS and proceed anyway. To them, the lack of accountability on Indiegogo and Kickstarter is a feature, not a bug.  

Let’s say for example, you are a fairly sizable company with a good amount of revenue, and you want to launch a new product in a new vertical. Here are your two options:

  1. Cough up some cash and take a balance sheet risk on a new product.

  2. Concoct a fake new company and obfuscate who the owner is (easy to do behind the Great Firewall and so near corporation-laden Hong Kong), then find a US accomplice who promises to ship off your risk to gullible Americans.

Good news! If you picked option #2, we have a partner for you. By this point I’m pretty sure you know who I’m talking about.

What Can Be Done?

So what’s the solution to this madness? Simply stop giving to crowdfunding campaigns. Or at least stop until they institute some accountability for themselves and the sellers using the platforms. You won’t be missing out on much, and anything remotely close to market is going to end up on Amazon anyway, even if just to dump inventory. Bad behavior needs to be punished, and your demands for transparency will go further than piecemeal investigations by the FTC.

Consumers need to know who is actually behind the project and why they are doing it. This should not be some fantabulous story (although that can still exist because it’s fun and sells), but there needs to be a section on the project page that has more detailed information about the project and various funding sources to date.

Sellers and consumers should know the chances of project failure—both failure to meet the stated goal and failure to deliver on product promises. I am willing to bet that armed with full knowledge of the data, people would be a bit more wary about throwing their money away.