Have crowdfunding horror stories ruined it for everyone?

By James Robinson , written on May 4, 2014

From The News Desk

Fool me once, shame on me. Fool me twice? Nuh-huh. Never going to happen.

On Wednesday I wrote about Consumer Physics’ Kickstarter campaign for its SCiO device, a small infrared spectrometer that can scan substances to give you a somewhat accurate approximation of what is in your food.

I was impressed with Consumer Physics and its sense of openness and transparency, as a week before it launched it had invited me up to the office of its PR agent to test the device. This was no Healbe. CEO Dror Sharon gave me the floor to use his device. I was encouraged to bring my own food. I forgot. But I tested it on different cheeses and fruit that they had supplied. I held the device in my hand, scanned the items in front of me in a not predetermined order and at my own speed, watching the app respond with the results in real time that I checked myself against the labels.

People were writing me before I published my article to call the SCiO a scam. My article didn’t sway anyone. “Whatever demonstration you observed was quite staged,” one reader emailed. “I am 100% positive these are scams,” someone commented to me on Twitter. The gist of some other feedback was that if true, this was a billion dollar idea, so why was Consumer Physics crowd funding?

One Redditor even expressed sympathy toward me for being so obviously duped. “I feel kinda bad for the guy,” he said of me, kindly.

I don’t believe that I was being tricked. The parameters of how I was testing the device, the order of objects I scanned and the ad hoc speed at which I worked -- as well as the open manner in which I was encouraged to bring in my own test items -- leaves me with no doubt that this was an honest display.

What I was sensing though, was a swelling group who will now disbelieve everything vaguely remarkable on a crowdfunding site. The assumption that any company crowd funding with new technology and big potential is fraudulent, can’t end well.

Consumer Physics could be a bust, or it could be a $1 billion dollar idea. It is an advancement of science, but what it does it isn’t against the laws of nature. Oculus went from a $2 million Kickstarter-haul to a $2 billion sale to Facebook in 18 months. This is how it is supposed to work with crowd funding. The size of the idea doesn’t equate to the size of the scam.

But crowd funding has a trust issue to deal with, that if not dealt with could slowly rot away at what is still a relatively new tradition.

This week Washington State’s Attorney General filed the first crowd funding consumer protection suit ever against Atlius Management, on behalf of 31 in-state residents who gave them money on Kickstarter for a product that never eventuated. There’s a comprehensive list on Reddit started last year of Kickstarter campaigns that took funding, but never shipped. Our own reporting on Healbe and Tellspec alerted us that looking for scammy junk on Indiegogo was just too easy.

The crowd funding honeymoon is over. We know it can end badly. But now we’re pretty sure that some of them are a crock, some of us are now assuming that all of them are to protect ourselves. The sites themselves don’t have our back, so we need to look out for ourselves.

The problem is multi-level. The idea of what constitutes “fraud” needs to be re-imagined. Kickstarter has minimum standards. Indiegogo has none. Fraud gets by both. But dishonesty goes past spambots setting up fake pages on Indiegogo or high-profile scams like the Kobe Red beef jerky campaign on Kickstarter that was hours away from banking $120,000 before it was pulled. Tellspec fundraised dishonestly on Indiegogo against an idea of what it thought a technology could do, but hadn’t figured out yet. Healbe fundraised against a product idea that is essentially science fiction. Both were real companies, arguably maybe trying to make a thing, but still essentially fraudulent, whichever way you’d like to split hairs.

Kickstarter and Indiegogo take a black and white picture to fraud but the problem doesn’t fit that definition.

Crowdfunding platforms then need to take more of a responsibility in the transactions taking place, than wimping out and claiming to be mere intermediary. Indiegogo claimed it was fraud-free, before it backtracked. Then it claimed it was neutral, before it was revealed that it actively recruited companies to enlist. Kickstarter is more open about the risks of crowd funding, but it doesn’t have anything on the line if a company doesn’t ship a product.

Indiegogo and Kickstarter need to start owning their failure rate. How many companies don’t ship? How many ship a broken product? How many ship on time? No one knows the true odds. For companies like Indiegogo and Kickstarter, it isn’t in their best interests for this to be known. For backers, this would provide context to the true risk of it all, beyond anecdotal horror stories. And as long as companies are not straight forward about how much money they’ve helped lose, people will always assume that it is a much bigger problem.

Kickstarter and Indiegogo profit from crowd funding, but they won’t take responsibility for it. They won’t quantify the risk, nor will they own up to it. But what we’re seeing is that failing them taking a stance, building in some protections for people who lose money, others will. Whether this takes the form of suspicious Internet factions refusing to believe anything is real, or litigious state attorney generals looking to make a point, the outcome isn’t going to be good for them either way.

[illustration by Brad Jonas for Pando]