Avoiding the Pitfalls of Crowdfunding: From a Donor's Perspective

Now that crowdfunding is becoming such a common way to fundraise, it’s time to discuss the potential pitfalls of this phenomenon from the contributors standpoint.

First, there are two potential things that can happen to your money when you give to a crowdfunding action and it doesn’t fully fund. One, they give back everyone’s money and that’s the end of it. Two, they don’t give back everyone’s money and assumedly, they use that money to forward their cause. It works differently with different campaigns, so make sure to read the fine print.

Giving to a crowdfunding campaign is equal parts philanthropy and investment. But be cautioned:  donating for perks is not like shopping at Amazon. In some cases, those perks are so tightly tied to the success of their campaign that you may never receive your perks at all, receive them years after the fact, or maybe receive them right away, depending on how tied they are to the campaign. Don’t expect to immediately receive those mp3 files that you paid for if you contributed to pay for studio time for that friend’s band. You’re looking at between 6 months to 2 years on that one.

I know if you’re considering giving to a crowdfunding campaign, you’re probably already invested in the campaign one way or another, through friendship or emotional investment. Something has touched you about the need, you want to see someone you know succeed. That’s the way it goes. Even complete strangers give to crowdfunding campaigns because of a common bond or emotional attachment.

That said, you’re investing in someone’s success or failure. And if they fail, you lose a little bit yourself. If they succeed, you can tell your friends that you helped fund that film, that record, that event. It’s pretty cool when you can hold up that CD or movie or what-have-you and say you helped get it made.

The flipside is that it’s not awesome when a crowdfunding attempt fails. It’s not earthshaking in many cases. Your money gets refunded and you go your own way, having had your money tied up for no good reason for a period of time. If it’s one of those where you don’t get your money back, it’s a little more painful. You could look at it like any bad investment, but either way, it stings.

So how do you tell whether the risk is worth the investment? In the charity world, you can look up ratings for charities and see what percent of your contribution will likely get to the end user and how much is tied up in overhead. There is none of that disclosure with most crowdfunding campaigns. These things are grass roots and oftentimes not well thought-out. For instance, the woman who was asking for donations for her daughter who broke both of her feet jumping off her roof into a pool and missing. Oh, the backlash that came about because people considered her “charity” unworthy.

 Girl Breaks Ankles Jumping Off Roof, Missing Pool

First: you are the only one who knows your risk tolerance. Some don’t care if they have their investment returned on at all because the cause is so worthy that perks would be unnecessary. Some are so infatuated with that perk: a rare, collectible item or unique experience of a lifetime is often offered for large donations. I might stop reading the fine print if I could spend $300 for a half hour interview with Bruce Campbell. You need to know how your money will be handled in case that the campaign fails. Heck, don’t you want to know what your money will be used for either way? I won’t discourage people from giving to crowdfunding campaigns. I’m just advocating that you read the fine print.

Second: read the refund policy first and foremost. I know people will scream that it’s a charity and you should give for the right reasons, but crowdfunding is often for those things that fall into a grey area. It’s not exactly charity, it’s not exactly investment, not exactly sales or marketing. You need to know if you’ll be expecting a refund or nothing once the crowdfunding campaign fails, if that is its destiny. For those that will be keeping your money if they don’t fully fund, what happens to your money at that point. Is there an alternative to what they were trying to do in the beginning?

Either way, don’t be counting on hearing anything about what your money went for. It could have gone to a depressingly drunk bender for the organizer and it would just be the way things go. If you’re not keen on paying for a drunk bender or Hawaiian vacation for a stranger, it might be good to avoid giving to a non-refundable crowdfunding campaign.

Of course, assuming that you’re not one of the gonzo ones who isn’t phased about losing a lump of cash in the name of charity.

Third: watch what people are saying in the comments. You might be tipped off early that a campaign isn’t what you think it is.

Fourth: don’t be swayed because the organizer is a friend or industry peer. Friends can fall on their faces too. And sometimes, they drag you down with them. I remember the first time I lost money on a friend’s unique promotions opportunity. It way predated crowdfunding, but I got suckered and I lost big. Walked away and didn’t look back.

Fifth: your perks will arrive when they do. No sooner. The most successful crowdfunding campaign I gave to still took two years to produce the goods. Now, I wasn’t upset about the wait, the final product was worth it.

I’m no fan of Marco Collins, but here’s an example of a successfully funded crowdfunding campaign. Note the fact that certain perks include digital downloads of a film that’s not completed yet. Those perks will take a while to get to you. Also: read through and see where the money goes if the campaign doesn’t hit its goal. While I’m not invested in this project enough to have given, this is a good example of a well put-together campaign that I would consider trustworthy enough to give to.

Marco Collins Kickstarter Success
More about Collins Film Project

Now, here’s one that you might have wanted to read a little more closely. Awesome event, but is this Con a con?

ZomBcon Indiegogo Page
More on ZomBcon Indiegogo Campaign

You win some, you lose some. Being informed of the hows, whens and whats of a crowdfunding campaign will help you direct your money in more useful and successful ways. Remember that your risk tolerance is not the same as others. A non-refundable crowdfunding campaign is less likely to succeed simply because the risk tolerance of most who would give is low. Even if one or two big spenders step up, there’s no guarantee of success.