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Overambition is a common snag with Kickstarter campaigns, particularly when products need to be designed, manufactured and distributed. Ethan Mollick, an assistant professor at the University of Pennsylvania's Wharton School, analyzed 471 projects in the design and technology categories and concluded that 75% of the ones that promised to send backers physical goods in return for their pledges didn't meet their own deadlines.
In a worst-case scenario, backers could end up wasting their money on an impossible dream--or at least one that is impossible to fulfill on anything resembling the original timetable. In July 2011, a company called ZionEyez raised $343,415 from more than 2,000 individuals, most of whom pledged $150 or more in exchange for the promise of receiving a pair of eyeglasses with a built-in HD video camera. It planned to ship the first glasses that winter.
Then its plans slipped. And slipped. And then ZionEyez (which changed its name to Zeyez) stopped posting Kickstarter updates altogether. In September 2012, the company resurfaced and said it was seeking a million-dollar investment from traditional sources to proceed. It apologized to its backers for its crummy communications. It did not, however, offer refunds.
Kickstarter fiascoes are rare: only 3.6% of the creators in Mollick's study were forced to issue refunds or went incommunicado. But projects carry no guarantees. And when they go awry, Kickstarter won't help. The site, which receives a 5% commission on funds raised by successful projects, doesn't vet creators for their ability to accomplish their goals and doesn't mediate when they fail to meet them.
If Kickstarter sounds as if it's not ideally suited to dealing with the challenges of garden-variety start-ups, that's because it isn't. In fact, there are whole categories of projects the site prohibits, including some that would put it in more direct competition with venture capitalists, such as social networks and e-commerce sites. If there's a next Facebook or a next Amazon--or, for that matter, a next Kickstarter--it likely won't be funded via Kickstarter. As Chi-Hua Chien, a partner at the legendary Silicon Valley venture-capital firm Kleiner Perkins Caufield & Byers, reminded me, venture capitalists generally see gadgets of the sort that do well on Kickstarter as risky investments with limited upside. But he went on to say that "it's highly likely that Kickstarter-like funding will eventually be involved in funding a meaningful percentage of companies."
Other sites, of course, will be happy to go where Kickstarter won't--including Indiegogo, which already allows small businesses of all sorts to raise money. According to Funding Launchpad, there were 138 crowdfunding sites in the U.S. as of February; among the start-up-centric ones are CircleUp, Fundable and PeerBackers.
But the more crowdfunding starts to look like old-fashioned venture capital, the less relevant its success stories are. People who invest money in conventional start-ups expect a return on their investment but run a meaningful risk of losing it all. The prospect of opening the option up to the teeming masses is decidedly controversial.