How Crackstarter Reflects a Growing Trend of Failure in Crowdfunding

Roughly one month after crowdfunding platform Indiegogo launched the Rob Ford Crackstarter campaign, cofounder Danae Ringelmann has indicated that in the absence of any video the $201,204 raised will now likely go to a non-profit.

“It looks like the campaign owner is proceeding with Plan B,” she said.

The news came after Ringelmann and Indiegogo “broke their silence” over the Crackstarter campaign in a wide-ranging interview with Techvibes.

For close observers of Crackstarter, it comes as no surprise. Gawker, the media organization that is running the campaign, indicated on May 27 that, “Our confidence that we can consummate this transaction has diminished.”

The absence of any tangible evidence showing Toronto mayor Rob Ford consuming crack cocaine reflects a greater trend of failure among crowdfunding in North America. It also brings to the forefront the question of whether both equity crowdfunding and regular crowdfunding should be regulated.

Ringelmann calls Indiegogo an incredible validation platform to showcase community or customer interest. She said the world is seeing “the beginning of an evolution and the building of a true incubation platform.”

But the sobering fact about people giving their money to a person or group’s campaign is that more than one out of every two projects fail to meet their funding objectives, and funders don’t always get their money back. In fact, just 44 percent of all Kickstarter projects succeed in hitting their targets. What’s likely more alarming is the percentage of those campaigns that hit their funding target but fail to deliver the product that they promised (like Crackstarter).

Indiegogo’s percentage is thought to be within ten points of Kickstarter’s 44 percent by various bloggers. In an email Ringelmann offered this response: “Indiegogo doesn’t quantify this percentage because even if a campaign doesn’t reach its goal, it can still be considered a success.”

Those who donated money to Crackstarter may be getting a “perk” like an e-book, or even the warm feeling inside that their money is going towards a “Canadian nonprofit that addresses substance abuse issues,” but the fact remains that they didn’t give up their money for that. They gave their money to see Rob Ford smoking crack. But according to both Gawker and Indiegogo it is unlikely that a video will surface at this point.

In J. Maureen Henderson’s article, Is The Crowdfunding Bubble About to Burst?, Alex Nichols of Your Kickstarter Sucks offers the adage, “a fool and his money will soon be parted.” The popular site pokes fun at head-scratching crowdfunding campaigns like, “steampunk NERF guns, homebrewed Ron Paul video games or Brony documentaries.”

“Just hundreds of people who will gladly shell out money for bacon soap or whatever in an attempt to feel some sort of connection with this groan-worthy internet subculture,” Your Kickstarter Sucks’ Michael Hale told Henderson.

Some will knowingly contribute to ridiculous projects while others will unknowingly give their money to causes that, worse than a lottery, offer no guarantee or chance that a backer will receive anything tangible in return. To this Ringelmann responded that it comes down to individual choice and that “no one’s forcing anyone to fund anything.” Crowdfunding is not a transaction, according to the cofounder, but rather a “social experience.”

“I think one of the things we’ve been focused on is building a trustworthy experience for both campaign owners and crowdfunders as much as possible,” Ringelmann told Techvibes. “One thing we encourage all funders to do is make sure they connect with the campaign owners if they don’t know them or ask all the questions that they may want answered in order for them to feel comfortable funding.”

But the problem with a “no one’s forcing anyone” stance is when no amount of questions will prevent a scam. Although never an Indiegogo project, take, for example, the notorious case of Kickstarter’s Geode from iCache. Many of the 1,784 funders never received anything. One look at the angry comment section of this project can explain why a set of light regulations governing crowdfunding could be positive.

In this case, iCache succeeded in raising its goal by nearly $303,000. Within Kickstarter’s “All or Nothing” pricing scheme, backer money is only refunded if a funding goal is not reached. (Indiegogo has the option of “Flexible Funding,” where all funds are kept by the creator regardless of whether the project was completed or not. Its “Fixed Funding” model, which Gawker chose, returns funders’ money only if the goal was not reached.)

Kickstarter tends to shy away from social causes, and is only available to creators from the US and the UK. Indiegogo’s platform, assured Ringelmann, is “open and inclusive,” and is available to anyone around the world. With over 100,000 campaigns launched and millions of dollars contributed to projects it is the largest global crowdfunding platform in the world.

The Indiegogo cofounder is passionate about what she believes to be a revolutionary platform that will help the democratization of funding. A daughter to small business owners who “sweat it out for 30 plus years, never, ever being able to get a loan,” Ringelmann grew frustrated with fundraising inefficiency. She noted a pivotal moment before launching the company in January 2009, when she couldn’t secure funds for a theatre director, “simply because I lacked knowing the right people.”

Ringelmann’s thoughts on equity crowdfunding, still illegal for the majority of North Americans, offer a glimpse into how crowdfunding companies are lobbying for its legality. She points out that outdated laws were put in place 80 years before the advent of the internet, protecting investors while completely blocking others out at the same time.

“Equity crowdfunding is really exciting from our point of view because it’s a natural next step for the industry,” she said. “Financing should be democratized and people should have the power to fund what matters to them whatever that may be and however they want to fund.

But even the most sophisticated venture capitalists and angel investors still have trouble netting consistently solid returns. Investing, whether its small- or large-scale, is not easy.  

As one Canadian investor recently wrote, “if we start to see people putting up large swaths of their retirement savings in the hopes of funding the next Google or Facebook, this will end in a disaster.”