Crowdfunding and the Future of Small Businesses in the Digital Age
By: Clayton Davis, J.D.
The internet has ushered in a golden age of global communication. It has connected people from all walks of life in ways that would have been impossible just a few decades ago. However, as is the case with nearly every technological advance throughout history, the internet has its drawbacks. While many people have correctly claimed that the internet has revolutionized how businesses function, this revolution has not been entirely positive. Just as we have begun to see the drawbacks of social media, it seems that we are also seeing the downsides of moving small businesses online. And nowhere are these downsides more apparent than in the realm of crowdfunding.
Crowdfunding, which has been popularized through platforms like Kickstarter and Indiegogo, is the practice of funding business ventures through small “investments” from large numbers of people. Crowdfunding is a concept that has revolutionized the way that small startups receive funding. And yet, despite its popularity, or perhaps because of it, crowdfunding has a tendency to be taken advantage of by scammers looking to make a quick buck.
Writing for Consumer Reports, Catherine Fredman explains that the problem with crowdfunding is that, “because crowdfunding is built on trust, it’s ripe for fraud.” Fund Me or Fraud Me? Crowdfunding Scams Are on the Rise. (2015). Fredman goes on to detail how a man named Erik Chevalier raised more than $122,000 for the production of a new board game. However, after more than a year of “production,” Chevalier announced that the project had been cancelled and, despite promising to refund his backers, Chevalier took the money that he had raised and, according to lawsuit filed against him by the FTC, spent it on unrelated personal expenses. This is hardly the only scam made possible by crowdfunding. In 2013, Quartz posted an article detailing a Kickstarter scam, which was narrowly averted because a group of filmmakers working on a documentary about Kickstarter noticed the campaign’s suspicious activity. Kickstarter almost enabled a $120,000 fraud, and it’s not the first. Christopher Mims. Quartz. (2013). And while fraud is not limited strictly to the internet or to crowdfunding, the internet is not nearly as regulated as it should be and sites like Kickstarter have not taken it upon themselves to crack down on scams.
It is perhaps unsurprising that sites like Kickstarter have become something of a haven for scammers given that, “the site’s laissez-faire attitude, which has allowed an incredibly diverse range of projects to debut there, also makes it potentially attractive to fraudsters.” Mims. Indeed, it turns out that “rather than vetting projects on its own, Kickstarter relies on its own users to report suspicious campaigns.” Mims. This problem is compounded by how difficult it sometimes is “to tell the difference between a fraud and a well-intentioned project whose creators just never got their act together.” Mims. One Kickstarter campaign that seems to exemplify this difficulty is that of Gravity, a company that sells weighted blankets. Gravity’s Kickstarter campaign was extremely successful, raising nearly $5,000,000. However, looking at the comments on Gravity’s Kickstarter page reveals dozens of backers complaining about never receiving the blanket that they had been promised as a reward for their contributions. Many of these comments have been posted within the last year, despite Gravity’s Kickstarter page claiming that backers would receive their blankets by October of 2017. And many of the backers who did receive a blanket complain about the its poor quality (despite a Gravity blanket being priced at nearly $300). So, one might ask, “how can I tell if this campaign was a scam or just a company that faced unexpected difficulties in manufacturing and delivering its product?” Unfortunately, it is likely impossible to say for certain. Although, it is telling that, like Erik Chevalier (the board game scammer noted above), Gravity’s founder, John Fiorentino, has moved on to new projects, seemingly without addressing his backers’ complaints.
Unfortunately, Kickstarter’s lackadaisical attitude towards monitoring the projects posted on its site has hurt more than just backers. In fact, Kickstarter does not require that its “creators” actually come up with an original idea, or even a fresh take on an old idea. This makes it incredibly easy for media-savvy people to find niche products online and use Kickstarter to market those products to a larger audience, without crediting the products’ actual inventors. It seems that this is exactly what John Fiorentino did with Gravity. Weighted blankets were first sold in 1997 by their inventor, Keith Zivalich of the Magic Weighted Blanket, and have since been sold by a number of companies online. Despite this, Gravity claimed in its Kickstarter campaign that, while “weighted blankets are well known within the medical community, where they’ve been used as a natural stress reliever for decades . . . society at large hasn’t had access to them.” It’s not clear what Gravity meant by saying that society at large hadn’t had access to weighted blankets when they had been available online for 20 years (and it should be noted that Gravity really didn’t address availability concerns by selling weighted blankets at a higher retail price than many of its competitors). This is a real problem for actual product creators, who may be hesitant to sell their products online, knowing that there are platforms that would allow others to profit off of their ideas.
After reading all of this, one might ask, “so what has Kickstarter done to prevent people from using its platform to scam backers and inventors in the future?” And, if you did ask that, you wouldn’t be alone. In fact, Kickstarter seems to have received so many questions/complaints since it was founded in 2009, that it posted a blog titled “Accountability on Kickstarter” back in 2012. In that blog, Kickstarter posted several questions that it had received, including “Is a creator legally obligated to fulfill the promises of their project?” Its answer was less than encouraging. Kickstarter responded by posting this link, which shows a text box that all creators see before they can post their idea on Kickstarter. While it does say that creators are required fulfill all rewards or refund any backers if the rewards cannot be fulfilled, it is less clear on what happens to creators who refuse to do so. The post says that creators could face legal action on behalf of backers, but, given that, as mentioned above, the FTC had to sue Erik Chevalier for his scam, it seems that Kickstarter will not be the one to take that legal action on behalf of backers. As noted earlier, Kickstarter generally relies on backers to flag potential scammers, so it makes sense that Kickstarter would also rely on backers or the government to file lawsuits against those scammers. And lets not forget that Kickstarter does not have any rules in place to prevent lazy entrepreneurs from stealing existing ideas and marketing them as if they are new.
This is not to say that crowdfunding is a bad idea per se. As noted above, crowdfunding sites have revolutionized the way that startups receive funding for their ideas. Sure, there have been problems, but those problems are hardly irreparable. To address the problem of creators not fulfilling their promised rewards, Kickstarter could require that creators settle all issues that they may have with their backers before posting a new project on Kickstarter. This would have forced Gravity’s founder John Fiorentino to address the complaints of his backers before moving on to a new project, while leaving the backers of his weighted blanket without their promised rewards. In addressing the issues that small businesses have faced due to its platform, Kickstarter could perhaps require that “creators” actually come up with an idea of their own, rather than allowing them to remarket existing products. Such a rule would have prevented Gravity from profiting off of weighted blankets, which were first sold in 1997 (two decades before Gravity launched its Kickstarter campaign) by the product’s actual inventor, the Magic Weighted Blanket.