Even in Crowdfunding, It's Buyer Beware (Obviously)

Felix Salmon has a post out today that’s about a topic that’s become (for unknown reasons) near and dear to my heart over the past couple weeks. The focus of the piece is a project to create some sort of awesome LED lightbulb that Felix is pretty sure will never actually ship. He seems to know a lot about what it takes to make a brand-new lightbulb and makes a compelling case that is worth reading but, for our purposes, the final paragraph is the key one.

So my feeling is that both Kickstarter and the tech blogosphere should start being a lot more skeptical about the claims made in Kickstarter videos, where anybody can say pretty much anything. And anybody thinking about supporting Lifx should take a deep breath and just wait until the product exists, instead. It’s funded, now, so pre-ordering on Kickstarter doesn’t cause the product to get made, it just maybe gets you the product a couple of weeks earlier. And in return for that negligible upside, you’re taking on the risk of a huge downside — that you lose all that money entirely, with nothing to show for it at all.

I couldn’t agree more.

My feeling is that the evolution of the crowdfunding market will be towards more thoughtful investing by backers who have been burned themselves, have heard of others getting burned or who are not credulous early adopters and know that, actually, some things are too good to be true.

The evolution will also be to a more nuanced understanding of what crowdfunding actually is, since it’s becoming clear that it’s not a simple pre-sale mechanism. Felix alludes to this when he mentions the “negligible upside” and the “risk of a huge downside”. What you really get when you back a crowdfunding campaign is “exposure” to risks and rewards associated with the project: If the project comes to fruition then your reward is a discount to the retail price, early access to the product, some sort of thanks, etc. The flipside is the risk that the project doesn’t come to fruition and you lose everything. As with the sale of actual securities, the key is for the backer to have enough accurate information to be able to assess the risk and reward.