Entrepreneurs Beware: Crowdfunding Is Not as Simple as We Are Lead to Believe

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Entrepreneurs Beware: Crowdfunding Is Not as Simple as We Are Lead to Believe

In August 2014 Coolest Cooler raised $13 million on Kickstarter, making it the second-most successful campaign in the crowdfunding site’s history. But more than two years later, only about one-third of the product’s backers had received the product, and the Oregon Department of Justice was investigating the Portland company after hundreds of consumer complaints.

While backers remained empty-handed, the high-tech take on the traditional cooler (it includes a built-in blender, USB charger and cutting board among other perks) was sold on Amazon to bring more cash into the business. CEO Ryan Grepper said the Amazon sales were necessary to “keep the lights on,” and to get the product to every Kickstarter backer.

According to the company, production hit a major snag when the factory which manufactured the blender’s motor went on strike. Backers were asked earlier this year to shell out an additional $97 on top of the original $165 to $225 they initially paid to get the product within three months, while Amazon shoppers could get the product immediately for $400.

For entrepreneurs mulling over the possibility of a crowdfunding campaign, this story begs the question: If you were one of Coolest Cooler’s original backers, would you ever do business with them again?

In the early days of crowdfunding, the proposition seemed like a no-brainer. Conceive of a product, an art installation, a condiment, or anything else that requires cash to get off the ground, put it on Kickstarter or Indiegogo and wait for the money to come. Some failed campaigns have revolved around products that might appeal to the paranoid or the technology obsessed: a nuclear bunker, internet-enabled toothbrush that records your dental stats, a saliva scanner to see if anyone has spit in your food. Even the ridiculous ideas – all received at least $1 pledged — have potential fans.

But for a serious but novice entrepreneur, there is potential risk in crowdfunding campaigns. Stage one – getting funded – is a significant hurdle, but it’s far from the last one. Coolest Cooler demonstrated it needed more than $13 million to get a vacation accessory to 56,000 people who backed the idea. Conceiving of a product is just the first step, while fulfillment is entirely different, from the crowdfunding process itself to continuing to build and grow the product after the campaign concludes.

In order to succeed, the campaign needs attention, which usually means tapping into the goodwill of an established list of contacts to get things going. Presence on the crowdfunding site alone won’t generate the interest needed to get backers; the sheer number of projects prevents that, but an existing network of loyalists can pony up funds and get the word out. A modest funding goal can make the project look like a success within the first few days, enough to entice industry media to write about it and generate buzz.

But all of that promotion has a flip side: once the project has attention, it risks loss of consumer trust if things go south. Even though no Kickstarter backer is guaranteed a return, few would forget they have shelled out real cash for an item they haven’t received, while it’s readily for sale elsewhere. Indeed, Coolest Cooler received some sour reviews on Amazon from Kickstarter backers still waiting to blend up some margaritas on the beach while charging their phones.

Product fulfillment is a challenge even for experienced entrepreneurs and rarely comes without some bumps along the way. Delays and unanticipated costs, while they may not be par for the course, are not unusual. Managing cash flow can be difficult for crowdfunded entrepreneurs who just didn’t ask for enough money up front and underestimated how much they would be out-of-pocket for the entire manufacturing process. Grepper reportedly told Coolest Cooler backers in an update that the initial contribution price was too low.

Back in 2012, Fuse Chicken unexpectedly raised $212,265 on a goal of $9,800 for a flexible iPhone tripod and docking station, Une Bobine. The company had established manufacturing contacts in China, but had to spend more than anticipated on injection molds as they fulfilled the product variations they promised as part of the campaign. The third party freight company failed to promptly deliver the completed inventory back to the US. When the company decided to sell overseas, it had to wrestle with complex tax agreements and revise its pricing structures accordingly. One wholesaler undercut them by reselling the product direct to consumer.

Despite the hiccups, Une Bobine is one crowdfunded product that was a success from start to finish. That same level of success might not have been achieved if there were different people behind the scenes without similar levels of contacts and experience. Fuse Chicken’s Jon Fawcett demonstrated an essential flexibility: when his third party provider failed to move the product from China to Ohio, he called UPS and did the job himself. While the first set of inventory did eventually arrive, it was only as he was receiving his fourth pallet of product he’d arranged for himself. This was despite paying extra to the third party company to get the shipment moved more quickly, essentially proving it’s not always possible to just throw money at a problem.

An entrepreneur who has never seen a product to market has a significant learning curve. When the money comes in through a crowdfunding platform, that learning curve is played out in the public eye. In many cases, companies can recover from the loss of face. Few failures are as infamous as Coolest Cooler, and the personalities behind products are largely hidden from public view. Backers unhappy with their experience might think twice before participating in another crowdfunding campaign. But they are unlikely to hold a grudge the next time the entrepreneur creates a product.

For products with little funding to either continue research and development or to manufacture an initial line off of a prototype, crowdfunding may be the only option. Kickstarter, in a post entitled Kickstarter is Not a Store, announced guideline changes back in 2012 that require creators to “show their work,” so backers know when a product is still in the development stages or ready to be mass produced. Product design is only one element of the entire process, however, so entrepreneurs anxious to hit the market might want to do their research before they make promises that are difficult to keep.