Crowd funding sounds good in principle and is generally a good concept that allows the community to select the investments instead of just relying on institutions such as funds and banks. However, like any other investments there are risks involved.
Crowd funding is basically raising funds for a project from a lot of people globally, usually through the internet platforms like Kickstarter. Due to the massive size of the crowd and the generally small amounts of money per contributor, funds can raise significant amounts of money within a short period of time.
One of the best known ones in Singapore is Pirate3D. They are the people behind the affordable 3D printer Buccaneer. The project is so attractive in terms of pricing as the price is listed as $347, which is much cheaper than most other 3D printers that cost thousands of dollars. In fact, they were so popular they raised more than $1.4 mil from over 3,500 people in June 2013.
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However, they started to fall behind in schedule and could not deliver. There were even features which were promised if the funding reached over $1 mil but later on these features were left out. To get these features, the buyers would have to pay an additional $100 over the original $347 price tag.
You could imagine the backlash from this. Worse still, when people asked for a refund, they made a mistake in calculating the refund date and told some of them they would take as long as 3 years to get their refund back. So let’s take a step back and look at why crowd funding can be a risky venture.
No Existing Products
For most crowd funding projects, they do not actually have the product available yet. So there are actually many issues that can come out from there, such as whether they can meet the delivery schedule, whether they can meet their costs and so on. Worse still, they may not even have a prototype, all they have is an idea. Whether the product is viable is also another issue.
Under Budgeting and Costs Overrun
To attract investors, crowd funding projects usually list their products at very attractive prices. For example, other commercial 3D printers are selling at thousands of dollars while they price the Buccaneer at only $347. Even if the calculated the costs of components and labour, have they factored in overhead expenses and buffered for potential cost overruns? Inflation is another big factor as they usually calculate their costs on existing prices, but during production later, the prices may have changed significantly.
No Legal Recourse
As crowd funding is relatively new, there are few regulations governing this. There is also nothing to stop them from taking the money and just declaring it a failed project. This is especially the case if you are funding an overseas project.
Risks for crowd funding are very significant and there are many cases where the money goes down the drain. Anybody who participates in crowd funding should be prepared to they could lose all their money and not get anything in return.