May 2, 2016
What happens when a crowdfunding campaign fails? Many companies are finding that backers often resort to harassment and death threats, when their funding promises are not met. Recently, CBC Radio aired a piece explaining this downside to crowdfunding. They spoke with Chad Bayne, Osler’s Co-chair of the Emerging Companies Practice Group who said he doesn’t recommend crowdfunding to any of his start-up clients.
Crowdfunding has been seen as a successful aid to entrepreneurs who want to get their projects off the ground. However, recent case studies have shown that when projects fail the crowd often gets ugly.
The failure of Zano Drone is one example. This Kickstarter campaign raised more than $4 million. However, bad manufacturing caused crashes and most backers received no money back for their initial investment. Due to backer harassment the founder claimed to have suffered a mental breakdown.
Zano isn’t the only failure. A University of Pennsylvania study claims that between 9% and 10% off all crowdfunding projects fail. This has caused some sites to state more clearly that funders are backing a project and not buying a product. This line gets blurred, however, when people purchase shares in a company through a crowdsourcing medium. Though there are only a small number of cases, the fear of the unknown is still there.
“If you’re buying a widget it’s one thing, but if you are spending a couple thousand dollars to buy equity it’s a different story all together,” Chad said.
To hear the full CBC Radio story and learn more about the downside to crowdfunding click the MP3 below.
(If you are unable to view MP3 player above, click to listen)