Since the advent of the Internet, many new terms, words, and phrases have come to life that never before existed. One such phrase is “crowdfunding,” a term that describes a collective of people coming together to donate money to a cause over the Internet. Thanks to websites such as Kickstarter and IndieGoGo, anyone can ask for any amount of money from any audience. Projects needing financial backing can be anything: board game production, creating a movie or YouTube series, charitable cause, and more.

Why is Crowdfunding so popular?

It is now harder than ever to start a business or project. Budding entrepreneurs need a lot of help, or they don’t stand a chance. Crowdfunding takes financial backing out of the hands of executives, bankers, and other intimidating and knowledgeable figures and into the hands of anyone with money. Anyone with a credit card can donate to any crowdfunding beggar.

This takes all of the responsibility off of one person and spreads it to hundreds or thousands of backers. Instead of losing large sums of money from lending money to a failed endeavor, the common person who donates to a crowdfunding project might only lose $10. Risk isn’t a factor at all when one decides to give money to a crowdfunding project – someone giving a loan would have to guesstimate the potential of a project, whereas the “crowd” knows that they want the product being produced. With interest already solidly known, it’s much easier to determine the potential success of a crowdfunding project.

Thanks to many social media outlets, crowdfunding enterprises can gain viral attention. Traditional charity causes have to spend money on advertising and other expenses before they can start earning money. As long as crowdfunding stays online, word can spread without losing any funds.

What are the drawbacks?

Unfortunately, there is less accountability with a crowdfunded endeavor. Kickstarter claims that the founders of individual campaigns are legally required to complete their promised project. However, Kickstarter mainly serves as a platform for the transactions, and rarely gets involved. Money goes straight from the donator’s account into the campaign founder’s Amazon Payment account.

On Kickstarter, campaigns that do not reach their monetary goal are required to refund their backers. On IndieGoGo, projects can be set to flexible funding, meaning that founders are under no obligation to return donations if they don’t meet their goals. Both sites have a high rate of failure: on Kickstarter, only about 46% of projects met their objective by the set deadline, and IndieGoGo has about a 9% success rate.

Even project founders who do acquire their target amount can fail. Multiple Kickstarter beneficiaries have gained attention from news outlets for letting down their backers. Seth Quest received full backing for his product “Hansfree,” an iPad stand with a flexible neck. However, Quest eventually had to file for bankruptcy and never produced his product. His followers were angry and disappointed, and one even filed a lawsuit against him.

Unfortunately, this problem is becoming more common with crowdfunding. Anyone can create a campaign, including novices and amateurs whose dreams are bigger than their actual knowledge. A few experts can be found asking for funding for an independent project: actor James Franco is asking for $500,000 to help create a series of films on IndieGoGo. But the Hollywood rebels are few and far between.

Conclusion

Crowdfunding can be a great option for projects and charitable causes that can’t find financial backing through another source, for whatever reason. Amateur entrepreneurs can get their first real break. Those who wish to donate to charitable causes can see all of their money given to individuals, rather than giving to a corporation that takes a part of it to cover their expenses and gives the rest to someone you’ll never see.

Ultimately, donating to a crowdfunding project requires very little risk on the part of the potential backer. Many have been upset when the campaign they donated to colossally flops, but very few have lost large amounts of money from it. In the case of the lawsuit against Quest, Neil Singh had only given Quest $70, which was never returned.

Losing any amount of money to a novice who is unable to live up to his or her promises is frustrating for anyone. Fortunately, everyone has the choice of which campaign they want to donate to, and how much.

Sources:

Bindley, Katherine. “Failed Kickstarter Projects: Where Does The Money Go?” http://www.huffingtonpost.com/2012/09/05/failed-kickstarter-projects-money-go_n_1858301.html. (5 Sept. 2013).

Tickle, Glen. “$122,874 Kickstarter-Funded Board Game Cancelled, What Happens to the Money?” http://www.geekosystem.com/kickstarter-board-game-failure/. (5 Sept. 2013).

Holt, Kris. “There’s a 9 in 10 change your IndieGoGo fundraiser will fail.” http://www.dailydot.com/news/indiegogo-kickstarter-failed-funding-goal/. (5 Sept. 2013).

Markowitz, Eric. “When Kickstarter Investors Want Their Money Back.” http://www.inc.com/eric-markowitz/when-kickstarter-investors-want-their-money-back.html. (5 Sept. 2013).

Zuckerman, Esther. “James Franco’s Celebrity Crowdfunding Is Actually Tolerable, Believe It or Not.” http://www.theatlanticwire.com/entertainment/2013/06/james-franco-celebrity-crowdfunding/66339/. (5 Sept. 2013).