What Happens When A Kickstarter Project Kicks the Bucket?

New questions are being asked about how much accountability the crowd-funding website Kickstarter should have when things go sour.

The site, launched in 2009, is a crowdsourced lending site designed to help amateur inventors, artists. innovators or organizations receive funding for their ideas. Donations usually come in relatively small monetary amounts from average citizens, as opposed to traditional loans or financing from large investment firms.

Since then, Kickstarter said that almost 30,000 projects, including video games, books, performances and documentaries have been fully funded by more than two million people.

Questions Raised

An article on NPR this week highlighted some of the times that those ideas didn’t come to fruition. It gave examples of Kickstarter projects that met their funding goals but have since been unable to fulfill their commitment, sometimes due to a lack of experience or the development process being slower than they expected.

Since Kickstarter is not responsible for the development of a product, and does not have a system in place for refunding incomplete projects, the article also questioned how far the site’s accountability should reach, and if it should be responsible for refunding investors if a project fails.

Kickstarter requires projects to fit basic requirements, including having a clear goal and complying with the “prohibited content” clause. The creator is also legally obligated under Kickstarter regulations to fulfill its promise. Beyond that, Kickstarter trusts its backers to determine whether or not their investment will be a safe one.

Think Before You Buy

That failure rate is something that any Kickstarter investor should consider, especially on a platform specifically designed to showcase ideas from amateur or unexperienced entrepreneurs, said Darren Cleveland, president of Start Up Consultants.

“Kickstarter is bringing new ideas to the market that may never have gotten off the ground,” he told the E-Commerce Times. “Usually, nine out of 10 new ideas are doomed for failure, and that’s not due to a lack of ideas or creativity, but due to a lack of execution. The biggest challenge is funding, end of story, period. So Kickstarter is fast-tracking that process, but there is still going to be a high rate of failure there, even if they reach their funding.”

Kickstarter did not respond to our request for further details.

Evolving Models

The recent coverage surrounding the lending site has not unearthed any hidden truths about Kickstarter’s practices, but it has called attention to the potential failure rate associated with backing Kickstarter campaigns. That shouldn’t put a dent in spending for the site’s current backers, however, said Cleveland.

“This won’t hurt Kickstarter in the short-term,” he said. “Many of these projects are successful and people are getting their products, they’re happy and they feel like they’re socially responsible. Most people haven’t really seen that typical 90 percent failure rate that usually happens in this business.”

That could soon be changing, though, he said. With changes from the JOBS Act that could change the way sites such as Kickstarter can award equity, the crowd-funding scene could be in for a change, said Cleveland.

“We’re still in the infancy stage with these sites,” he said. “We’re not talking in huge numbers yet. But in any other instance, if some business were to lose millions of people’s money, there is recourse. Right now, people are still relatively happy. But the fact is that there is a high failure rate in general with new projects, and there will be legislation to come.”

With the potential headaches and legal wrangling that would accompany increased regulation, independent start-ups such as Kickstarter and Indiegogo might be replaced by similar companies with more experience in financial transactions, said Chris Barsness, senior associate at Barth Calderon.

“With all the liabilities and the fact that these sites are almost acting as a securities broker in some sense, in the long term there will probably be a handful of companies that come in and can handle that professionally,” he told the E-Commerce Times. “Kickstarter does things pretty well, but it might be one of the smaller companies that get phased out as larger companies can come in and do these complicated processes properly.”