As a nascent industry, crowdfunding is experiencing its fair share of ups and downs. Thousands of entrepreneurs continue to launch fundraising campaigns on sites like Kickstarter and Indiegogo, in pursuit of raising cash to fund their projects. This has propelled crowdfunding to be a multibillion industry as for many businesses, it's a way to kickstart the creation of new projects and products.
While we like to read about crowdfunding successes, where an entrepreneur raises millions of dollar in pursuit of building his or her dream product, not all projects end successfully. Some projects fail to reach their funding goals and others, even after raising the funds they set out to raise, struggle to deliver a product.
We've written before that some of the largest and most successful crowdfunding campaigns ever launched are suffering. As some high-profile campaigns are severely delayed. Kickstarter recently turned to an expert on crowdfunding, University of Pennsylvania's Ethan Mollick, to determine just how many crowdfunded companies fail to deliver the goods, on time or at all.
In March 2015, we invited a scholar from the Wharton School of the University of Pennsylvania to help answer this question. Professor Ethan Mollick is an expert in entrepreneurship and innovation who developed an independent study surveying nearly 500,000 backers about project outcomes and backer sentiment.
What Kickstarter Found
Prof Mollick is part of a select few researchers who've done deep work in the crowdfunding space. Kickstarter emphasized that this research, done in conjunction with the Wharton School of Business, was done independently and both parties were committed to publishing their results, whatever they were. Here's what the study found when it came to crowdfunding campaigns that failed to deliver:
- 9% of Kickstarter projects failed to deliver rewards
- 8% of dollars pledged went to failed projects
- 7% of backers failed to receive their chosen reward
- 65% of backers agreed or strongly agreed with the statement that “the reward was delivered on time
Here's how Professor Mollick summarized the results of his survey:
“Project backers should expect a failure rate of around 1-in-10 projects, and to receive a refund 13% of the time. Since failure can happen to anyone, creators need to consider, and plan for, the ways in which they will work with backers in the event a project fails, keeping lines of communication open and explaining how the money was spent. Ultimately, there does not seem to be a systematic problem associated with failure (or fraud) on Kickstarter, and the vast majority of projects do seem to deliver.”
Certain Categories Have Higher Failure Rates
Most crowdfunding campaigns that you'll find on Kickstarter or Indiegogo are in the technology and gaming categories. Some of these campaigns have raised millions of dollars of crowdfunded capital for their projects. The study looked at failure rates across various crowdfunding categories to see if there was a lesson to be learned there.
The research found that failure rates for projects across all 15 creative categories hover within a narrow range around 9%. Projects from some categories tend to fail less often than others, but there are no major outliers. Mollick also looked at how much money each one of these campaigns raised and found that projects that raised less than $1000 typically failed at a higher rate (about 14%) than the average (9% failure rate).
Lastly, Mollick polled survey respondents to get a feel for how their experience not receiving a product they crowdfunded impacted them. A failure wasn't enough to deter backers completely from crowdfunding (73% said they would back another project). But how the campaign creators handled the failure had a big impact on respondents.
- in 15-20% of cases, backers reported that failure was handled well by creators.
- About 13% of backers of failed projects reported receiving a refund or other compensation from the creator
- And 17% agreed or strongly agreed that they understood why the project failed
There were cases that failed and still, respondents were positively inclined to the campaign given how the creator handled the failure.