Posted Fri, Nov 22, 2013 by Xerin
If you’re not sure how crowdfunding works, it basically works like this. Someone has a really good idea, but they need money to make that idea a reality. Instead of limiting themselves to investors, they pitch the idea in a public forum and allow anyone to donate to their campaign so that they can raise the money to do something interesting. To sweeten the deal to the average Joe who is holds the cash, they offer rewards that range from the actual product they’re trying to produce to luxury gifts like travel accommodations and rare one on one experiences with big time personalities.
Now, the trick here is the keyword “donate.” Backers are not investors. They are not investing into it for a return. They are donating with the promise that if the project is successful, they will receive their pledge reward. Investors are given ownership of whatever they pour their money in, an actual tangible component. Whereas backers are given a promise, and that’s it. Many see it as pre-ordering, but it’s more like pre-ordering a promise more so than pre-ordering an actual game, object, or whatever.
The interesting thing about crowdfunding is that we rarely hear of the successes, because most of the successes happen at the local level, usually when a band or group of performers are asking for money to pay for costumes and venue space to put on a performance. In these scenarios there is a fixed cost for what they want to do (a venue is X amount of money to rent), so if they raise the money they can rent the venue, at which point the pledges get access to the show.
For technology and video games, it’s a bit different. There is an idea that can be translated into a product that can be sold at a certain time. This idea needs a lot of money in order to turn into an actual product. The issue though is that there is a lot of risk and difficulty in making it from point A to point B, even when a project is given tons and tons of cash.
Here’s an example. The Doom That Came To Atlantic City raised over three times its pledged amount. Three times! It had over a thousand backers and guess what, no one will be receiving anything but hopefully, maybe, a refund at some point. The good news is that some of the higher tier backers have received refunds and more may receive it at some point, but it’s an example of when a crowdfunding campaign has failed.
Now, there are some successes - most of which are by seasoned producers who usually have enough cash to make the game anyway but are looking for added features. These are my favorite Kickstarters, because there is a guarantee that a product will be produced. The crowdfunding is for the fans to decide if the added work is completely necessary and if so they can vote with their cash.
Realistically though, crowdfunding is a thing right now and it’s not going away. It’s up to us the consumers to be smart about where we throw our money. So moving forward, I suggest everyone do a lot of research before they allow a crowdfunded project to take their money, especially for the higher tiers. At some point though, I’m sure the industry will find a new and more interesting method to raise funding for lesser known ideas, but until then I have one thing to say: be safe with your money.