Plenty has changed this century, particularly in the last decade or so. The rapid rise of the internet has created a new linked planet where we can reach out from our home laptops and affect action all around the globe. Truly, it’s a strange and wonderful new world.
On the commercial side there have been plenty of changes, as well. One of the things I’ve watched with fascination over the past five years has been the proliferation of crowdfunding sites. Eager entrepreneurs hope to get the word out about their start-ups on sites such as Kickstarter or Indiegogo, asking for people to invest in them and the company.
For those not familiar with the premise of crowdfunding it operates basically in one of three ways — as donation, debt or equity crowdfunding. With donation crowdfunding, those who believe in a company or entrepreneur’s message can give money with no expected return. With debt crowdfunding investors receive their money back with interest. And with equity crowdfunding people invest money in a business to gain a share of the company in return.
Part of the equity mentioned earlier can even be an advance copy of whatever product is being manufactured. Typically, those who are early crowdfunding investors get a discounted pre-production price and the opportunity to be among the first in the open market to have the new product.
This is great when the product and the company are the real deal. The Pebble smart watch got its start via crowdfunding, and recently even a movie adaptation of the cult television show Veronica Mars got funded (they were hoping to raise $2 million but ended the campaign at $5.7 million.)
But then a company like Skully comes along and ruins it for everyone. Skully was a start-up tech company that promised to build the motorcycle helmet of the future. The company’s vision of the modern helmet included heads-up information projected on the inside of the flip-down visor, information that included speed, RPM, GPS satellite intel and even a rearview camera. Speaking as a motorcyclist, I was excited. This promised to be revolutionary.
But as I followed the company I began to see red flags popping up. Despite raising more than $2 million dollars, deliveries of the $1,400 helmet of the future were delayed over a period of two years. Finally, the company declared bankruptcy amid lurid allegations by a former executive assistant who worked with brother-owners Marcus and Mitch Weller. In a lawsuit filed last week, Isabelle Faithhauer alleges that the brothers squandered nearly $2.5 million on “personal expenses” such as: pricey Lamborghini rentals; a Dodge Viper; a second Dodge Viper to replace the first one that was wrecked; a $2,000 tab at a strip club; and the brothers’ rent on their personal apartment in San Francisco. Then there was the $80,000 in cash to an unnamed and unidentified “co-founder” and the thousands spent on artwork.
And what of all the investors? Short answer — they’re out of luck. Sure, they can engage the owners in a civil suit but that would surely cost more than the $1,500 or so each person invested. That’s the thing about crowdfunding: It’s a risk. These are companies that generally do not want to get the capital from recognized financial institutions for a myriad of reasons. Instead, they reach out to the public which results in fewer audits and less oversight. It’s truly a case of investor beware.
While crowdfunding is here to stay it is by no means a slam dunk for the entrepreneurs or the investors. As the Skully case tells us crowdfunding is still a gamble, but it can be one heck of a wild ride.
Rodney Williams is the managing editor for The Anna-Melissa Tribune, Van Alstyne Leader and Prosper Press. He can be contacted at firstname.lastname@example.org, email@example.com or firstname.lastname@example.org. Follow along on Twitter with Rodney Williams@GateHouseWeekly.