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Is crowdfunding a scam?

posted Jul 17, 2014, 7:09 PM by Siamak Ebarhimi

Every time a new buzz word comes along, it's human nature for some to use it as an excuse to scam the public. 

This comes to mind in considering a fairly recent buzzword — crowdfunding. That's the word to describe when a company or individual puts a pitch on the Internet and waits for the money to pour in. CrowdFunding advertizing

Sometimes, these crowdfunding events sound legitimate. Consider the case of Cassie Wessely, 19, of Third Lake, Ill. She used a crowdfunding platform called Go Fund Me to raise $40,000 for her tuition at Vanderbilt University within four days.
Ms. Wessely had a pitch for money that pulled at peoples' heartstrings very effectively. According to Chicago's ABC affiliate, she "successfully completed her freshman year at Vanderbilt University despite losing her mother to suicide three weeks before she went off to college and her father losing his job. In dire straits about how she was going to pay for her sophomore year after her financial aid was canceled, the biomedical engineering student got creative: 'Please help me stay at Vanderbilt University.' Her goal was $25,000 and 24 hours after sharing her story on the GoFundMe website, she reached it. Four days later, people [had] donated more than $40,000." 
CrowdFunding marketing

In exchange for their generosity, Ms. Wessely will try to thank everyone who gave and she says she is "planning to pay it forward in her field of study in the medical community." 

In my view, Ms. Wessely's family tragedies sound terrible, and I am heartened that people responded with such generosity. Nor can I see any reason to doubt the truth of her story — although I am not sure how donors were able to verify its truth before giving her their money. 

However, some people are not beyond using a fake sob story to fool people into giving them money online. For example, last month, a girl in Mississippi who had been attacked by a pit bull in April claimed that a restaurant chain's Jackson, Miss., franchisee had barred her from getting service because the sight of her would disturb its customers. But later in the month, the girl's GoFundMe page — which had raised more than $135,000 — was suspended after the restaurant chain said they had not found evidence that the incident ever occurred. 
Kickstarter Marketing

I get emails all the time from people using something called Kickstarter to raise money for their startups. With Kickstarter, people read a pitch letter or view a YouTube video, give money to the startup, and hope that the startup will figure out how to build the pitched product and deliver them an early copy. 

To me, this does not seem like a great use of money. However, if the Kickstarter is very explicit about what will happen to the money, then the people who write the checks know what they are getting themselves into. 

But some people get confused. For example, Facebook acquired virtual reality system builder, Oculus VR, in March 2014 for $2 billion. Some people who had put money into Oculus VR's Kickstarter were angry because they felt that they had an equity stake in the company and deserved some of the money from Facebook. 

To be fair, I have seen some fairly clever and legitimate uses of this money-raising approach. For example, I interviewed a San Francisco-based designer of blue jeans called Gustin that used a crowdfunding approach to raise money from potential customers. If Gustin receives enough pre-orders, it collects the money from the customers and contracts with a company to make and deliver the product to those customers. 
Indiegogo Marketing

What's nice about this approach is that it takes away much of the risk to clothing designers of the traditional process, in which designers send their designs to manufacturers who produce the clothing and deliver it to retail stores a year later. If they guess right about what people will buy, they make a profit and if not they are stuck with huge piles of unsold inventory. 

Gustin's approach removes all those risks. 

On the other hand, the most ridiculous crowdfunding effort I have encountered came from an aspiring college student who emailed to ask me to help pay his tuition. In exchange for this, I was offered a chance to get a link to articles that he had curated. 

While I admired his gumption and the clarity of his proposal, I chose not to participate. What I find humbling is that I have so little insight into human nature that I would be completely unable to explain why some of the people who get his email will probably write him a check. 

I guess crowdfunding is OK — if people asking for money are honest about what they are offering people who write the checks. 

But it presents so much of an opportunity for fraud that eventually bad things will happen, and the government will have to step in to regulate it more effectively. Doing that right could take a long time. 

America is still figuring out how to regulate the stock market nearly 90 years after the roaring 1920s bubble that spawned the Great Depression. 
crowdfunding websites

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By David Khorram