Crowdfunding: risky but rewarding
Last month, Amazon pulled the plug on the e-book crowdfunding site unglue.it and a number of other similar sites. Amazon says it is no longer able to support certain crowdfunding or social fundraising sites, despite the wild success of Kickstarter, which was built on Amazon’s platform. (Kickstarter still utilizes Amazon.com payments, however.)
But why? Although standout campaigns have served as great proof-of-concept for crowdfunding’s worth, like the Pebble wristwatch raising $10.2 million on Kickstarter seemingly overnight, the challenges that come along with the medium are almost too overwhelming to enumerate.
To name a few:
- Fraudsters capable of producing a slick video or business plan can now dupe thousands of people into buying vaporware or investing in a ghost company;
- Incompetent entrepreneurs can fail to deliver on their promises, spending millions of dollars of other people’s money in the process;
- Unsatisfied customers or investors can dispute their purchases or investments, amassing huge liabilities for the businesses, platforms, and payment processors;
- Insecure and non-compliant platforms can risk cardholder data, misappropriate funds, and violate federal and state statutes.
I can’t necessarily blame Amazon for wanting to avoid the regulatory and compliance issues that come along with processing payments for other platforms. Amazon Payments, Google Payments, and PayPal (eBay) were built to support merchants within those respective marketplaces. It does not make sense to shift their focus to a more complex and labor-intensive niche, regardless of its promise.
And yet as Amazon moves away from the crowdfunding arena, companies like WePay, for which I’m the chief executive, as well as traditional merchant processors like Braintree and Chase Paymentech, are moving toward it to capitalize on this massive opportunity. Over the past year, the number of crowdfunding sites has mushroomed: There are platforms that cater to medical expenses, launching startups, paying for group activities, and supporting Jewish enterprises. There are even crowdfunding sites raising money on crowdfunding sites, and they all need back-end payment support. Since processing payments is our primary business, unlike Amazon, the rewards far outweigh the risks.
While the economic power of the crowd continues to rise and the opportunity begins to unfold, there will most certainly be missteps, which will pose a real threat to the model itself. Whether they’re enough to seriously threaten the movement or just slow it down, only time can tell.
And with missteps will come additional scrutiny. It’s likely that government will try to curb the fallout with additional statutes, but this is a problem better solved by the crowd than by the SEC. The Crowdfunding Accreditation for Platform Standards (CAPS), for example, is an independent initiative by Crowdsourcing.org to promote the adoption of best practices for the operation of crowdfunding platforms globally. It will be some time before we know whether self-regulation is effective.
The capitalist in me believes that democratizing fundraising and investing will make the market for early stage projects and ventures more efficient, which is why we think the risks are worth taking. It’s a huge opportunity and a phenomenal boon for our economy and its democratic roots. But there are challenges ahead, so let’s keep sight of the opportunity as we endeavor to solve the problems it creates.
Crowdfunding is off to an amazing start, but it’s just the beginning. The way businesses, causes, and projects raise capital will dramatically change. It has already.
Bill Clerico is the CEO of WePay, an online payments company that provides an API for facilitating payments on crowdfunding platforms and marketplaces. See https://www.wepay.com/payments-api for more information.