The biggest risk for crowdfunding is "snake oil"
The biggest prospect for crowdfunding is the creation of a viable, supportive and transparent crowdfunding ecosystem that would support entrepreneurs on the way to realizing their endeavors. But in this article we will take a look at the unpleasant side of business: "snake oil" (snake oil, a quack drug).
According to Wikipedia, a snake oil seller is a person who intentionally sells counterfeit goods or is himself a crook, fraudster, charlatan, etc. Perhaps one of the most prominent representatives of this type is the father of the co-founders of the American oil giant Standard Oil, John Rockefeller Sr. A former lumberjack and traveling salesman unexpectedly declared himself a "botanical doctor" and began selling miracle drugs popular at that time. Such people can generally be described as promising a lot, but giving little.
In the nascent crowdfunding industry, there are three interest groups that may turn out to be "snake oil sellers":
- Project creators are people who attract funding to implement their ideas.
- Consultants/Service providers are specialists who help people attract finance.
- Funding portals are crowdfunding websites that provide a platform for the exchange of funding.
Project creatorsProject creators can, without realizing it, turn into "snake oil sellers" through several mechanisms.
If they fail to convince a large number of people that their project is worthy of support, as a rule, the reason for this is the shortcomings of planning and implementing the campaign strategy. Or, even worse, they don't even work through their project to make sure it's viable. Before the start of attracting financing for the implementation of your idea, its validation is necessary – verification from the consumer's point of view.
Even worse, if the product is viable and even has a market, they often don't bother to estimate the costs of its production. In such cases, they can successfully finance their project based on erroneous financial assumptions. This will make it impossible to fulfill obligations to sponsors (shareholders). In fact, this is a serious oversight in fulfilling the obligations of the creator of the project and as a result, many will recognize you as a fraudster.
Consultants/Service ProvidersIf you don't know where this picture came from, then it's from the blockbuster "The Wolf of Wall Street", telling the story of Jordan Belfort.
He was convicted of fraud on the stock exchange, for which he spent 22 months in prison. What I fear is the appearance of "Wolves in crowdfunding".
Service providers and consultants must adhere to strict moral and ethical standards. Despite the absence of official documents regulating the work of consultants in this area, I have developed my own personal code, which should protect me from problems.
- You should not consult if the client assigns you not only authority, but also responsibility.
- You should not advise if the client has not validated his product/service.
- You should not advise if the client has turned to crowdfunding for the first time and has not conducted his own research. In this case, you should provide him with appropriate educational materials.
- You should not consult in areas with which you are not familiar, except in cases when you have assistants who are knowledgeable in these areas and worthy of your trust.
Undoubtedly, there will be people who do not follow such codes and pursue the only goal – to make a deal. The end result of such an attitude to business will be not only the harm done to customers, but also a rapid loss of reputation. We should all make long-term predictions about the crowdfunding industry and not transfer the mores of Wall Street into it.
Funding portalsCrowdfunding websites also have a defined field of activity.
Funding portals have an inventive approach to the issue of obtaining income from the creators and sponsors of projects. Some websites receive income in the form of a percentage of the total amount of funds raised. Others deduct a commission from each sponsor payment.
Some sites introduce additional payments, such as remuneration for the placement of the project. It is at this stage that the taste of "snake oil" arises. If the creator of the project has to pay a fee for the placement of the project, it would be nice to provide for the possibility of returning the investment. The promise to provide access to a unique investor base in exchange for a monthly payment without providing any support will be considered as the sale of "snake oil". In addition, financing portals that provide consulting services will also need to take into account that all the risks listed above apply to sellers and consultants recommended by them to their clients.
And in conclusion, in general, the crowdfunding industry should work for the long term. We are entering an amazing period of world history in which the interaction between people is becoming more interpenetrating. The possibility of such interaction allows us to believe in recovery after the great depression and the global economic crisis of 2008.
Crowdfunding acts as a spark that will take global cooperation to a new level by redirecting the financial flow to worthwhile ideas, not only validated, but also having a plan and presented to the public in the spirit of cooperation.
All the best,
Manolis Sphinarolakis, founder and producer of Reality Crowd TV
Evgeniya Ryabtseva
Portal "Eternal youth" http://vechnayamolodost.ru based on LinkedIn materials:
The Greatest Risk to Crowdfunding: Snake Oil.
27.06.2014