What kind of responsibility do crowdfunding platforms have in protecting their users against fraud?
On August 1, 2012, the small team at Oculus launched their campaign on the crowdfunding site Kickstarter, hoping to pull in $250,000 in cash to help them develop their product. Five days later on the 6th, they announced that they had hit the $1.3 million mark. Finally, on September 1, they closed their campaign, having garnered nearly $2.5 million from supporters who wanted to help them make VR a reality.
Less than two years later Oculus sold their company to Facebook for over $2 billion and helped to launch the future of VR, communication, and how we interact with technology.
Their having run a campaign on Kickstarter helped them not only raise money faster and arguably cheaper than through a VC allowed them not only to bring in the necessary funds but create a buzz around their product that would have been difficult to otherwise achieve.
Everyone loves to hear about a crowdfunding success story. Entrepreneurs dream of being the next Oculus, gaining a following before even launching their product. Consumers love it as it allows them to find products early and at pre-market prices.
Unfortunately though, despite all the promise that the platform has in an otherwise beneficial arrangement, sometimes it just doesn’t work out. According to a study that was conducted by the University of Pennsylvania’s Wharton School’s Professor Ethan Mollick in 2015 found that 9% of projects on Kickstarter fail to deliver as promised to their backers.
Based on these numbers, nearly 1 in 10 campaigns will leave people disappointed or even angry. This story is definitely one of those cases.
Back in August 2016, a company calling themselves Backzips launched a campaign to sell backpacks. These weren’t just any bags. Made with a mix of kevlar, USB charging ports for your phone, and a design aimed at keeping your stuff secure while on the go, it was no surprise that these bags became very popular on the site.
By the time their campaign had run its course, Backzips had raised $159,476 from 1,495 backers. Building on this success, they then went to Indiegogo where they picked up another $9,001 from supporters there.
All told, they brought in $168,477.
All good so far, right? With cash in hand, $133,477 over their initial goal of $35,000, they should have been hard at work, pumping out bags for their promised November shipping date.
Instead, it was when the bad news started coming for the campaign’s backers.
On November 24, 2016, the company issued an update on their Kickstarter page, apologizing for the delay and promising to start shipping in the first week of December.
Less than a month later on December 19th, having passed the shipping date, they yet again promised to start sending them out on January 20th, owing to the need to wait until the end of the Chinese New Year. Asking for patience from their supporters, they sent along photos of the newly-made bags at the factory in China.
This was the last time that the backers ever heard from Backzips.
What followed were threads of complaints and demand for answers on the campaign’s site, with backers leaving disappointed messages there as recent as this week. It appears as though by February, there was already a steady stream of accusations that this Backzips was involved in fraud, and the frustrated customers were asking for their money back.
So what was going on? Who could give them answers?
Speaking with an angry backer named Danny Shaket who bought two of the bags, he tells Geektime that he had attempted to reach out to Backzips on February 4, 2017, to demand answers. What he found was that the people on the other end of the line answering his emails were not from Backzips but from another company called BackerKit.
In their emails with Shaket, the company describes themselves as “a service that crowdfunded project creators use to keep track of backers—from pledge levels, preferences, and quantities, etc.”
Essentially a service provider, they had come on to help Backzips take care of the heavy lifting when it came to their campaign. In this role, they had been the ones sending out the updates to the backers, asking them what colors they wanted for their bags and handling other customer support jobs. They, like the myriad of marketing firms and other services that have popped up to play a role in the crowdfunding space, had no real affiliation with the project team.
So even as they told Shaket that they were reaching out to the Backzip team, they were unable to provide him with any new information or a refund.
At the same time, on February 19, Shaket reached out directly to Kickstarter, asking for help.
In their response, Kickstarter’s support team member thanked him for bringing the matter to their attention, and notified that she had:
“…reached out to this creator and offered our assistance. In my note I’ve encouraged them to provide an update on their project for backers, as well as respond to any messages sent through Kickstarter. My goal is to open the lines of communication and encourage them to update more openly moving forward. You should continue reaching out to them on your end as well. Through this joint effort, we’ll be reminding the creator to check in.”
On the face of it and under normal circumstances, this would appear to be a normal response.
However given the number of complaints on the site and growing body of evidence that something here was likely afoot, it felt underwhelming.
Kickstarter’s team like the folks from BackerKit all told Shaket that they were reaching out to the Backzips project team and that he should just keep trying to get a response from the campaign.
At no point did any of these parties offer to provide him anything other than assurances and recommendations to just keep sending the company emails.
Then something really weird happened.
The angry backers had begun to form a community on the page, posting comments and even warnings.
While most of the posts are used for venting, on March 1 Shaket found one link to be particularly interesting. It was a link to a seller on AliExpress, offering an eerily similar looking bag to the one at the center of so much frustration.
Shaket reached out to the seller, demanding to know what was up. Possibly expecting another run around like he had received from Kickstarter and the others in that orbit, he was taken aback by the seller’s response:
I am a backpack distributor in China. I suffered the same situation with you.
I ordered 100pcs from KS, but I still didn’t receive it. Unfortunately I did pre-sale in domestic market, my customers pushed me from Nov, I don’t want to lose my reputation in China, It is very important for us to do business. so I tried to contact the manufacturer of this bag per the info on KS “same manufacturer with samsonite”, I know that factory, it is famous in China, so I contacted them, I was told that they did have 2000 stocks in warehouse, waiting for their customer to pick them up. They can’t sell to us directly, they have signed contract, but if we need, they can make as they have material stock, so I negotiated with them, placed 500pcs order with them directly. they don’t accept order less than 1000pcs of each color, I am lucky because there is rest material. now I can hold my Chinese customers, but i am waiting my products from KS also.
So apparently not only had the scammer found a way to rip off the backers on Kickstarter, but they had left the manufacturer in the lurch. It would appear as though the campaign’s creator had made a down payment to the manufacturer, who is now holding onto 2,000 bags on contract for a buyer who is unlikely to show up and pay to collect.
Terms and conditions may apply
When Shaket asked for the details of the Backzips project team to pursue other avenues of recourse, he was told that “Kickstarter takes the privacy of our users very seriously, so we don’t provide a creator’s information directly to backers.”
She advised him that if he felt that he had been wronged, that he should approach an attorney.
This would seem to be a bit extreme, hiring a lawyer. Especially when Kickstarter was not being forthcoming with the contact information about Backerzips. Kickstarter seems to be determined to stay as far above the fray as possible, even if it leaves their users vulnerable to bad actors.
There is some other legal language thrown in there, but they wrap it up nicely by stating that, “All content you access through the Services is at your own risk. You’re solely responsible for any resulting damage or loss to any party.”
If there was any doubt on where they stand on the issue of backers getting their money back, forget it since they state that, “Responsibility for finishing a project lies entirely with the project creator. Kickstarter doesn’t hold funds on creators’ behalf, cannot guarantee creators’ work, and does not offer refunds.”
When asked for comment directly by Geektime, they doubled down by pointing to their claim that they “are not a store” and that “We think that 9% is a reasonable failure rate given the amazing creative work that comes to life when projects do work out. But we understand that not everyone wants to take that kind of risk.”
We hear you loud and clear Kickstarter, buyer beware.
That said, there are a few other items in the Terms of Service that feel a bit extraneous and downright pointless if there is no enforcement.
They lay out rules and responsibilities for their users, telling them not be jerks. These include things like “don’t break the law” and “don’t lie” to the backers.
More specifically, they lay out how a “creator” is supposed to work with backers in the event that they fail to produce the rewards. These include reasonable things like posting updates on how the money was used and what went wrong, be honest, and tells them to “work diligently and in good faith to bring the project to the best possible conclusion in a timeframe that’s communicated to backers.”
All reasonable expectations, right?
What is bothersome to me here is that there are all of these companies like Kickstarter, BackerKit, and others that took part in making this operation come together with Backzips, and yet nobody seems to have a satisfying answer to give the backers. Nobody seems to be holding the company to task.
Moreover, I have little doubt that everyone in this group also got paid. While the fees for the marketing and customer support were probably paid up front, Kickstarter took their money when they released the funds to the Backzips team.
It is worth asking what does Kickstarter actually know about the campaign organizer. Is there any kind of due diligence that goes into accepting someone as a creator onto the site?
As part of their sign up process for project teams, Kickstarter says that they verify a member of the team. Interested backers can look on the company’s page to see who they are. If they have a green checkmark next to their name, then according to Kickstarter, they have shown the company some kind of ID.
This check is likely due to financial regulations that require ID checks by institutions that transfer money. They will often require you to send your ID and a house bill to verify that you are who you say you are, falling under the Know Your Customer (KYC) and Anti-money Laundering (AML) regulations.
A quick Google search for Izak Shrira turns up a few hits, the most interesting of which was a Twitter profile that was last active in July 2011. Four out of his five tweets offer links to scam sites offering visitors to make money from home. His name appears on a number of websites dealing with Forex, adding to the sketchiness. While legitimate foreign exchange is a thing, most of the ones that are run over the internet target the inexperienced with near impossible odds or simply steal their user’s money outright, making it disappear from the books.
There are indications that this campaign is connected to a string of other bad acts as shown in this user-made video. Take a few minutes to watch as Adnan follows the crumbs through this mess.
Can we be absolutely sure that Shrira is a scammer? Is somebody by that name really connected with this campaign? Without further investigation, this could be hard to prove. Has he fallen off the face of the earth? Fallen down a well?
Well, maybe not. According to Kickstarter, he was on the platform as recently as April 15, 2017. You’d think that if he was acting in good faith that he would have been able to post a quick update on the bags while he was on the site.
So while this is either the worst customer service in the history of crowdfunding (of course it isn’t since this happens frequently enough, remember that 9% of campaigns fail) or something is definitely fishy here.
The question is whether he is involved in other campaigns and if Kickstarter has a system in place to prevent him from starting new campaigns while this one is still left outstanding.
Reading through the comments on the page, you can feel the ripped off backers seething in a mixture of frustration, agony, and helplessness.
The page is peppered with people vowing never to put their money into a Kickstarter campaign ever again. This is a sentiment shared by Shaket who says that he and others are not going to back projects again because he doesn’t trust the platform to safeguard him against fraud.
“I’m sure that of these 1500 people, 90% will not back a campaign again,” Shaket tells Geektime.
He is particularly upset that the platform is not taking any cautionary steps to know who the creator is. This is debatable since the company claims to be performing some kind of ID check. I’m inclined to believe that they are probably asking for some kind of ID. Why you ask? Mostly because I can’t picture any self-respecting scammer going with the name Izak Shrira. It’s way too Israeli. Given the chance, Israeli scammers will go for names like Matthew Berry or Tom Smith. Imagine an Indian IRS scammer opting to use Veejay. It just doesn’t follow.
“I’m not just bashing Kickstarter. There are things that they can do to show backers that they are making an effort and avoid similar situations in the future,” continues Shaket, noting that “There are many systems that they could apply to protect their users.”
One such system that he suggests is to offer risk-based star ratings for sellers, depending on how they have behaved in past campaigns. This way he believes a backer could know who is likely to be a riskier project to back. You could even imagine backers asking for better perks based on risk or vice versa where a trusted creator can get better terms.
The issue here appears centered on how the risk of a campaign is being divvied up.
This is perhaps where Shaket and I slightly diverge. While I agree that there should be a performance-based rating system, I believe that investing involves placing more of the risk on the backer.
Not all campaigns that fail to deliver on their promises are necessarily bad actors. Just like in the development of any product, teams can hit snags before they even hit the production stage. There can be problems with the manufacturer, a falling out amongst the team, or one of a million other problems that can come up during this process.
If we support the idea of crowdfunding campaigns when they work out for us and Shaket agrees that there is a level of acceptable risk that is involved in crowdfunding campaigns. This is borne out in the lower prices that the backers can get as perks. While of course a creator needs some of their own money to get started, build a prototype and pay for marketing, some percentage would likely be discouraged from putting their innovations out there for us if the risk was too high for them. As crowdfunding campaigns can involve hundreds or thousands of backers, at least this way the risk is more evenly spread out.
We agree though that communication is key to making this system work. A creator, even one who fails miserably, needs to stand up and keep their backers in the loop.
To defend Kickstarter for a second, they would also be unlikely to be able to operate if they were held liable for every failed campaign that happened on their platform. The same goes for Indiegogo and others. We need to ask ourselves if the sweet juice of good prices on cool shit is worth the occasional rotten apple.
Now back to being angry at Kickstarter. They definitely could have played this better. It is clear that they really have no role in refunds, especially after the funds have been released. However, the question going forward is whether they will offer a less naive approach to dealing with customers who have been defrauded. Looking at their responses to Shaket, they clearly either did not read the situation that was going on with that campaign or they simply decided to chalk it up to that 9% failure rate statistic. While they may be covered legally from any action, this was a definite customer service fail.
Perhaps what makes this scene so onerous is that it hurts people’s belief that they can do business on the internet. While we all know that scammers are out there, there are certain spaces that we expect to be better maintained.
“Many backers are also surprised at this Kickstarter policy,” says Shaket, noting that he believes that the creator chose Kickstarter to run his campaign for their credibility and trust they have from backers. “If it weren’t for that trust, Kickstarter would have had nothing.”
I believe that if I buy a product through Amazon, or from Apple, Fuji, or anybody else, that it will be delivered. If there is a problem, then I have someone who will give me service to rectify the situation.
Understandably the backers believed that Kickstarter was playing by similar rules. Maybe they should be. If platforms like Facebook are acting more like publishers, should they be held to a greater degree of responsibility? Similarly, if platforms like Kickstarter are being used to help companies build buzz around their products and make sales from which they are taking a commission, does that make them a store?
5 tips to avoid crowdfunding fraud
So what should you do to stay clear of the scammers?
Based on his painful experience in this case, Shaket offers the following advice:
1. Check their website, if it looks a little too simple, it might be sketchy.
2. Check the contact info of the creators – is it only an email or even just a generic one (here they used a service that helps creators called BackerKit) – it might be better to avoid
3. Visibility – if the creators are not seen in the video or give their full contact info, they might not be real and will find it very easy to disappear. If they don’t show themselves, they are most probably scammers. Real creators stand behind their products and services and help their backers. It is sometimes worth running a Google Images search on the creator’s photo to make sure that it isn’t a stock pic.
4. Do they have a history? Check what other projects are connected to the specific project. Have they reached their goal and backers got their products? Great. Good sign. If all other projects are shady or full with complaints, steer clear.
5. If it runs on several crowdfunding platforms simultaneously, they might just want to take advantage of the buzz and not use the money for development of their offering. This is can be a legitimate tactic, but beware.
As a general rule, Google can be your friend. Before you throw your money at somebody, research them a little bit. If this is not a company that you have bought from before and been happy with, take the necessary precautions. Bad things can still happen, but at least you’ve done the best you can to avoid smacking your forehead in frustration later.