Crowdfunding is inherently risky for investors. But just how risky?
As a campaign backer on Kickstarter, you are looking at about a one in 10 chance you will not get the reward you are promised when you invest in a project. That’s according to an independent study.
The Brooklyn, N.Y.-based crowdfunding platform collaborated with the esteemed Wharton School of Business at the University of Pennsylvania to complete the study. And according to an analysis of 47,188 randomly selected backers of successfully funded projects 9 percent of the time a Kickstarter campaign has reached its funding goal, the project creators did not deliver the reward that was promised.
If the campaign fails to fulfill reward promises, then only about 13 percent of campaign backers were refunded their money.
This is the first time Kickstarter has published such rates disclosing the failure of campaign backers to deliver rewards.
The professor who authored the study had a pretty forgiving perspective on the fulfillment failure rate. “Ultimately, there does not seem to be a systematic problem associated with failure (or fraud) on Kickstarter, and the vast majority of projects do seem to deliver,” says Professor Ethan Mollick, who has a focus on innovation and entrepreneurship, in Kickstarter’s statement announcing the results of the research.
Unsurprisingly, Kickstarter also says the fulfillment failure rate found by the study is appropriate.
“Is a 9 percent failure rate reasonable for a community of people trying to bring creative projects to life? We think so, but we also understand that the risk of failure may deter some people from participating,” the company says in the report. The goal of the report for Kickstarter is transparency. “We want everyone to understand exactly how Kickstarter works – that it’s not a store, and that amid creativity and innovation there is risk and failure.”
The size of the project has a slight impact on whether or not backers will receive their awards, according to the research, which Professor Mollick also published. Among projects that raised less than $1,000, 13 percent failed to deliver rewards to the backers.
The category of campaign also had a small impact on fulfillment success rates. Film, technology and food projects are more risky than music projects, according to the white paper. Those differences, however, could be due to the level in complexity associated with each project category. “It may be that film or technology products are aiming for more breakthrough products or are offering more complicated rewards (a completed movie or gadget, rather than a band t-shirt), and are thus at a higher risk of failure,” says Mollick.
Perhaps most noteworthy for the industry as a whole, however, was the non-finding that the demographics of the campaign founder had no bearing on the relative success of the campaign to deliver rewards.
“There was no significant difference in failure rates between women and men, between highly educated and less educated creators, between teams and individual projects, between single or partnered creators, or between creators with children and those without,” wrote Mollick in his paper analyzing the results.
The data that Kickstarter and Mollick jointly released today is entirely reflective of those campaigns that have already reached their funding goal. The crowdfunding platform has long been transparent about what percentage of campaigns launch and do not ever reach their goals. Currently, almost 37 percent of projects that launch on Kickstarter do not reach their goal, and therefore funds are not dispersed.
Related: The Inventors of This Travel Jacket Set Out to Raise $20,000 With Crowdfunding and Ended Up Raising More Than $10 Million. Here's What Happened Next.