The 7 Biggest Crowdfunding Scams: Lessons to Learn

Crowdfunding has revolutionized how projects are funded, and ideas are brought to life. It’s a platform that has democratized innovation, allowing the ordinary person to pursue their dreams. But rosy glasses aside, there are some real concerns amongst investors – or, as the crowdfunding jargon has long since called them, backers. And these concerns are not at all unfounded. The fact remains that there are quite a number of startups that do not deliver on their promises. As unpleasant as it is for us to admit, there are even those who are malevolent in their practices.

As a crowdfunding PR and Marketing agency with 10 years in the crowdfunding game, we usually provide insight to entrepreneurs. Today, however, we want to address all the backers out there. When someone has an idea – that’s nice. But you are the foot soldiers that bring that idea to life. And the one thing we definitely don’t want is for you to be the victim of a crowdfunding scam.

In that spirit, we’ve compiled a guide covering the 8 biggest crowdfunding scams and the invaluable lessons you can learn from them.

!Disclaimer: Before jumping in, we want to clearly distinguish between a product launch that was simply unsuccessful and a blatant scam. The product can happen when the crowdfunding goal simply isn’t met and a given start-up doesn’t have the means to produce enough prototypes. In this case, either money was never gathered from backers or was collected and returned. By comparison, a scam is a situation in which money is taken from backers with no reward.

Understanding Crowdfunding Scams

Crowdfunding is simple: gather a large group of people who believe in your idea and have them fund it in small increments. While this model has been remarkably successful, it has also been fertile ground for scammers. As a backer, the onus of research and trust is on you, making it crucial to understand the common types of scams and how to spot them.

Crowdfunding Scam Types

There are various guises a crowdfunding fraud might take, but two stand out in particular: the crowdfunding pyramid scheme and the plain fraudster.

Pyramid Schemes

These scams promise large returns or hefty rewards for small investments, often under the guise of supporting a noble cause. The problem arises when these campaigns rely on the continuous influx of new backers to deliver on their outrageous promises, leaving many high and dry.

So, for instance, if you have a start-up that launches its crowdfunding campaign and does not meet its goal, it may not be able to fulfill its duties even to those who pledged. This is why Kickstarter is known for not charging backers until the full goal is met. (That’s not to say there haven’t been scams on KS. Read on to find out.)

Deceptive Campaigns

Such fraud occurs when a company gives misleading information to backers about the project’s essence, progress, and potential results, either deliberately or unintentionally.

Misappropriation of Capital

Another classic form of fraud, this practice involves misusing funds intended for a project for personal gain. In many cases, such projects are never completed, and any demands for a refund from backers are dismissed.

Pseudo Platforms

Scammers create platforms that mimic legitimate ones to prey on naive investors who do not probe further into their authenticity. Although not all newly emerged crowdfunding platforms are harmful, detecting the signs of fraud is crucial.

Unlicensed Enterprises

Companies that evade registering with the appropriate regulatory bodies are unsolicited and illegal. These companies frequently engage in fraudulent practices, putting their user base in danger. Honest entrepreneurs who fail to register their establishments often face legal prosecution.

Recognizing the Red Flags

Knowing the red flags can help you avoid falling for a crowdfunding scam. If a campaign lacks a clear plan, over-promises or under-delivers, or has little to no information about the creators, these should all be warning signs.

The 8 Biggest Crowdfunding Scams

Now, let’s tackle the eight largest scams that shook the trust in crowdfunding and identify the warning signs in each case.

iBackpack 2.0

This campaign promised a backpack that could charge electronic devices, had a bulletproof lining, built-in Wi-Fi, a GPS tracker, and Bluetooth speakers. iBackpack 2.0 took nearly $800,000 from backers, only to collapse without delivering a single product. Eventually, the Federal Trade Commission sued iBackpack for deceiving backers.

Lesson: Be wary of grandiose promises, especially when they seem too good to be true. Research the feasibility of the product and the team’s track record.

The Skarp Laser Razor

Offering the concept of a laser-powered razor that could shave hair as effectively as a blade, Skarp managed to raise over $4 million. However, the product violated Kickstarter’s policies and was later revealed to be a failed concept. The crowdfunding platform requires that physical prototypes offered as rewards actually work. Kickstarter noticed suspicious details about the company and ultimately shut down the campaign.

Lesson: Ensure the campaign complies with the crowdfunding platform’s regulations. Backers should be cautious of extreme innovations beyond current technological capabilities.

Fontus Self-Filling Water Bottle

The water bottle was positioned as capable of producing water out of thin air. The water bottle was meant to use wind, the momentum of a bike, and even solar energy to draw in air that would then condensate.

Unfortunately, the water bottle was mathematically proven to be full of hot air rather than water. The campaign raised over $345,000 yet did not have a single working prototype that would be able to produce the amount of water advertised in their original promo videos. In the end, the company filed for bankruptcy.

Lesson: As an enthusiastic backer, it’s always worth checking the science – especially with products that claim to be very technologically advanced. Video reviews or explainers from subject matter experts go a long way to confirming the product’s credibility.

Pluck n’ File

This campaign was launched on Indiegogo by its founder, Dawn Sole. She originally planned to launch on Kickstarter, but the platform did not approve her campaign. This is why she found it shocking when she began receiving phone calls from people confused about which campaign they should contribute to. Apparently, a copy campaign was created on Kickstarter (by someone other than the founder) and fraudulently raised money for a product it never intended to deliver.

Lesson: Campaigns should be professionally made. Things like low-quality images are usually a sign that something’s wrong.

The Lily Drone

Lily Drone promised a camera drone that could follow and film its user. Despite raising over $34 million and delaying its delivery several times, the company ultimately declared bankruptcy, leaving backers empty-handed. More importantly, the company was sued for fraud in the Superior Court of California in San Francisco. In court, the State produced evidence proving that the footage used to advertise the quality of the drone was filmed using a GoPro mounted to a drone. This confirmed the fraud since the company claimed that the camera drone negated and replaced the need for a GoPro altogether.

Lesson: A successful crowdfunding campaign isn’t the same as a profitable business. Look for signs that the project has a realistic long-term plan. And in case of any setbacks, look for open and timely communications from the company to the backers. In the case of the Lily Drone, delay followed delay, and no refunds were offered at any of those points.

ZANO Drone

The Torquing brand, under the leadership of Ivan Reedman, embarked on the ambitious project to produce a consumer drone named the Zano, following an unsuccessful stint in military drone development. Zano was positioned as having more features than commercially available ones for ten times less. Despite receiving significant private investments, the Zano’s development was fraught with problems from the get-go, with false advertising regarding its readiness, inability to perform at key trade shows (e.g., CES), and unmanageable success on Kickstarter that led to unrealistic production and communication demands. It’s true; sometimes, you can have too much of a good thing. Backers pledged an amazing £2.3m on Kickstarter, 20 times the project’s original goal.

Torquing’s directors failed to anticipate mass production challenges without established prototypes, leading to questionable financial decisions, including shipping unfinished Zano units and prioritizing pre-order customers for additional revenue. The resignation of Reedman signaled the end for Torquing, which sought liquidation with over £1m in shortfalls. In retrospect, it’s clear that the team lacked the necessary technical and commercial skills to deliver on their promises. Moreover, the money was never returned to backers.

Lesson: Be on the lookout for overconfidence in a company. With such an experimental playing field like crowdfunding, when someone says it’s a sure thing or ‘will work 100%’, be careful.

Triton Gills

Triton Gills was meant to be a dream come true for every mermaid wannabe and snorkeling aficionado. The creators claimed that users could enjoy 45 minutes of snorkeling. However, skeptics quickly questioned how this would be physically possible, stating that “there is simply too little dissolved gas in water to allow the principle [of rebreathing oxgyen] in any practical way.”

Instead of closing their Kickstarter campaign and essentially admitting that the company overpromised on what the products could deliver, they simply issued a statement that said the liquid oxygen cylinders won’t last forever, so [they] plan to make it possible for backers to purchase cylinders through [their] website.” So backers were charged $900,000 for a product that would never fully work. (n.b. In 2016, the company came clean and refunded the money.)

Lesson: Trying to beat the competition is good. Trying to beat science – not so much.

Suggestions & Advice: Avoid Being the Next Crowdfunding Victim

As a backer, it’s important to be vigilant and discerning when browsing crowdfunding sites. There’s always an element of risk involved in investing in any project, but awareness and due diligence can significantly mitigate it. The allure of the next big thing can cloud judgment, but the heartache of being duped is a steep price. Consider this actionable checklist of suggestions before choosing to back a product:

1. Look for technical people on the team and check their backgrounds. Do they have relevant experience? Have they worked in relevant industry companies? Bottom line: relevant experience is a big plus.
2. Check how transparent they are with communicating with backers. Scammers typically try to avoid appearing in public and sharing info about themselves. The more transparent the team, the better.
3. Check out the competition. Is the technology claim too good to be true? If it is, you’re better off consulting with a technical expert. What about the price? Sometimes, pricing a product significantly lower than the competition can be a tactic just to raise funds fast.
4. Check out the prototypes. Did they send a prototype to prestigious media or influencers? Are these unbiased and truthful reviews?
5. Did the company have experience delivering similar products? This is the most important: if they have experience — great; if not, you need to research.

With knowledge of the past and a watchful eye on the present, you can ensure that your crowdfunding experience is as rewarding for you as it is for the innovative creators you choose to support.