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Are Crowdfunding Sites the Future, or a Bubble Waiting to Burst?

By John Casteele - Mar 27, 2014 at 6:44AM

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On March 3, the crowdfunding site Kickstarter announced that it had reached $1 billion in total pledges since the site was launched. What's next?

Kickstarter, the site launched in 2009 where entrepreneurs, makers, and everyday people can take product and project ideas in hopes that others will help provide the funds to make those ideas into reality, reached $1 billion in pledges on March 3. According to the site, more than half of that amount was pledged in the past 12 months alone.

Kickstarter and other crowdfunding websites like Indiegogo allow project creators to create fundraising campaigns for their ideas. Backers pledge amounts to help the creator reach his or her funding goal, typically in conjunction with various reward tiers related to the project. When the campaign ends, the creator gets the pledged money (assuming that the fundraising was successful) and gets to work on the project. As with most things, of course, it's not always that simple.

The crowdfunding industry
While it seems a bit odd to think of crowdfunding as an "industry," an industry has built up around it. Websites such as BackerKit, an online service that project creators can use to organize backers, confirm shipping details, and offer pledge upgrade options after the campaign has ended, exist solely to provide resources for crowdfunding projects.

Existing industries are fed by crowdfunding as well. Crowdfunding sites help fund a wide range of products including books, playing cards, 3D printers, Arduino and Raspberry Pi accessories, and a number of gadgets that are operated from a smartphone or tablet. A number of crowdfunded technology products require devices running Apple's (NASDAQ: AAPL) iOS or Google's (NASDAQ: GOOG) Android operating system to function properly, including the popular Pebble smartwatch that set a fundraising record on Kickstarter after raising over $10 million on that site alone.

High-profile projects
Some crowdfunding projects have succeeded spectacularly. In addition to Pebble, successful technology projects have included a space telescope, glowing plants (that prompted Kickstarter to disallow future genetic modification projects), the Ouya game console, and the Oculus Rift virtual reality headset.

Feature films have found funding success as well, including the recently released Veronica Mars movie (which Time Warner's ( TWX ) Warner Bros. studio distributed for a same-day digital and theatrical release) and Zach Braff's Wish I Was Here (which is being distributed by Focus Features, a division of Comcast's ( CMCSA -1.80% ) Universal Pictures.)

Crowdfunding abuse
Of course, as popular as crowdfunding has become, it isn't without its problems. Some have cited the use of websites like Kickstarter to raise funds for celebrity projects (with a particular backlash against Braff's film) as an abuse of the original intent of crowdfunding, which critics claim is to raise money for projects that the creator couldn't afford to make a reality otherwise. Celebrity projects are not even close to the worst abuse of crowdfunding, however.

Some project creators simply fail to develop anything with the funds they receive, leaving expectant backers with nothing to show for their investments and limited options for recourse. Others produce results that are significantly different (and often very much inferior) to what the project claimed would be produced. Some projects have seen "cutting edge" iPad accessories being made from cheap cardboard or "full-length instructional books" resulting in 37-page PDFs that provide only general overviews of a topic.

That isn't even getting in to more common problems such as project delays and stretch goals or shipping costs pushing projects over budget. The expected shipping date included in most reward listings is just an estimate, and some backers feel that it's best to assume that the project will go well beyond that estimate to avoid being disappointed.

Is there a crowdfunding bubble?
Some believe that sites like Kickstarter are a fad, and that the crowdfunding bubble is doomed to burst as consumers lose confidence due to scam artists and products that don't live up to what the project promised. To an extent, I agree; crowdfunding is still young, and as it ages it will see changes and its growth may slow. Some of these changes are already occurring, as bad experiences tend to make backers more cautious when choosing new projects to support.

Though Kickstarter and sites like it have seen an increase in activity over the past couple of years, competition among the sites and the potential for scammers to take advantage of crowdfunding will eventually see this level off. The lack of instant gratification since crowdfunded projects sometimes take months or even years to produce rewards will also chip away at crowdfunding's popularity. While it won't necessarily see a massive collapse like most "bubbles," a plateau is likely where it loses some of its faddish nature and its rapid growth evens out.

The future of crowdfunding
When this happens, it's likely that Kickstarter will become somewhat of the eBay ( EBAY -0.96% ) of crowdfunding; being the largest and most well known of the crowdfunding sites, it's the most likely to survive crowdfunding's shift from fad to status quo. It's possible that the site might even become an acquisition target for eBay and its PayPal payment service, or possibly for Amazon ( AMZN -1.81% ) since Kickstarter already uses Amazon Payments as its current payment processing solution. 

As crowdfunding becomes more commonly accepted, it will likely expand into other venues as well. The Securities and Exchange Commission is already working on opening crowdfunding up for business start-ups, and some businesses have taken to hosting their own crowdfunding drives to allow potential customers to preorder products that are still in development without the use of major crowdfunding sites. In the end, crowdfunding isn't likely to burst like a bubble... it will simply mature and become another common funding source once the fad passes and a few legal hurdles have been cleared.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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