How Hong Kong crowdfunders got burned, and why they’re still investing
For some, investing through sites such as Kickstarter is entertainment, for others it is like betting on penny stocks. Either way, thousands continue to back schemes, some of which are little more than pie in the sky
Digital industry veteran Francis Fong Po-kiu makes it his business to keep track of emerging technologies. But he scours crowdfunding sites as much for fun as to look for the next big thing on the horizon. Fong has spent about HK$5,000 so far backing six projects, half of which have yet to come to fruition – and they seem unlikely to.
He has received delivery of a motorised paper plane and a super efficient LED light from Nanoleaf, that was also funded by Li Ka-shing’s Horizon Ventures, he says.
“But a 3D printer that I ordered [through Kickstarter] in 2014 for US$299 never arrived. For two years, [the creators] just kept sending updates about what they were doing, the problems encountered and the solutions they came up [with].”
When he complained to Kickstarter, administrators just told him to sort it out with the product maker. “I didn’t pursue it as I am too busy,” says Fong, president of the Hong Kong Information Technology Federation.
Investing in a crowdfunded project is always a bit of a gamble – that’s just the nature of the set-up. But casual backers may not realise there’s a one in 10 chance campaign promises will fall through. According to an independent study of successfully funded Kickstarter projects, 9 per cent of creators failed to make their targets (whether a gadget, game, film or other creative work) and deliver on pledges of rewards to investors.
Yet despite being burned by such experiences, thousands bet on these schemes, some of which may be pie-in-the-sky visions.
Entrepreneur Erwin Huang, who helped turn around the TSL Jewellery chain, set up several social enterprises and founded the charity WebOrganic, perhaps epitomises the mindset of these crowdfunding backers.
“I love using the Kickstarter and Indiegogo apps,” says Huang. “Pictures and videos [from the campaigns] show what we might have in the future, be it gadgets or smart shoes. Those products [reflect] people’s dreams.”
Just trawling through the various campaigns is fun for Huang: “It’s a kind of entertainment for me. After looking at them, I want to support their dreams,” he says.
In a sense, the crowdfunding bets are small contributions from the businessman, who isn’t expecting much by way of returns.
“Last time, when I was about to put in an order for a drone, my wife stopped me, saying I should wait for the last two drones [I invested in] to be delivered before I put in for a third one,” he says. “I forgot I had placed orders two years ago for the drones, which have yet to be shipped.”
Other backers are far less tolerant, as brothers Nelson and Benson Chiu found with their Arist coffee machine.
In 2014, their start-up company Nbition Development raised more than US$850,000 via Kickstarter to produce the smart appliance that was touted to produced barista-quality coffee (the design, which won the Hong Kong ICT award in 2015, enables users to control factors such as the amount of milk, sweetness, and strength of flavour using a smartphone).
But investors began to lose patience after the start-up missed several delivery deadlines, and a public demonstration of the latest model in March has only partly appeased critics.
A spokesman for HK Crowdfunding, which monitors the local start-up scene, says the Arist experience illustrates the pitfalls of crowdfunded initiatives.
“I have backed about 25 projects so far, 20 of which failed to materialise. But inventors on crowdfunding sites seldom eat humble pie and admit that they have failed. They just keep postponing [delivery dates]. But most backers know they are not buying stuff from Taobao; they are supporting ideas which may fail. Knowing such risks, they are still willing to fork out money. It’s like a father giving his son some seed capital,” the spokesman says.
“[Some] backers who are tech buffs or scientists themselves understand the technicality and even give inventors suggestions for improvement.”
Lack of transparency can be a bad sign.
“For the dubious inventors, they will say they can’t reveal anything as they are applying for patents. Other inventors post pictures of pretty boxes with a [company] logo on the factory floor ready to be shipped, but nothing ever comes.”
Often, delayed delivery simply stems from inexperience, as was the case with design graduates Patience Lee Pui-yan and Martin Tsang Chi-ho, who created an LED device called Umbrella Here. The light, which slips onto the tip of an umbrella, serves to indicate when the owner is willing to share the brolly with people caught without one on rainy days. Intended to bring communities closer together, the project raised US$15,000 on Kickstarter in 2014.
The designers set January 2015 as the delivery date, but failed to meet the deadline because they had not anticipated the difficulties with scaled-up production.
“We found out that making a prototype was different from mass productionas different machinery and technologies were involved. If we adopt the method used for making the prototype in mass production, it would be very expensive. In the end, we spent a lot of time figuring out such problems with the factory,” Lee says.
“When the[umbrellas] were ready for shipping in April 2015, we found out that lithium batteries could not be airmailed. We eventually had to post the packages by surface mail. The overseas backers only got the umbrella three months later. And about 10 packages failed to reach the backers.”
The concept of crowdfunding to fund creative projects has caught on in a big way.
According to research firm Massolution, there are now more than 400 crowdfunding platforms around the world, which between them raised US$34 billion in 2015. Hong Kong has spawned a few of its own, including FringeBacker and Music Bee.
Some projects have been breakthroughs, such as the Oculus Rift virtual reality headset. Tech whizz kid Palmer Luckey raised US$2.43 million on Kickstarter in 2013 to mass produce the device that he first developed in his parents’ garage, and his company Oculus VR was acquired by Facebook in 2014 for US$2 billion.
But highly successful fundraising campaigns are no guarantee of projects coming to fruition. Creators of the Zano mini-drone raised HK$27 million on Kickstarter in early 2015, but crashed to earth within the year; the company went into liquidation and many of its 12,000 backers emerged empty-handed.
Other reports highlighted complaints about projects such as a PID-controlled espresso machine that had yet to produce a prototype after two years, and a bluetooth-enabled earbud project that went silent in 2014 after raising more than US$140,000 the previous year on a target of US$30,000.
And for the first time ever, US regulators took legal action last year over a crowdfunded project that failed to deliver: officials charged Erik Chevalier with misappropriating funds raised to produce a monopoly-like board game called The Doom That Came to Atlantic City. Chevalier raised about HK$1 million on Kickstarter in 2012, but cancelled the project the following year after spending the money on things such as rent and personal equipment.
The HK Crowdfunding spokesman describes the mindset of many backers as similar to people who buy penny stocks.
“Penny stock buyers often don’t study a company’s annual report, or their business plans and revenue record. They just buy the ideas behind the company,” he says.
“Backers see it as a test of their vision. They can get addicted as they see themselves as venture capitalists looking for the next big thing. But I am not like that. I will never back people without any experience in making the hardware needed for their inventions.”
That’s why he did not back the Arist coffee machine project – neither Chiu brother had produced such hardware before, the spokesman says. Moreover, a manufacturer with a decade’s experience producing sophisticated coffee machines in China informed him the one-year delivery schedule was not feasible.
Nicholas Chan Hiu-fung, a partner with law firm Squire Patton Boggs, says there is currently no law in Hong Kong to regulate the burgeoning crowdfunding sector.
“It’s hard to say that people like the [Arist coffee ] brothers are cheating people out of money. They are not selling company shares. The backers are simply supporting young entrepreneurs.
“The Trade Descriptions Ordinance protects consumers by prohibiting false trade descriptions.
But we have to see how the terms and conditions are written [in crowdfunding campaigns]. If they are written in such a way which states that backers will first provide funding and fruits of invention will be shared if the projects succeed, then the ordinance does not apply.
“Investment carries risk. Backers cannot sue people for failure, except when a scam is involved. But the possibility of the [Hong Kong Police] commercial crime bureau [taking up such cases] is low as it is only business failure.”
That’s why the HK Crowdfunding spokesman advises would-be backers to avoid items promising fantastic functions or seem remarkably cheap.
When a project promises a fancy new machine for less than one tenth the market price of an automatic coffee maker, he says, you know it’s too good to be true.
“An unrealistic delivery date is another red flag. Backers should only support projects that have already come up with a prototype. Though Kickstarter has guidelines which state that projects must come with prototype, you often see projects that only provide 3D rendering of the ideas. Backing projects with only 3D rendering is risky as inventors can underestimate the difficulty in putting the idea into practice.”
For his part, Huang urges potential backers to think before forking out hard cash.
“From my own experience, it’s easy to act like an impulse shopper on those sites. But prospective backers should bear in mind that in many cases, it will be two years before they eventually receive the product. And the item may well be outdated by then.”
As with any purchase, the maxim is caveat emptor.